When you are in the market looking for a bargain deal, a short sale is the first thing that comes to the mind. Short sales are sometimes listed for ridiculously low prices, prompting many buyers to jump on the offer immediately. Without giving much thought to the fact that there could be some ‘serious issues’ with the property, they proceed to the checkout like they are buying a product on an e-commerce website. But it may end up being a big mistake.
A short sale is basically to sell a property in a pre-foreclosure phase. It means the seller has already fallen behind on the mortgage payments and the lender is accepting a discounted payoff to release the loan. It saves the lender from the headache of initiating the legal process for foreclosing on a property. So the loan is settled before the lender has to sell the property at an auction or through the traditional home selling process.
There is no denying the fact that the process of buying a short sale is fraught with risks, but if you do your due diligence, you can actually find a diamond in the dough.
Here are a few things you need to keep in mind before buying a short sale:
Sellers Don’t Get Pre-Approval From Their Lenders
Lenders have to secure written approval from their lender before putting a property, that is under foreclosure, up for a short sale. Most sellers list their properties before even notifying their bank. So the chances are the lender will not approve it. A lender may not accept a short sale if the property has built equity. The same may be true when the bank believes that the owner can repay the difference between the sales price and the existing loans. Just because you saw a short sale listing online, it doesn’t mean the owner has the right to sell.
Know The Legal Hurdles
In order to avoid foreclosure, many sellers file for bankruptcy after advertising for a short sale. A successfully filed bankruptcy requires that all collection activities must cease, preventing lenders from collecting the proceeds from a short sale. This means that the short sale deal will be a non-starter from the very beginning.
As per the standard procedure, a homeowner has to default on a home loan before listing the property for a short sale, but due to lack of knowledge, many start the process even if they are not underwater. So make sure the deal is actually a short sale.
In another scenario, your offer may be accepted by the seller, but the lender may not approve it. Keep in mind, the lender has the final say, so find out early in the buying process if the particular lender who has the lien on the title is difficult to work with.
The lender will want a copy of your earnest money deposit and proof of funds. The lender can even ask you to increase your offer price. The lender will also check if you have your own loan available and you are preapproved.
Find Out If There Is A Second Mortgage On The Property
If there is more than one lien holder on the title of the property, things get more confusing. While the principal lender may approve the sale, the second lien holder may not play ball. If proceeds from a short sale aren’t enough to pay off all the liens, it may happen the second lien holder refuses to relinquish its second lien position.
Condition Of The Property
A home will go into despair if the owner is struggling financially. A homeowner who isn’t able to pay mortgage installment will not look after the property’s maintenance. So before buying a short sale, you need to have a professional home inspection performed to determine renovation and repair costs.
Also, make sure that you will be to undertake a renovation project successfully. You will need to hire a general contractor or a team of skilled workers. Repairs and renovation projects can turn into a money pit if you are not experienced in this area.
Many legal formalities are involved in a short sale and most cases, they are very time-consuming. It can take up to 3-6 months before the buyer is brought to the table to close the deal. So if you are in a hurry to move into your new home, you should probably think twice before making an offer on a short sale. And be prepared to deal with some unexpected circumstances and legal hurdles.
If you are equipped with necessary knowledge and have the patience to get through the cumbersome process, a short sale may present a great opportunity. You should be aware of all the risks involved in the process so that you know what you can expect and are mentally prepared to deal with common hurdles, legal and otherwise.
You can consult with an experienced real estate lawyer to do due diligence like checking out the title and liens on the property.