This year I have been working with many first time homebuyers in the Richmond area, and, of course, they are all looking for great deals on their first home!  Many of them have been looking at the short sales as a way to find some great deals on homes.  But what many of them are finding out is that short sale purchases are not for the impatient person or the faint of heart!  So below I am putting down my thoughts regarding short sale contracts for the homebuyers out there!

First of all, many of the homebuyers want to know just what a short sale is!  A short sale is one in which the home’s value has dropped & the seller, for whatever reason, is no longer able to make their payments and rather than letting the house go into foreclosure, they are trying to sell the home for whatever the market will give them for the home.  However, what typically happens is that the price that the seller will get for the home will not be enough to cover the shortfall the lender (s) will have to take on the mortgages that they are holding.  In all transactions I have been involved in, the sellers also do not have the assets to cover the shortfall.  You may ask, why would the bank agree to a short sale?  In many cases, the bank may be better off letting the home be sold through a short sale rather than taking it into foreclosure.  Once the bank owns the home by foreclosure, they are no longer getting any payments for the house, but they will have to maintain it and pay taxes on it and they will have incurred costs in order to complete the paperwork taking it into foreclosure.  Additionally, if there is more than one lender, the junior lenders will get wiped out through a foreclosure sale, so sometimes getting something is better than getting nothing!

So if I am a buyer and I want to buy a short sale, should I?  Well, the answer to that depends on how much time you have available to wait for the lenders response.  Let’s say you do find a house that you like and you decide that you want to make an offer on it.  The price is excellent, well below what other homes in the neighborhood are selling for and you don’t mind doing the work needed on the house.  So you have a really great buy here!  What do you do next?

First, you will make an offer on the house.  The seller will sign off on the offer!  Should you be excited – after all you do have a fully ratified contract!  The short answer is NO!!!

Hopefully, you have attached some sort of short sale addendum.  We use an addendum that says how long the buyer will give the seller to get written approval from the lenders to the short sale and also details the time frame for completing the contract contingencies!  Since the contract is contingent upon the lenders approval, this is where all buyers need to learn patience!

But, you may ask, why wouldn’t the lender(s) approve the short sale?   Obviously, they have gotten a qualified buyer who can close as soon as possible and will get the delinquent loan off their books sooner rather than later!  It should be a no-brainer to get the approval done as quickly as possible, especially since it is obvious that the home is being sold for as much as it can be in the current market.  But that is not how it works with the short sales!  The approval process can take as much as 60 to 120 days to get the lender approval!  So if you are a first time homebuyer, trying to get closed before the $8,000 tax credit expires, or you are in an apartment and trying to move when your lease expires, or you have sold your home and need to coordinate the closing of your old home with the closing on your new home – a short sale may not be the best type of transaction for you! 

Once it goes to the lender for approval, I have found many buyers get very frustrated because you may or may not be hearing anything back from the listing agent.  This does not mean that the listing agent is not incommunicado with the bank – it may mean that the listing agent may be playing phone tag with the bank’s negotiator or may be getting a “nothing new to report”.  Hopefully, the buyer’s agent is hearing back from the listing agent on a weekly basis, even if it is a “nothing new to report” report!

So what are some of the other considerations you need to take into account when you are considering purchasing a short sale?

• Generally, all sales are “as is”.  You can do your own inspections; however, the owners will not do any repairs, so your only options are to either terminate the contract or take the house and do the repairs at your cost & time after closing.
• You may wait the 60 to 120 days for the written lender approval, only to have no response from the bank and find out that the bank has decided to take the house into foreclosure rather than selling it through a short sale!
• The house in it’s present condition may or may not qualify for the type of loan you are using to buy the house.  Government loans (VA, FHA, VHDA) appraisals may not approve the house if things such as deteriorated siding, lead paint, plumbing leaks, mold, etc. are present.  You need to make sure that if you are buying a “fixer upper” home, that you are comfortable going with a renovation loan or a conventional loan, which may carry higher closing costs & a higher interest rate & down payment.
• During the time the lender(s) are taking to approve off on the short sale, there may be changes to the mortgage market, which can make a huge difference in the payment you may be making each month.  If this presents a concern, a short sale may not be the right choice for you, no matter how great a deal you may be getting on the home!
• Finally, you want to make sure you use a competent real estate attorney that is well versed in Virginia real estate law!  A title search may reveal title defects that may require a lot of work to remove from the title in order for you to get title insurance!  Additionally, you may have lots of questions that only a Virginia real estate attorney can answer for you.

Short sales can represent a great deal, but can test the patience of even someone like Job!!!  Should you have any questions on buying a short sale in the Richmond, VA area or you would like to see what is out there, don’t hesitate to call or email me.