Short Sales and First Time Buyers

Wikipedia describes a short sale as:

A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.[1] In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Most Short Sales leave a deficiency balance for which the Mortgagor / Borrower is still liable. In 99% of all cases it is not a settlement-in-full. A deficiency balance will remain while the mortgage broker, real estate agent / broker, loan officers, title and closing agents retain their profit. No regulatory agency governs this hybrid transaction. (Continue Reading About Short Sales on Wikipedia Here)

For many, the instant reaction is that this is an easy place to get a deal. In some cases it is. But often it adds to the complication and potential heartache a real estate transaction can cause. I haven’t been a first time buyer since the 90s but we work with many. Nor have I ever been in the position of being a short sale seller. I can report about what we’ve seen though. The point of this post is by no way a plea not to buy a short sale but to reveal some additional challenges they can create.

A property is listed in RMLS. It had a buyer that fell through so the bank had already approved the sale once. The new offer should be a slam dunk with a prequalified buyer since the banks has already done their math. Nope. While the bank goes back through their process from scratch (which has no set timeframe, they decide when they decide), the seller starts heading down the road of bankruptcy. They’ve stopped paying their utilities and they have been shut off with past due balances. The offer was written September 23 and accepted November 15th in part because there was now a trustee involved as well. The inspection period clock is now ticking but no one will pay to turn the utilities on… the bank and seller don’t “care” and the buyer doesn’t want to pay the seller’s past due balance to check that the systems work but what option do they have? We eventually convinced the utilities to turn them on temporarily so they could be checked (they’re fine).

End result in this case is that everything will probably work out. Most offers between a buyer and seller are hammered out in a day or two, even with counter offers. Add a third party and it took almost seven weeks to get an accepted offer. That’s a long time if you are eager and becoming emotionally attached to a property. What would have happened if the bank got a better offer on November 14th? The buyer probably would have gotten a rejection somewhere around December 1st!

If the inspections had revealed major issues a whole new problem is created. Real estate transactions in Oregon are written on standard paperwork are “As-is” but we all know that repairs and reductions are a part of the negotiations prior to closing. Banks are much better at holding the as-is take it or leave it position. We had a bank decommission two in-ground tanks found during the inspection period, but as a buyer, you have to go into the transaction expecting the bank will make no repairs. The offer they accept is the one they plan on closing with. The buyer still has all the contingency rights but we haven’t seen banks being very, if at all, flexible when it comes to concessions once the offer is accepted.

One Comment on “Short Sales and First Time Buyers

  1. Beware when the sellers agent says its an “Approved Short Sale”

    I put a bid out on house listed as that and a month went by with no reply. Finally my agent found out that the bank requested and appraisal order. It turns out that the bank had approved that they can sell it short but never decided how much. Basically meaning that my bid sat in some dusty file cabnet for over a month and was never even thought about. Another month later my offer was rejected and teh price of the house was jacked up from 245,000 to 278,000. So basically I wasted over two month of my life on a house I thought had been approved at around (or at least close to) 245. Oddly enough that house has been sitting on the market ever since. If your going to bid on a short make damn sure that the sellersellers agent has done all their paper work.

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