Short Sale Equity Purchase Benefits
While buying a short sale can be an exercise in patience for the buyer, these properties can offer some of the highest equity positions in the market place. The reason being that normally these properties have not fallen into the state of disrepair that lender owned properties have. Usually, the home owners are still present in the property and maintaining it. The electricity is still connected. The heat and air condition is still on and operational. The plumbing has not been winterized. All of these home systems are still in good condition and the house has not frozen over the winter or baked over the summer. The appliances are usually included with the sale of the property.Furthermore, with the owner still involved with the sale of the property, the seller’s disclosure is accurate and available. Having firsthand knowledge of the properties history helps the purchaser understand any issues with the home prior to closing. This helps the buyer to budget for repairs and make an appropriate offer on the property considering those repairs.
Short Sale Purchase Agreements:
1) Closing Dates
When writing your offer on a short sale property, keep in mind you cannot control the closing date. Each bank’s short sale department and process will have different reaction times, work loads, systems and procedures. Also, depending on the investor of the mortgage, the bank servicing the loan will need to get investor approval on the short sale which will add even more time. While you can plan on about three months for a bank to process a short sale, that timeline is unknown. Therefore, write “30 days from bank approval” in the closing date. Prepare your loan officer for a quick closing once the short sale approval letter is received. Short sale lenders may issue one 30 day extension. However, it is not guaranteed and therefore your loan officer should be ready to order the appraisal and close the loan quickly.
Due diligence and home inspections are an important part of short sale transactions. The common practice is to have the home buyer do the inspection after the offer is signed by the seller, but before it is sent to the bank for approval. This allows price corrections to be made before the offer is sent to the bank for approval. For example, during the inspection it is learned the roof needs immediate replacing. The buyer can then adjust the price for the appropriate replacement prior to the short sale package being sent to the bank. The inspection report will then go with the offer to the bank to justify the lower price as the bank compares it to the appraised value. Plan on a traditional inspection window of three to five business days.
3) As-Is Condition
Due to the fact most short sale sellers are in a state of financial distress, the short sale buyer should not expect the seller to make any repairs. Occasionally, the seller will make repairs to help move the short sale process along more smoothly. However, that is the expectation. Normally, the buyer will make adjustments to the price to compensate for repairs needed or issues brought up by the buyer’s home inspection.
4) Association Documents and Resale Disclosure Certificates
The buyer can expect to receive official association documents and the resale disclosure certificate after short sale approval has been received. The reason for this is that the seller needs to provide the most current versions of these documents to the buyer. Therefore, if the documents were provided at the time the offer was made they may be out of date by the time the short sale approval letter is received months later. The buyer still has the MN statutory period of 10 days to review these documents. However, the buyer can reduce that to 3 days in the interest in time.
5) Short Sale Contingency Addendum
The short sale contingency addendum is a document that discloses to all parties that the property is a short sale and requires third party approval from the seller’s mortgage company or other lien holders. It further discloses that the seller and the seller’s lender need to come to a mutually acceptable agreement to accept the buyers offer. Therefore, if the seller’s bank comes to the seller and stipulates that the seller pay the entire mortgage back, the seller may not feel that is mutually acceptable. The seller can discontinue the short sale or let the property fall into foreclosure. Also, if the bank’s appraisal is higher than the offer and the bank counteroffers the buyer a higher amount, the buyer can cancel the offer. While it is frowned upon, sometimes buyers use this contingency to cancel an offer if they find another property while they are waiting for the bank to respond to their offer. This puts the distressed seller in a difficult position as they have lost a significant amount of time working with the current offer and the bank. This addendum, in the state of Minnesota, has a blank by which to insert a date that you want a response from the seller’s bank by. This does not push the bank any harder or move them along any quicker on approval so don’t fill it in. It simply creates more paperwork for all parties when it has to be extended.
6) FHA/Lender Repairs
As stated earlier, short sale properties are usually sold as-is. The buyer should expect to do any repairs themselves. Sometimes, if purchasing a short sale property on FHA financing, a buyer may get minor repairs since as chipped and peeling paint or a missing smoke detector. The buyer should plan on coordinating with the seller to make a time to get those repairs done prior to closing at the buyers expense. Doing an escrow fore repairs is usually not an option as the seller will not have the money to do so.
7) Other considerations
There are other factors to consider when buying a short sale property. Using a Realtor, especially one that is familiar with short sales, to help purchase a short sale property is highly recommended. Have the Realtor check the experience level of the listing agent to determine how many short sale properties the listing agent has sold. Also, determine if the listing agent will be using a resource to help with short sale negotiation, such as a law firm or other third party negotiation service. A third thing to research is how many liens are against the property. The more liens, the longer the short sale will take to negotiate. Don’t be deterred by the number of liens. I have negotiated a short sale with 5 mortgages against it. It is more important about the types of liens and who holds them.
Chris Dennis, Realtor
Chris has represented sellers in over 250 short sale transactions throughout the Twin Cities area. His short sales have been located as far north as St. Cloud and as far south as Waterville, MN. He has also represented numerous buyers in short sale transactions. Some of these buyers have included renters purchasing the very home they have been renting, saving them hundreds of dollars a month and turning them into homeowners! Chris has also represented investor and owner occupant buyers of short sale properties.