Are Short Sales Good Options for Buyers?

The following article comes to you from Tali Wee of Zillow:

The current U.S. real estate market is fraught with low for-sale inventory, competitive buyers and inflated prices due to bidding wars. These circumstances motivate frugal buyers to consider all available for-sale properties including short sales and foreclosures. But, are these wise options for buyers?

What is a Short Sale?

Short sales occur when a lender accepts resale of a property for less than the remaining balance of the home loan. This occurs when homeowners are unable to make their payments due to hardships such as unemployment, divorce or financial stressors. Homeowners who borrow multiple loans against the equity of their homes might find themselves unable to make payments and stay current on multiple debts. Other times, homeowners who must relocate might request short sales if their property values have depreciated dramatically and they owe more on their homes than they could get at resale.

Short sales cause the lender to be shorted in the transaction but the owner avoids the costs of foreclosure. Alternatively, foreclosed homeowners are evicted and banks take full ownership of properties to attempt resale. Banks and lenders aren’t set up to manage a large number of real estate transactions and may prefer to settle distressed properties in short sales rather than foreclosures. Because full loan repayment is unlikely on distressed properties, lenders focus on the most lucrative and time-saving options. In most cases, short sales are preferred.

What Are the Advantages of Buying a Short Sale?

Bargain Prices
Home-buyers typically consider short sales as opportunities to acquire more home for less money. Generally, buyers can purchase these homes for 5 to 15 percent below market value. Because lenders are getting shorted on their original contracts, they’re interested in receiving the highest possible returns on their investments and avoiding legal fees and hassles of foreclosures. However, lenders still rely on comparable market analysis to negotiate fair prices for homes. They will not accept offers for 50 percent of homes’ market values. Buyers who offer reasonable market prices for properties are more likely to be approved, as opposed to buyers who aim for the cheapest deal.

Motivated Sellers
The sooner the home sells, the sooner the lender receives cash. By agreeing to a short sale, lenders avoid foreclosure fees such as taking the owners to court, paying for resale repairs on properties, and paying staff to coordinate resale transactions – while lenders aren’t receiving payments. So, it’s financially beneficial for lenders to work with qualified buyers. These buyers can sometimes negotiate favorable loan terms from in-house lenders such as reduced interest rates, which save buyers significant funds throughout the life of loans.

Modest Competition
Short sale homes have little buyer competition in otherwise competitive real estate markets. Many first-time buyers prefer to avoid the hassle of buying a short sale home which lessens competition. Short sale buyers can circumvent bidding wars and inflated home prices in their current markets.

Ideal Homes
The crashed market caused many homeowners to offload homes in good condition and favorable neighborhoods through short sales, releasing affordable options for first-time buyers. Since mortgages are expensive and require a long-term commitment, buyers shouldn’t settle for properties they don’t love. Home shoppers who avoided short sales early in their searches may broaden their hunts and happen upon their dream homes. When buyers find homes they can visualize their futures in, they become attached and willing to jump through hoops to buy them.

What Are the Disadvantages of Buying a Short Sale?

Lengthy Closing Process
The closing process on short sales is typically two to eight weeks, but can drag on for months. Lenders dictate the duration of the closing process, leaving time-sensitive buyers helpless. The cause of the delay depends on a few factors including lengthy paperwork, short sale qualification, negotiations and lack of lender communication. Short sales rely on bank approval, which depends on sellers’ hardships and finances, and their ability to find buyers offering fair market values for properties.

Excessive Paperwork
Banks need full short sale packages from sellers including bank statements, pay stubs, tax returns, equity account statements, hardship letters explaining the request and other financial details. Lenders review these packages within several days of receipt, sometimes long enough to require buyers to send updated statements. Banks then approve purchase agreements, confirming buyers have reliable funding and offer agreeable prices. Banks typically counter with requests for reduced commission fees, increased purchase prices and contributions from sellers. The back and forth of this process can be tedious, especially for sellers without specialized short sale agents representing them.

Qualification Delays
Another cause for delay is the length of time the homeowner has defaulted on his or her mortgage. Homeowners who need to relocate or know they won’t be able to make future mortgage payments are required to default by 30, 60 or even 90 days before most lenders would even consider approving a short sale. A homeowner with perfect credit who is current on his or her mortgage and has a willing buyer with a fair-priced offer still may have to default on the loan for the specified time period.

Risk of Foreclosure
At 90 days of nonpayment, homeowners receive notices of default, prompting the foreclosure process to begin. Usually, the short sale negotiation and foreclosure departments of banks are not collaborative, and once the foreclosure auction takes place, the lender then owns the property, voiding all short sale efforts.

No Guarantees
After a lengthy commitment to purchase the property, the buyer has no guarantee that the lender will approve the short sale. During the weeks or months that buyers have accepted offers hung up in short sale processes, they cannot make offers on other properties. However, buyers can negotiate the right to make offers on other homes throughout the short sale closing process by writing it into their purchase agreements. Meanwhile, the longer a buyer stays in escrow on a home, it’s common to grow more attached to the property. If the sale doesn’t go through, buyers tend to be discouraged.

Plus, lenders are permitted to change terms at any stage in the short sale process potentially causing a prospective deal to fall through at the last minute. All funds buyers advance for home inspections and title searches are lost if a deal falls through.

No Disclosures
Buyers of short sale properties don’t have the opportunity to negotiate with sellers about property repairs or credits; they purchase properties as-is. Buyers are still allowed to pay for inspections to protect themselves from purchasing homes with serious damages. Otherwise, buyers can research public records to find previous sale documents, they can contact neighbors who may know more and buyers’ agents can contact previous listing agents to determine potential risks.

Are Short Sales Good Purchase Opportunities?

The benefits of buying a short sale completely depend upon buyers’ circumstances. If listing agents are experienced in short sales and have submitted short sale packages, then buyers can assume the processes will be handled within reasonable time frames. Proactive listing agents who stay in contact with banks can smooth the path of closing short sales. However, buyers have no control over closing timelines and risk losing their deals along the way. Yet, buyers can yield significant savings on their purchases if they’re willing to wait. Therefore, prospective short sale home-buyers should evaluate their urgency to buy versus their desire for discounts before considering short sales.