Saturday, November 21, 2009

Tips on Buying a Short Sale

I read an article that cited a number of reasons why a buyer should avoid purchasing a short sale or pre-foreclosure property.  Of the 11 reasons they provided to avoid short sales, 10 were inaccurate.  Therefore, as someone who lists and sells a number of short sale properties in the Chattanooga area, here are a few tips to aid you when offering on a short sale property.

1. What the Seller Owes Really Doesn’t Matter

The article on short sales noted that buyers should be concerned with the amount the seller owes when compared to the market value of today.  That is FALSE.  The reason why a home is listed as a short sale is that the seller owes more than the home is worth.  In some neighborhoods, the banks are settling short sale properties for 40-60% of the previous purchase price because those sales figures are no longer relevant.  As a buyer, you shouldn’t focus on that number either but rather the market value of the property today.  If a seller had Private Mortgage Insurance, it can occasionally complicate the transaction. However, with so many mortgage insurers going belly up, their impact is becoming less and less.

2. Your Offer Should Be Within 10% of Market Value

No, the banks are not giving these homes away. But, they are not giving away bank-owned homes either.  Short sale offers within 10% of the fair market value of the property are accepted 9 out of 10 times.  Some buyers prefer to low-ball the bank because they do not understand the bank’s valuation process.  However, low-ball offers are typically countered to by the bank at full market value.  Therefore, a buyer who is not willing to pay 10% of fair market value should step aside.

So, who determines what fair market value is??... A local real estate agent or an appraiser.  Depending on the price of the home, the values may be set by a local real estate agent (often not the listing agent) after there is a contract between buyer and seller.  Often times the agent who establishes the price for the bank will be the one to list the property for sale should the short sale fail and the home ends up in foreclosure.  As a result, they want a low-priced listing they can sell and routinely price the home low for the market.  Also, bank owned homes are priced in the same manner (usually it’s the short sale price) with the banks accepting within a percentage of the listed price.

3. Ask Questions of the Listing Agent
Ask 10 agents the way a short sale should be handled and you’ll get 10 answers.  Therefore, ask your agent to quiz the listing agent as to how many offers the property has, how your offer will be treated by the bank, where the seller is the short sale process, if a title search was done to reveal additional liens, etc.  Our group handles short sales in this manner:
1. When an offer comes in from a buyer, it is negotiated between buyer and seller then signed by the seller creating a binding contract.
2. All other offers after the time of contract are accepted as "backup offers" only.
3. If the bank asks for all offers, we respond that we have 1 contract and x backup offers.  We take a counter, if any, to the primary buyer and negotiate the sale with them.  If they fail to consummate the transaction, we move to the next buyer with a backup contract.  If we do not have a backup contract, the property is relisted for sale.
4. Once we have all parties in agreement, the buyer moves to closing.

4. Do Not Ask for Repairs to be Made

Short sales, like bank-owned properties, are sold in ‘AS-IS’ condition.  Let’s face it, the sellers are broke! If they hired someone to make the repairs, chances are they won’t have the funds to pay them. We recommend that buyers to perform their home inspections even though the property is being sold ‘AS-IS’ because there are usually a host of latent issues that need to be resolved.  Proactive buyers should consider performing their inspections pre-contract and use any repair work as leverage in their negotiations.  For example, if the home has a bad roof, price the home with a bad roof, make your offer with the idea that you will need to replace that roof, and let the listing agent know the roof is bad.  Word will travel and it will work in your favor to encourage a lower price.

5. No Contingencies and Be Prepared to Wait

Unfortunately, there’s nothing short about a short sale.  The banks are under staffed to meet the needs of sellers and think that with a 10+% unemployment rate, how many sellers are requesting assistance?  Therefore, you need to be patient.  That also means that you should not even think about asking for a contingency on the sale of your current home.  Once the bank approves the short sale, you must close within 30-45 days.  As a result, you must be flexible - preferably living with friends, family, or in a month-to-month rental - in order to consider a short sale.  However, bank-owned homes are the same way. So, what’s the big deal?

Never say "no" to a short sale in spite of what your agent may tell you.  You’re getting a great home for a great deal but like all good things, they take some time.  The banks are getting easier to work with.   By all means, do not expect that every short sale will work out. And unfortunately those are the ones you hear about most.

Good luck with your short sale purchase!