WHAT HOME BUYERS NEED TO KNOW ABOUT SHORT SALES
SHORT SALES, TIPS FOR BUYERS
August 7th, 2008
In recent years, lenders were granting loans to home buyers that required little or nothing down, limited
or no verification of income and only fair to poor credit scores. The catch was the borrower was stuck with risky adjustable rate mortgages (ARM’s), interest only loans or similar products that made it difficult for buyers to meet their mortgage payment obligations once the loan’s interest rate reset. Normally, borrowers could refinance their way out of a bad loan into a fixed rate loan but declining values, combined with the fact the buyer started with little or no cash investment, left many property owners “upside down”. Once a borrower has decided to walk away from a property that is over-encumbered, the mortgage holder is sometimes contacted by the owner to determine if a short sale is possible. The lender will ask the borrower to complete a “hardship package” which details the borrowers current financial situation including income and expenses and any personal circumstances that may be contributing to the inability to make the required payments. If approved, the owner is instructed to put the property up for sale, but the lender will usually initiate the foreclosure process anyway once the payments become several months delinquent.
A prospective buyer wishing to purchase a preforeclosure home may find the process confusing and frustrating. Even though the seller accepts the buyers’ offer, the offer must still be forwarded to the lender(s) for approval. This can take at least several days or as long as several months. During the wait for a response, other buyers could submit offers on the property potentially bumping the first offer out of contention. Buyers must have a firm loan commitment or proof of funds if paying cash before the lender will consider negotiating the sale. The lender typically obtains one or more Broker Price Opinions (BPO’s) before rendering a decision. The negotiator for the lender may change the price, terms and conditions of the sale or deny the offer completely. They may also specify a title and/or escrow company outside the city,county or state the property is located in. These uncertainties discourage all but the most patient and flexible buyers.
Once approved, the escrow is opened and the buyer usually has a limited amount of time to close the sale. The bank is unlikely to renegotiate the price, even if the buyer finds serious deficiencies with regard to the property, title or disclosures. Unlike bank foreclosures, the buyer should expect the full compliment of disclosures from the seller. If the bank insists on changing the price or terms substantially, the buyers only remedy may be cancelling the sale. The seller must then find a new buyer willing to pay the price set by the lender. In this case, the foreclosure process will continue with a new sale date scheduled. Keep in mind that their is no single way all banks handle short payoffs. Things get even more complicated when multiple lien holders are involved. Delinquent property taxes, utility bills, mechanic’s liens and homeowner association fees must be addressed in some cases before clear title can be delivered to the buyer.
The bottom line is short sales offer potential savings for buyers that understand the process and can stomach the possibility it won’t come together after considerable time and effort is expended. Special forms have been developed by REALTORS to address the specific issues involved in short sales to protect and inform buyers and sellers. If you need a real estate professional to assist you in any real estate matter, please don’t hesitate to contact me:
530-224-6767 or 530-941-7492
BRAD GARBUTT
REAL ESTATE PROFESSIONALS GMAC
TWENTY FIVE YEARS LOCAL EXPERIENCE
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