By Chris Sloan, president of the Utah Association of REALTORS®
14 February 2009 - During these tough economic times,
a once uncommon real estate transaction is becoming more and more prevalent.
In fact, if you've been watching the marketplace, you've probably already
run into a few homeowners who are looking to sell using this type of deal.
It's called a short sale, and it's a situation that occurs when homeowners
are unable to sell their property for the amount they owe on their mortgage.
In other words, the owner can't sell their home unless a third-party creditor,
usually a mortgage lender, approves the deal. The situation usually occurs
when home prices fall and the owner has little or no equity in the property.
The seller seeks to do a short sale rather than face foreclosure.
While these situations are difficult for each of the involved parties,
they can also be a win-win: Sellers receive a less severe mark on their
credit reports, which can help them purchase another home in a quicker timeframe
than if they had a foreclosure on their record; banks can often reduce their
losses by avoiding the costly foreclosure process; and buyers can purchase
competitively priced real estate. Nevertheless, they are complicated and
often frustrating transactions, especially for buyers who are unfamiliar
with the process.
Below is information that can help you decide if a short sale purchase is right for you and, if so, what to keep in mind as you go through the transaction.
Hire an Experienced Realtor
By their nature, short sales are complicated transactions. One figure from the California Association of Realtors estimated a short sale success rate of only 50 percent. That's why if you decide to buy one of these properties, you should work with a Realtor who is experienced in short sales. A Realtor can protect your interests, guide you through the process and provide advice when things don't go as planned.
Get Information about the Asking Price
Buyers typically see short sales as a way to get bargain-priced real estate.
While it's true that short sales can be a way to get good deals, don't expect
huge discounts. Lenders are trying to minimize their losses, and while they
will sell competitively priced real estate, they require purchase prices
to be in line with current market values.
Also keep in mind that the asking price for a short sale is usually only
a baseline figure because the seller doesn't know how much the bank will
accept. That's why it's a good idea to initially find out whether the lender
has approved the listing price. If not, know that the final price could
be higher.
In deciding how much to offer on a property, your Realtor will be a great resource. A Realtor experienced in short sales will be able to determine a price that the lender will likely accept.
Be Patient
Once you've been pre-approved for a mortgage and find a property you're
ready to purchase, you'll submit an offer to the seller who, upon acceptance,
will then submit your offer to the lender for approval. Once the offer is
submitted to the lender, be prepared to wait. Getting an answer from a bank
can take at least 60 days, and the entire process from start to finish can
take about three to four months.
One tip for possibly reducing the response time is including in your offer
a deadline by which the lender must act. When banks have stacks of pre-foreclosures
to review, your offer can end up near the bottom of the pile if the lender
has no reason to look at it sooner. Nevertheless, keep in mind that significant
delays do occur even when deadlines are included.
Because of these delays, buyers looking to act quickly may be better off making an offer on another property that is not subject to third party approval.
Be Careful about the Contract
In most short sale transactions in Utah, buyers will include in their offers
a provision that states there is no legally binding contract until the lender
accepts the offer. That allows the seller to continue to accept other offers,
but it also allows you to walk away from the deal for any reason. So if
you find another house in the meantime, you're not obligated to buy the
short sale if the bank has not yet approved your offer. But that's not always
the case, so make sure you know and understand what you are agreeing to
when you submit an offer.
Short sales are complex transactions, but they can also be great opportunities. For the best chance at success, make sure to work with an experienced real estate professional.