From 2008 until the fall of 2012, I was one of the leading Realtors in Charlotte listing, facilitating, and closing short sale transactions. My attorney and I educated hundreds of local real estate agents through free workshops to help educate the others on the process and pitfalls of these type of transactions. In the fall of 2012, as the housing market started to improve, it was time to shift into a new direction. However, if you want advice of purchasing a short sale (having closed only a few hundred in a short amount of time), I’m still your man.
1. Short Sales are not Deals
Probably the biggest misconception that people have about short sale homes is that they are a tremendous bargain. W-R-O-N-G! A Short Sale allows a Seller, who owes more on their mortgage than the home is currently worth, to sell for today’s market value. That means that in a neighborhood where the market values are a 5 Bedroom 3 Bath 2 story are $300,000, chances are slim to none that an offer of $175,000 for s short sale 5 Bedroom 3 Bath 2 story would be accepted. The only instances where this rule doesn’t apply are on FHA short sales with a PFS pre-approval already obtained, HAFA, and certain bank proprietary programs where the bank directs the price for the Seller.
2. Short Sales are Sold AS-IS and Need Work
This is the one point that the banks do not understand very well so prepare yourself. In order for the Seller to apply for a short sale, they must have a hardship that requires that they sell the house. This hardship could be the loss of a job, death of an income earner, divorce, overwhelming debt, etc. Having personal experienced financial hardships in m past, I can attest that they rarely sneak up on anyone. Rather, it becomes inevitable as time catches up with circumstances and creates a hardship. As a result, before a homeowner stops making their mortgage payment, they stopped maintaining the house. So when the furnace broke, it stays broke. Painting the wood soffits on the outside of the house often became rotten due to neglect.
The bank, in their evaluation process, rarely (if ever) considers even obvious damage and neglect when deciding on a price to settle the debt with. They instead rely on another real estate agent to do a Broker’s Price Opinion (BPO) and hopefully catch and report these items. Here’s the heavy dose of reality: BPO agents are paid $30-$50 per report that would take an average agent 2-4 hours to complete. As a result, they have to fly through houses in order to complete enough in a day to make a living for themselves. Do you think that someone being paid that little would crawl in the crawl space to uncover mold or pay attention to whether the A/C compressor is missing from the outside? The answer is no.
3. Most Short Sales Need a Title Search but Most Never Get One Until Late
A common misconception is that only a mortgage can attach themselves to a property to prevent a sale. In fact, any legal action that becomes a judgment can attach itself to a property from unpaid credit and medical bills to HOA liens. Unpaid and unfilled IRS and state taxes can also stand in the way of a sale and must be settled before the sale can close. Most Sellers are completely oblivious that this can and does occur so after negotiating the mortgage and preparing for closing, these other items emerge and must be dealt with. These are deal killers and unfortunately waste everyone’s time and effort on a property that can’t be sold without additional expense. Therefore, if you’re thinking about buying a short sale home, invest in a title search to see how many actual liens are attached to the property before wasting any additional time and effort only to not close. Title searches through an attorney cost $90-$200 and are usually back in 48 hours after order. It is the best money you could spend in due diligence on a short sale.
4. You’re Not Protected as a Buyer
In North Carolina, almost every offer will include the North Carolina Short Sale Addendum drafted by the real estate commission, NC Bar Association, and North Carolina Association of Realtors. Overall, this addendum isn’t bad since it followed the template for how I operated for years with regards to closing and due diligence times. However, paragraph 6 is troubling for prospective Buyers as it allows the Seller to sign multiple offers on the same house.
In any normal transaction, a Seller full executing more than one offer usually results in a lawsuit and possible jail time for fraud. Now thanks to the short sale addendum, a Seller can continue to execute multiple contracts at the same time and their agent is required to present them to the Seller’s lender until the Seller’s lender has approved one. While this was intended to cut down on short sale fraud, the unintended consequences are continued delays as lenders will only consider one short sale file at a time per Seller. Introduce another contract and the current short sale process grinds to a halt and an entirely new file must be submitted.
5. Watch for Hidden Fees
While the state of North Carolina doesn’t explicitly mandate that an attorney facilitate a short sale, the negotiation of debt is a gray area that few agents are uncomfortable with entering. As a result, many real estate agents and Sellers are hiring “Short Sale Negotiation Firms”, lawyers, and other third parties to facilitate and negotiate the sale. Usually, third parties are big on promises, short on results, and are costly… that’s where the trouble starts. The Seller’s lender has strict guidelines on whom they will pay and negotiation companies aren’t one. As a result, these guys look for someone to pay them and that someone may end up being the Buyer.
Some firms ask that the Buyer ask the Seller for the maximum amount allowed in Seller Paid Closing Costs and that money is then paid to the negotiation firm. Others seek compensation from the real estate agent as well as from Buyer and Seller. The less trustworthy will actually place a lien on the home and then demand payment from anyone (this is usually called extortion). Either way, prepare yourself for the unexpected. A good way to protect yourself is to ask your agent to obtain the HUD-1 that the Seller’s agent and the Seller’s lender are negotiating with.
I know what you’re thinking: “There’s no way I would ever deal with a short sale after reading this. Why not just wait until the home forecloses?’ Well, the truth is that the short sale allows the Buyer to purchase the house of their dreams now instead of months or years later as a bank owned property. For a buyer that decides to wait, another buyer may decide that the property is worth the risk.