If your considering buying a short sale house, there are a few things to consider. The most important thing to understand is that buying a short sale is not a typical transaction. After the housing crisis fall out in the 2007-2012 era it seemed like all I was doing in real estate was selling foreclosures and short sales. So I can confidently speak with authority on this subject! As I often quote the Farmers Insurance commercial, “we know a thing or two, because we’ve seen a thing or two”!
So the biggest benefit of buying a short sale is that you have the potential of getting a great deal! Over the years we have sold short sale homes well under market values with buyers walking into substantial equity. However, the flip side to the gain, is you have to be flexible, understanding and most of all patient!
1 – When Buying A Short Sale – Know The Market
Whether you are buying a short sale or buying a home from an equity seller, knowing the market is the first place to start. Is the market strong or weak? Are homes selling fast or taking months on the market? What is the list price to sale price ratio for homes where your considering purchasing? Knowing these answers is the only way you are going to know whether or not a home is listed as a good deal! As Professional Realtors, as well as Short Sale Experts, we study homes and prices everyday. We can provide you with the numbers you need to understand any real estate market.
Also, you’ll want to make sure you get advice from the right sources. Unfortunately we see too many home buyers rely on advice from out of state or online sources. Keep in mind it’s important to consult with people that know our local market, contracts or customs. Each state has different laws and rules regarding how real estate transactions are handled. You’ll want to develop your own understanding of our market. This way your decisions will be based on local benchmarks and not experiences from another state. Therefore, our recommendations are to use your local resources and learn the market with our help and guidance. In the end you’ll be much more confident and well equipped to make great deal.
2 – When Buying A Short Sale – The Seller’s Mindset
The first thing to realize is you’ll need to understand what a short sale is, and the impact it has on the seller. Briefly, a short sale is necessary when due to some hardship, the seller can no longer afford to make their payments. And, the home is worth less than the amount owed on the loan. Thus the payoff will be “short” when the home is sold.
Here you have a distressed seller that most likely is not maintaining the home. Typically deferred maintenance is usually a given. Why would they fix their home before feeding their family! The other element here is the sellers mindset. They are typically not happy about their situation, maybe a little embarrassed, so you need to approach the situation with empathy. Compassion early on will always go a long way when it comes down to the end of the transaction if things get stressful. Which can happen with a short sale.
3 – Understand When Buying A Short Sale “The Bank Calls The Shots”
When you are preparing to make your offer, understand that the bank calls the shots. The reason for this in the banks point of view, is that they are taking the hit and eating the difference between the amount owed and the sale price. So they are going to call the shots! But that’s okay, if your patient you may be rewarded with a great deal. But, you may have to put up with a little inconvenience along the way.
4 – Know Your Limitations When Buying A Short Sale
If you have to move in by a certain date, you probably should not attempt to buy a short sale.
The process of approving a short sale is unpredictable for a variety of reasons. Over the years we’ve discovered every bank and person processing a short sale has a different way of doing things. Basically you are dealing with a transaction where everyone has a different set of procedures they follow. And from one sale to the next we are dealing with new sets of guidelines we have no control over.
So if you go into this process needing to close on a certain date, you might want to think twice about buying a short sale. You may be very surprised that your demands to close on a specific date will not matter. The folks at the bank will only move as fast as they will move. You see the seller has no input either here because the seller is not paying for anything! The bank is paying the realtor commissions, the closing costs, sometimes (but infrequently, don’t expect them) repairs and all other fees.
What this means to you, you have an unattached party making the decisions on the selling side with nothing to gain. The guy or gal working on the file is still going to have a job if you walk away from the transaction! And since the seller is already asking to be bailed out, the seller has no influence on the bank either.
I Hear The “Yea Buts”
Yes, I hear and have heard all of the “yea buts”! “If I walk away the bank will have more carrying costs”! True. “They’ll have to put it back on the market, maybe they will end up with less”! True. “It doesn’t make any since that they would do that”. True. “It’s a bad business decision”! True. And I’m sure you can come up with a few more reasons why a bank should respond to a buyers demands and threats of walking away. But the bottomline is you are not dealing with decision makers that have skin in the game! They don’t care about the deal and that’s the hard reality!
So, go into your purchase of a short sale knowing it’s going to be a ride! I’ve seen short sales approved in as little as 30 days, and one that took over a year. However the one that took a year was back in the early days of the housing crisis when the bank were still training people to process them. The problem then was not the process but the shear number of short sales in the pipeline at that time. It’s not like that now, however we have all know change happens, so who knows what tomorrow will bring!
A Recent Experience
The last short sale we did was just a few months ago. Waverly Byrd on our team had a client that bought a short sale in North Charleston that took about 3.5 months to close. The contract was ratified on January 22, 2020, the short sale was approved on February 20, 2020 and closed on April 3, 2020. The processing of this sale was fairly quick because the seller had two previous contracts that fell apart. However, we had counseled our client well in the beginning, so they knew what to expect when buying a short sale. They were in this for the long haul and their efforts were rewarded!
We were told that in both cases the buyers walked away from those sales because they either were not, or could not be patient and wait for the short sale to be approved. So my conclusion is that the agents representing them didn’t have the experience or skills to advise them properly from the start. We’ve found is that when we help our clients understand what to expect, positive results will follow. Consequently, our client bought a nice brick home on a lake for $270,000 that comped out in the $350,000 range! Not bad! Patience was rewarded and Waverly helped our client get the deal that the others left behind!
If you’re not ready and willing to make or pay for repairs, you probably shouldn’t buy a short sale.
Not that all short sales are in bad shape but you should be ready for repairs just incase. You see, often short sales are sold “as is”. Meaning, it doesn’t matter what your home inspector tells you about the homes condition. In most cases the bank will not authorize money for repairs. So our best advice is to have some money set aside for a few improvements once you take possession. Keep in mind as I mentioned in the beginning of this article, sellers of short sales are typically not maintaining their homes.
5 – When Buying A Short Sale – Your Lender
The most important thing to know regarding your lender, is how they will handle any appraiser required repairs if they come up? Most lenders will not lend on a home that doesn’t meet certain condition guidelines established by their underwriters.
Let say the appraiser notices some typical deferred maintenance, like rotten wood siding and chipping paint on the home. The appraiser may require this to be corrected before they will give you the money to close! In most short sales, the seller has no money for such repairs. Then the bank, that’s eating the loan, may not authorize funds for such repairs! What do you do?
In this situation, it’s not advised that you spend your money to repair a house that you don’t own yet. And unless you have enough cash to buy the home without getting a loan, the deal could fall apart. In some cases there may be way’s to save transactions like this but not always. Keep in mind every situation is very different and having the right real estate professionals guide you is very important.
Pay Cash
So there are two ways to avoid this situation. One is to pay cash. Not everyone can do this, so what do you do? The best practice is to look closely at the condition of every home you consider purchasing. And with our guidance we can give you a good idea of whether or not a bank will lend on it. Sometimes you’ll just have to pass and move on no matter how good the deal looks. If you can’t get the money or don’t have the money, it make no sense to pursue a damaged home.
The Rehab Loan Solution
There are a few lenders out there that do rehab loans for homeowners and investors. We have access to several. What you will find though is that these type of loans come with a cost. Typically they will have higher interest rates, more upfront fees and many will have inspection fees. This is because this is what is considered a non-conforming loan and is seem as having a higher risk to the lender. In the past many of our clients have not gone this route due to the added expense.
Our recommendation is that you do your research ahead of time so you completely know the in’s and out’s of this type of loan product before you’re under contract. This will save you time and in the heat of the battle of buying a new home, time is precious.
Conclusion
So in conclusion, when buying a short sale you can insure your success a couple of ways. First of all, hire the right real estate professional to help you. (We would like to apply for the job!) Have them help you do your homework on the market. Follow our 8 Steps to Buying a Home and follow the guidance of your agent. Lean on local professionals for advice, from Lenders to Home Inspectors and others. Lean on your agent. Your agent has a trusted network of professionals that service every type of need in a real estate transaction. And most of all be flexible, it will be your greatest asset!
Our team’s goal is that you have the most successful experience working with us that you rave about us to your friends and family! And when they need real estate service you refer them to us! This has been the cornerstone of my business since 1986!
If you are planning to buy or sell a home in Charleston, I can help! Call Bill Byrd at 843-972-7670 for a free, no obligation consultation.
The Author…
Bill Byrd is a Husband, Father, Realtor, Educator, Musician and Athlete. A licensed Realtor since 1986 who loves helping his clients grow their personal wealth through real estate! Having helped hundred’s of families and individuals during his career you can feel comfortable that Bill’s and his Team’s experience and expertise are unparalleled in our market. Plus, Bill’s a great guy and one heck of a guitar player! More About Bill
