What Buyers Need to Know About Short Sales
A lot of potential homebuyers are interested in short sales because they think they can get a “great deal”. But short sales can be complicated and take longer than traditional owner sales. Please review the Short Sale Addendum (Form 2A14-T) approved by the NC Bar Association and NCAR.
What’s a Short Sale?
If a home is sold below what the homeowner owes on the property, and the homeowner does not have the funds to make up the difference at closing, the sale is considered a short sale. A short sale is different from a foreclosure, which is when the homeowner’s lienholders have taken title of the home and are selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure.
You are a good candidate for a short sale if:
- You’re very patient. Even after you come to an agreement with the seller to buy a short sale property, the seller’s lienholders must approve the sale before you can close. Approval times vary, but are typically 30-90 days.
- Your financing is in order. Lienholders like cash offers. If you can’t pay cash, it is important to show that you are pre-approved with a lender. If you are pre-approved, have a large down payment and can close any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.
- You don’t have any contingencies. If you have a home to sell before you can close on the purchase of a short sale property, or you need to be in your new home by a certain time, a short sale may not be for you. Lienholders like no-contingency offers and flexible closing terms.
- You can accept the home “as is” with no repairs. The homeowners may not be financially able to make any repairs. Even though you have the right to a home inspection, it is likely that no repairs will be made and you will be responsible for paying for any and all inspections and appraisals performed whether you close on the home or not.
- You may be responsible for paying part of your buyer agent’s commission. If the lienholders refuse to pay the full commission to the agents involved in the transaction, you will be responsible for paying the difference in your agreed upon commission.
In order to successfully purchase a short sale, be prepared to include these things in your offer.
- Earnest Money Deposit in certified funds. The offer will not be submitted for lender approval without it.
- Pre-Approval or Proof of Funds. Your pre-approval letter should include that you income and assets have been confirmed and that the lender requires no more than 30 days to close. The lienholder may require pre-approval through another lender as a back-up plan in case there are delays with your lender’s funding.
- Closing date. Include a 60-90 day closing date, but be prepared to close sooner or later if necessary.
- Inspection/Appraisal. It is important to remove these contingencies while waiting for lender approval. These days many buyers are having several different inspections (general, septic, radon, oil tanks, chimney, wood destroying insects, structural, etc.) and are spending $1000 or more on the various inspections. This will enable you to close quickly and eliminates the risk of waiting 60-90 days only to find repair issues that may cause you to terminate the contract. Once the lender has issued approval, it will be too late to negotiate repairs or credits.
- Additional Provisions. Include a short sale addendum that gives you the right to withdraw your offer for any or no reason prior to lender approval. Indicate that the offer is “subject to 3rd party approval”.
- Closing Costs/Warranties/Expenses. Do not include any seller paid concessions if you don’t actually need them. The lender is already taking a loss and is not likely to approve any concessions.
Short sales fail for a variety of reasons. It depends on who the lienholders are and how many. It depends on the seller’s motivation to follow through with all the lienholder’s requirements. It depends on having a seller’s agent who is experienced and knowledgeable in the short sale process. Understand that the lienholders will not give the seller’s confidential information to your buyer agent or you. We are dependent on the listing agent for communication and will not go to the lienholders directly, as that is a violation of ethics and is useless.
So why bother with a short sale? If you are very, very patient and are willing to risk your inspection fees if necessary, and the house is exactly what you want, it could work out well. It is important that you are prepared for the frustrations that are bound to occur and are willing to accept it as part of the process.
