Buying a Short Sale Home
With the incredible rise in the amount of distressed properties on the market and the potential to score a “bargain deal”, many buyers are interested in purchasing short-sale properties. There have been a lot of stories on short sales and foreclosures in the media over the last couple of years, and rumors of people buying homes for pennies on the dollar are everywhere. The reality is that not all of the stories are true and short sale purchases are definitely not for everyone. In fact, there are as many (or more) horror stories out there about short sales as there are great deals.
So, how do you know if you are a good candidate for purchasing a short sale? Here are some questions to consider:
- Do you have to sell your current home before purchasing a short-sale property?
- Banks will not accept a short sale contract that is contingent on a buyer having to sell their home first. Once a short sale is approved by a lien holder they are looking to close within a short period of time, often times 30 days or less.
- Are you pre-approved and qualified for a loan or are you a cash buyer?
- Be prepared to submit a pre-approval letter or a proof of funds letter with your offer. Banks want to verify that you are a solid buyer and can actually close on the property should they approve your offer. This should be a standard practice on any home you make an offer on.
- Are you patient and have the time to wait out the months of delays?
- Depending on the banks involved, short sales can take months to go through the approval process and are not always successful. If you are a serious buyer you must be prepared to wait 3-6 months and sometimes more before getting an answer to your offer. If you need to be in a home by a certain date then you should seriously consider not looking at short sales.
- Do you have the resources to repair and rehab the property, if needed?
- Because the third parties involved in a short sale transaction are taking loses they generally will not give a buyer any concessions to use for repairs. They will sell the home in an “as is” condition, meaning they do not warranty the condition of the property. Consequently, you should be prepared to make any repairs or updates on your own after closing. This is also a key reason why you should always hire a professional home inspector to go through the property before you make a purchase.
- What happens if you change your mind after submitting an offer on a short sale?
- Once a seller signs and accepts your short sale offer you have a valid contract that is SUBJECT TO THIRD PARTY APPROVAL. What this means is that even though the seller is willing to accept your offer a third party (typically a bank) must sign off on the deal. This “contingency” is spelled out in the Short Sale Addendum that is part of the contract you submitted. The Short Sale Addendum also outlines what you need to do if you want to terminate the contract prior to receiving approval.
- What about the earnest money on a short sale?
- Like any real estate transaction, a buyer is required to put down some earnest money to show that they are serious buyers. Typically, we encourage buyers to put down at least 1% of the purchase price as earnest money. In Utah, the Short Sale Addendum to the Real Estate Purchase Contract allows you to wait until receiving Third Party approval before you have to deposit your earnest money. According to the contract, you will need to deposit the earnest money within FOUR calendar days of receiving Third Party approval.
- How do you find a short sale?
- Your agent has the ability through the multiple listing service (MLS) to pull up the majority of potential short sale properties on the market in a given area. Just as you would when purchasing a home in a normal transaction, you will want to set up appointments and tour the properties in order to find the one that is right for you. Because there are many potential complications throughout the short sale process, your Blackhawk Realty agent will be your most valuable tool in order to pre-qualify the homes that you look at to make sure you are not wasting your time with homes that have multiple offers on them or those that have so many liens and other problems that the odds of them closing are slim.
- How do I decide what price to offer?
- One of the biggest reasons short sales do not close is that buyers have unrealistic expectations and they submit ridiculously low offers. An exceptionally low offer runs the risk of not being approved by the lender, and may put the seller in imminent danger of a foreclosure sale. If you put in one of these really low offers you also run the risk of waiting months for a response from the lender only to have it rejected and as a result you will have missed out on other properties that would have been suitable and available. One of the biggest tools a lender will use to determine if they will accept a short sale offer is how much the BPO (Broker’s Price Opinion) came in at. The BPO is essentially a market analysis performed by an agent at the request of the bank. Your agent has the ability to do the same type of analysis, and at Blackhawk Realty we pride ourselves in our detailed and accurate market assessments of properties. Although there are occasional situations where a lender might accept an offer that is at 50%-60% of the price stated on the BPO, the reality is most banks are looking for offers somewhere around 85% of the BPO. If you think you are going to get a home that has a current market value of $500,000 for $200,000 you are most likely headed for a frustrating and disappointing experience that will also have wasted a lot of people's time.
If after all of this you think you are a good candidate to buy a short sale call us today and let’s get started!