Are You a Buyer Looking to Purchase a Short Sale?
Posted: 08 May 2012 by KCM with additional commentary by Mark Slade
It seems that there is a significant amount of confusion when it comes to purchasing a short sale. There are many misconceptions when it comes to this type of transaction, so below I have provided some information to potential buyers of short sales. If you are looking to purchase a short sale, understand that it is not the same as a normal sale and the approach is very different. There could be several parties involved and issues that are unknown to the buyer and buyer’s agent that can affect the transaction. If you are looking to purchase a short sale here is some helpful information.
1. On average, to get a short sale approval, it can take 60-90 days.
There could be mortgage insurance and an end investor on the loan as well as the servicer, which means it has to go through three different processes. Bank of America could be the servicer (the paperworks shows loan as BofA, on the loan but they do not actually own the loan–other companies/investors actually own it–so, the short sale has to pass their guidelines, then go to the mortgage insurer if there is one, then to the end investor like Fannie Mae and Freddie Mac. If you are a buyer and can’t wait at least 60-90 days for an approval and then another 30 days to go to closing, then you need to look at other houses. The worst thing you can do is tie up a house that is in a short sale with no intention of being patient while waiting for a short sale approval. Approvals can come sooner than 60 days, but industry standard is at least 60 days to get an approval or denial. And the average time to close a sale is a good 3-4 months. I’ve had short sales close in 35 days (usually investor owned) on the one hand and at the other extreme, i have one in its 6th month and counting).
2. There is a general assumption that you can purchase a short sale for 40-50%, according to KCM, under its listed price. In a short sale the bank comes out and does a valuation of the property and will expect a slight discount, but will not accept a huge amount under the market value.
Hopefully, if the agent who is handling the sale is experienced, they will have already gotten an approved list price from the bank by the time you are interested in making an offer, although this is rarely the case. The bank will usually be willing to negotiate on that price, but will not, in almost every case, take 40-50% off of that price. To that point, you may be able to get a reasonable deal on a short sale, though it will not be, in most cases, as much of a deal as you may be able to get on an REO (foreclosed property). Also to that point, most short sales will be in better condition than an REO. When you look at the potential repairs a comparable REO needs and the time and expense it can take to do those improvements vs. a short sale being sold at a slight market discount with improvements already made, the investment could even out. There are REO properties that can be picked up for a huge discount, but require massive repairs that a comparable short sale may not require.
To help clarify, the average Short Sale usually trends at about a 16-17% discount off of fair market value.
3. Short sales are a very difficult process and it takes a qualified person to handle this type of transaction.
With this type of transaction it takes a very experienced agent on the listing side as well as the buying side. Make sure before you move forward on the transaction that the listing agent has ample experience dealing with these types of transactions, or you could be tied up in a contract for months that never goes to settlement. There are several different types of short sale processes and each bank’s process is somewhat different; it takes a professional who has had experience with all of these different types of short sales to help facilitate a successful transaction. How do you know if your agent is qualified? They need to either have a SFR (short sale/foreclosre designation from NAR) or CDPE–Certified Distressed Property Expert designation. Then ask them how many Short Sales they are either working and/or have closed.
4. In most short sale transactions the properties are sold “as-is” and no repairs will be made.
Although there are some exceptions to this rule, speaking in general, short sales are sold “as-is” and no repairs will be made even if they are found during a home inspection. In most short sale transactions the bank will require both the buyer and the seller to sign an addendum that states the property is being sold “As-is” and no repairs will be made. If you are an FHA buyer, then you may find yourself with a serious bottle neck as FHA requires that the home meet a certain level of quality before allowing a mortgage to be processed.
These are just a few short pointers for buyers who are looking to purchase a short sale as they are a reality in every market, and if you have the patience you may be able to get the home you are looking for at a discount!
At the same time, there is one other “distressed” type of property commonly overlooked. I refer to these homes as homes with “leprosy.” Yes, its a strange word to use when buying a home, but with explanation i trust you will see my point.
Sometimes homes start on the market with poor staging and/or over priced for the market. Sometimes a home comes on the market in the same neighborhood if not on the same street and its priced more aggressively than another home. It’s like buying a diamond, with nothing to compare a poorer quality stone might look great; up against a superior rated diamond, the original perception is reversed.
So, a home can just sit with minimal traffic and online views because it doesn’t look the price nor fit the price value equation for the market. When these homes hit 120-140 DOM–Days On Market–they become the lepers on the market as buyers and even agents make the assumption there is something wrong with the home, when the only thing wrong might have been its presentation and/or pricing out of the gate.
Looking through the inventory with excessive DOM provides you with a good size discount; often allows for purchase of a home that is owner occupied and in better phyiscial condition and, most importantly, gives the buyer more control over their own destiny with regard to negotiations, repairs and the timeline in which you truly want to purchase a home.
Mark Slade, SFR