Short Sales: Fact Vs Fiction – Buy Side

Over the past couple weeks I have heard tons of questions about “Short Sales” and how they work.  With my next couple posts I will provide some clarity as to how they work and what to expect.  This post will cover the buy side of the transaction.  If you are unfamiliar with the process of purchasing a home as a whole, scroll to the top of the page and take a look at my “How to Buy a Home” page.  It will provide you with a basic understanding of the process and make the rest of this post more cogent.

I chose to separate this post into the following three sections: Qualities that are similar to a general transaction, qualities that are different, and general facts for buyers to know about short sales.

 

Similar to a Normal Transaction: 

1. Banks look at offers in much the same way an individual seller would.  Meaning a cash offer will be most viable, followed by conventional financing, and lastly creative financing or a home sale contingency.
2. After negotiating with the seller, a buyer can still expect to have a home inspection and an attorney review period, but after this point the similarities come to an end.

Different from a Normal Transaction:

1. Because the seller is distress it is often difficult to negotiate for repairs.  Not to say it can not be done, but not with the flexibility found in a conventional transaction.  So while you should have a home inspection, in a short sale situation it functions more as due diligence for the buyer before fully committing to the purchase.
2. The Bank is making the final decision on rejection or acceptance, not the seller.  Over the past year banks have been inundated with short sales and currently do not have the capacity to process them efficiently, therefore buyers can expect to wait 45- 90 days to receive final confirmation that the offer has been accepted.  Rejections generally occur in a more timely manner, approximately a month or less.  
3. Closing dates are not set in stone and are often not locked in during the initial negotiation with the seller.  Due to the soft time lines, it takes a buyer with a certain level of flexibility to purchase a short sale.

Things to Know:

1. Banks will take between 75%-90% of fair market value.  Due to a declining market and a lack of recent sales, the  issue in many situations lies in determining that fair market value.  So while a buyer can find a fantastic deal, short sales are not absolute fire sales in which the bank will take pennies on the dollar.
2. Because you are buying from a distressed seller, a buyer should expect to do at least some cosmetic work to bring the home to your standards.  (changing carpet, painting, etc.)
3. As a buyer, of course you want the lowest price possible.  From what I have seen and read, the 75%-90% of market value is accurate as to what banks will accept.  The best way to move closer to the low end of that spectrum is to make your offer as “clean” as possible.  Clean meaning low on contingencies and repair requests.  Remember, banks look at this much like a normal seller would.  For example take a $100,000 home.  Given the option would you sell to someone with a cash offer of $75,000 who will buy it as is, or the $90,000 buyer who has his own home to sell before closing and wants you to do $5,000 in repairs?

 

Short sales are here to stay for the next few years at least.  My goal is to function as a valuable resource for my clients so please feel free to contact me if you have any questions regarding your personal situation or what you have read here.

Best,

JLC