Tuesday, April 5, 2011
If you are currently in the market to purchase a property, you can sometimes get a good deal if you buy a short sale property. However, as I learned a long time ago in basic economics 101, there are no free lunches. If you see a short sale property listed for sale at a price that is too good to be true, it probably is. For those of you who have been thinking about purchasing a short sale, I am going to give you some things to keep in mind when deciding whether or not to move forward with your purchase. Before that though, I am going to talk a little bit about what a short sale is and how they work. In a short sale, a homeowner negotiates a payoff amount with his or her lender to save the distressed property from foreclosure. The payoff amount the homeowner negotiates with the lender in a short sale is less than what the homeowner owes on the loan. A lender will usually agree to do a short sale because it saves the institution a considerable amount of time and expense associated with foreclosing on a property. As part of the short sale, the lender has to approve any offer that a buyer makes on the property. So how does the owner’s lender decide whether or not to accept an offer on a property? Once an offer is received, the lender will pay a third party broker, who is not involved with the transaction, to come look at the property, evaluate comparable properties, and give an estimate of value for the property. If the offer received is equal to or greater than the value the third-party broker assigned to the property, the owner’s lender will generally approve the offer. A lender generally won’t tell the homeowner, or any other party involved with the transaction, what price they will take for the property until they receive an offer and the offer is reviewed. This means that the listing agent must do his or her best job at determining the fair market value of the property and list the property for sale at that price in hopes that the lender will accept an offer at or near that price. Even if you make a full price offer on a short sale, there is no guaranty that your offer will be accepted. If the listing price can be supported by recent sales of comparable homes in the vicinity though, there should not be a problem with the lender accepting an offer that comes in at or near the listing price. However, sometimes short sale properties are not appropriately priced. I’ve seen real estate agents list short sale properties for outrageously cheap prices that are well below market value. This means that the property does not have any comparable sales to back up the listing price. If this situation occurs and someone makes an offer on the property at or below the already very cheap list price, the lender will usually reject the offer because it isn’t supported by comparable sales. When this happens, the buyer and everyone involved with the transaction ends of wasting a lot of time and effort. It can be as much as 90 days or longer before the seller’s lender responds to an offer on a short sale, so buyer’s can also miss other opportunities while waiting on the lender to respond to the offer. So as a buyer, if your offer is rejected by the lender, you’ve just wasted 90 days or however long it took for the lender to respond to your offer, and you still don’t have a home. This situation can usually be prevented. Before you make an offer on a short sale property, approach the listing agent or your own real estate agent, and ask them to provide you with at least 3 comparable sales from the same area or neighborhood that have sold within the last 6 months. Properties that have sold within the last 3 months would be even better. Also ask the agents to provide you with at least 3 comparable properties for sale in the same area or neighborhood. If the price that the property you are interested in buying is well below those of the comparable properties, the lender probably won’t approve an offer for that price it is listed at. This is because the list price is below market value, and the lender will assume they can get more money for the property. At this point it would be a good idea to ask the listing agent if the lender has pre-approved a short sale at the low price they have the property listed for. If they have, ask to see a copy of the approval letter from the lender to prove it. If the lender has not approved the short sale at the list price, you should probably make an offer that is supported by recent sales and comparable properties for sale, or you should move on and find another property. Otherwise, you are probably just wasting your time and effort.