Short Sale Buyer’s Top 5 Don’ts
1. Don’t expect an immaculate home
If the seller doesn’t have enough money to pay the mortgage, they often don’t have enough money for cosmetic upgrades and needed maintenance. If the house was built within 5 years, the mechanical systems of the house are probably in good shape, but there may be cosmetic issues. If the house is more than 5 years old, expect to find some problems and factor that into your bid. Make sure you have an inspection contingency in the contract and that you have a thorough inspection done before you finalize the contract. Some buyers even pay for an inspection before making an offer so that they don’t waste time on a sub-standard home.
2. Don’t plan to use creative financing
If the home is a great deal, you may be competing with other bidders that are offering 100% cash to close the deal. If you offer creative financing, the seller’s mortgage company will choose the cash offer. Also, the seller’s mortgage company might require you to take your loan from them and you can expect them to be conservative with their standards. If you have a low credit score, income is difficult to verify and/or you have a small down payment a short sale might not be right for you.
3. Don’t assume the sale will be simple
Even if the bank is responsive and quickly approves a short sale (a pleasant surprise if it happens), be prepared for other potential problems. If a short seller has a 2nd mortgage the 2nd will have to be dealt with and 2nd mortgage holders often are not enthused about losing 100 % of their money. Also, many short sellers have other liens against the property that may not come out until there is a title search. Make sure you don’t put a significant amount of money in escrow until you have a good inspection, clean title report and you know that there is an agreement to satisfy all liens against the house. If you take title to the house with an outstanding lien, it’s your responsibility to pay!
4. Don’t bid too low
You’re negotiating with a bank and they want their money back! The mortgage company will have a real estate agent estimate the value of a home and produce a broker price opinion (BPO) so they have a good idea of how much the property is worth and they won’t accept offers that are not close to that value. If you know of defects that may reduce the fair market value, you can negotiate with the bank, but in general, don’t expect to get a favorable response to a price more than 10% below fair market value.
5. Don’t get too committed
You love the house and you REALLY want to move in now. This is extremely dangerous in a short sale situation. Getting over-committed might mean overlooking defects that reduce the value of the home and cause expensive repairs after you move in or paying over market value in a falling market – reducing the value of your equity in the home before you even move in. If your decision to buy is based on loving the home, then a short sale isn’t for you. Take your time and find your dream home in the simpler typical home sale market.