Author Topic: Short Sale Questions  (Read 2379 times)

nirvines88

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Short Sale Questions
« on: July 27, 2014, 04:09:27 PM »
I toured a house the other day that is a short sale and I like it A LOT!  It's a 1999 house and most of the things that I noticed that need to be fixed are superficial, although there could be other unseen issues.  I am having a "pre-inspection" done tomorrow before I delve deeper into the buying process.  Looking at the publicly available financial records of the house, it looks like the owners lived beyond their means (several mortgages taken out although only one lienholder remains; also, the house had some fancy updates), and a quick Facebook search tells me that there may have been a divorce in play too (wow the internet is creepy).  I imagine these things led to the short sale taking place.  With that being said, I have a few questions below:

1) A short sale is when a homeowner can no longer afford to make mortgage payments or is very underwater on their mortgage due to a decline in value.  Because of this, the seller contacts their lender and tells them this, and the two parties make an agreement to sell the house short to avoid the lengthy and expensive foreclosure process.  Is my interpretation of a short sale basically correct?  If not, please correct it or elaborate on the complexities of short sales in general.

2) What are the disadvantages of buying a short sale home?  For example, it takes much longer than a typical sale.  What else?

3) On a similar note as question #2, what are the risks of buying a short sale?  For example, I've heard it's hard to get title insurance for a short sale.  It'd be a bit unfortunate to shell out 200k for a house only to have a claim put on it by a lienholder 20 years later for something that a previous owner did! 

Thanks in advance, y'all are awesome!



escolegrove

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Re: Short Sale Questions
« Reply #1 on: July 27, 2014, 05:00:29 PM »
We have bought 4 out of our 5 houses as short sales. They are also my "favorite" type of houses to buy. Short Sales are in much better condition than foreclosures. Since the seller is getting no money they will also tend to take a low offer, although sometimes they want the highest price because the different is now consider "income" and taxable. You do have to get the house approved.

1) A short sale is when a homeowner can no longer afford to make mortgage payments or is very underwater on their mortgage due to a decline in value.  Because of this, the seller contacts their lender and tells them this, and the two parties make an agreement to sell the house short to avoid the lengthy and expensive foreclosure process.  Is my interpretation of a short sale basically correct?  If not, please correct it or elaborate on the complexities of short sales in general.


Its because usually because the seller has to sell for some reason and move. The house is underwater so they get the bank to agree to let them sell for less than its worth. It still is negative against the sellers credit. The bank has to agree to it. 

2) What are the disadvantages of buying a short sale home?  For example, it takes much longer than a typical sale.  What else?


Short sales really are area dependent. Here are the issues we are seeing.
 *You wait so long they are going into foreclosure. We waited for a year for a short sale only for it to go into foreclosure (i.e. we lost it).
*Banks are also countering up really high. You wait so long that the bank then counters higher than price of a similar house the year before.
*Long wait- Our successful shorts sales we have waited from 52 days to 10 months

3) On a similar note as question #2, what are the risks of buying a short sale?  For example, I've heard it's hard to get title insurance for a short sale.  It'd be a bit unfortunate to shell out 200k for a house only to have a claim put on it by a lienholder 20 years later for something that a previous owner did! 

We have bought all of our short sales the same as any other sale with a mortgage. We have never had any issues with insurance and we have title insurance on every house we bought for the same reason you describe.

I personally love short sales. Two of our short sales have been form people who have backed out. My biggest disappointment is they are disappearing.

123flip

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Re: Short Sale Questions
« Reply #2 on: July 29, 2014, 06:52:09 PM »
1) A short sale is when a homeowner can no longer afford to make mortgage payments or is very underwater on their mortgage due to a decline in value.  Because of this, the seller contacts their lender and tells them this, and the two parties make an agreement to sell the house short to avoid the lengthy and expensive foreclosure process.  Is my interpretation of a short sale basically correct?  If not, please correct it or elaborate on the complexities of short sales in general.

I've purchased dozens of short sales, so I'll take a stab at your questions...

Generally, the bank will require that the borrower have some hardship that would make it difficult for them to continue paying their mortgage.  The borrower requests that the lender agree to a short payoff (below the amount owed) and the bank -- under certain circumstances -- will consider a short payoff.  Typically, the borrower will have to list the property publicly (on the MLS), and when an offer is received and accepted by the seller, it's then forwarded to the lender for approval.  The lender will do a BPO (a watered down appraisal) and will look to get a minimum of about 80-90% of the value for the property (different types of loans have different guidelines for minimum acceptable offer).

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2) What are the disadvantages of buying a short sale home?  For example, it takes much longer than a typical sale.  What else?

Long approval period is certainly a big one.  Also:

-  Because most short sales are being sold by sellers who are in financial hardship, there are generally lots of deferred repairs in the house (they couldn't afford them and/or had little incentive to fix them since they won't be getting any money from the sale). 

-  It's unlikely the seller (or the lender) will make any repairs to the property prior to closing.  If there are any major issues, you may find it difficult to get a mortgage on the property without those issues being addressed prior to closing.

-  Many short sale seller are unrealistic about the process and are difficult to work with (a great real estate agent helps here).

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3) On a similar note as question #2, what are the risks of buying a short sale?  For example, I've heard it's hard to get title insurance for a short sale.  It'd be a bit unfortunate to shell out 200k for a house only to have a claim put on it by a lienholder 20 years later for something that a previous owner did! 

Unless there is some issue independent of the short sale, there should be nothing inherent in the short sale process that would impact your ability to get title insurance.  If for some reason you couldn't get title insurance, you likely shouldn't proceed with the transaction, but I've never seen any title insurance issues due to the short sale itself, so I wouldn't worry about that.

Fishingmn

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Re: Short Sale Questions
« Reply #3 on: July 30, 2014, 08:39:06 AM »
The first 2 responses were good. The only other things to consider -

- The seller may not be including things like the appliances. Make sure to verify and include those in any Purchase & Personal Property Agreements.

- You can be tied up in waiting for many months while the listing agent or their lawyer try to negotiate with the bank (or more likely banks) to accept the offer. I'd always recommend having a date that you need to have acceptance by - typically around 90-120 days. This allows you to get out of the deal if it's taking too long. You can always sign an extension if you so desire as the date approaches.

TheHouseStache

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Re: Short Sale Questions
« Reply #4 on: July 31, 2014, 08:48:15 AM »
This is ok advice, but I would like to offer some corrections/ clarifications.  My responses begin with **

We have bought 4 out of our 5 houses as short sales. They are also my "favorite" type of houses to buy. Short Sales are in much better condition than foreclosures. Since the seller is getting no money they will also tend to take a low offer, although sometimes they want the highest price because the different is now consider "income" and taxable. You do have to get the house approved.
** You have gotten lucky that they are in better condition. I agree that most of the time this is the case, but not always.  I've seen some fairly insidious things done to short sales.  Also, just because it's a short sale, doesn't mean that the seller isn't getting money.  The prime lien holder will likely take any money the seller would net, but there is no incentive to just take a low offer, as they can be required to pay back the shorted amount to the lien holder.  The amount of the short is not automatically counted as income, as this depends on how the primary lien holder wishes to close the sale/ file.  Finally, the price must always be approved by a third party, so it is relatively irrelevant what the sellers wish to take.

1) A short sale is when a homeowner can no longer afford to make mortgage payments or is very underwater on their mortgage due to a decline in value.  Because of this, the seller contacts their lender and tells them this, and the two parties make an agreement to sell the house short to avoid the lengthy and expensive foreclosure process.  Is my interpretation of a short sale basically correct?  If not, please correct it or elaborate on the complexities of short sales in general.


Its because usually because the seller has to sell for some reason and move. The house is underwater so they get the bank to agree to let them sell for less than its worth. It still is negative against the sellers credit. The bank has to agree to it. 
**A short sale is when the market value/ likely sales price is less than what is owed, and the amount to be gained falls 'short' of the amount that is to be paid back to all lien holders.  This actually does not have to be a bank, and a decline in value is not needed to have a short sale.  Many times, this is due to some hardship such as the loss of the primary bread winner (income) due to lay-offs, divorce, death, health issues, etc.  Some times, depending on the state, the short sale process can be more expensive than foreclosure. 
Also, the short sale is merely an attempt to beat the foreclosure process, and does not guarantee that you will.


2) What are the disadvantages of buying a short sale home?  For example, it takes much longer than a typical sale.  What else?


Short sales really are area dependent. Here are the issues we are seeing.
 *You wait so long they are going into foreclosure. We waited for a year for a short sale only for it to go into foreclosure (i.e. we lost it).  **This actually happens quite frequently.  Different states have different laws regarding foreclosure.  Some states are a judicial process state, where a foreclosure proceeding has to go through the courts, or race notice, where the foreclosing party is whomever posts that they are seeking the collateral to repay a debt first.  (That's really glossing over it, but you get the idea)
*Banks are also countering up really high. You wait so long that the bank then counters higher than price of a similar house the year before. **Also don't forget that in some cases there may be an office of people dealing with many of these at a time, and things can get confused, lost, or just mired in a long queue. 
*Long wait- Our successful shorts sales we have waited from 52 days to 10 months

3) On a similar note as question #2, what are the risks of buying a short sale?  For example, I've heard it's hard to get title insurance for a short sale.  It'd be a bit unfortunate to shell out 200k for a house only to have a claim put on it by a lienholder 20 years later for something that a previous owner did! 

We have bought all of our short sales the same as any other sale with a mortgage. We have never had any issues with insurance and we have title insurance on every house we bought for the same reason you describe.
**This is why A), you have a title company or attorney do a title search and abstract and make sure that any outstanding liens are paid and B) You get title insurance on a short sale.  Most new sales to private owners are (and should be) conveyed with a 'warranty' deed, which by itself declares the deed to be free of financial encumbrances and or liens.  It's not a guarantee, but should mean you are fine in most cases.

I personally love short sales. Two of our short sales have been form people who have backed out. My biggest disappointment is they are disappearing.
**You could always just go to neighborhoods or homes you'd like to purchase and ask if they would like to sell.