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< About Buying Real Estate
Are you looking to buy a new home? Are you thinking that now's a great time
to find bargains? Before you make an offer, it pays to know a little about the
seller's situation.
If a home is being sold for below what the current seller owes on the property
— and the seller does not have other funds to make up the difference at closing
— the sale is considered a short sale. Many more home owners are finding
themselves in this situation due to a number of factors, including job losses,
aggressive borrowing against their home in the days of easy credit, and declining
home values in a slower real estate market.
A short sale is different from a foreclosure, which is when the seller's
lender has taken title of the home and is selling it directly. Homeowners often
try to accomplish a short sale in order to avoid foreclosure. But a short sale
holds many potential pitfalls for buyers. Know the risks before you pursue a
short-sale purchase.
You're a good candidate for a short-sale purchase if:
- You're very patient. Even after you come to agreement with the
seller to buy a short-sale property, the seller’s lender
(or lenders, if there is more than one mortgage) has to approve the sale
before you can close. When there is only one mortgage, short-sale experts
say lender approval typically takes about two months. If there is more than
one mortgage with different lenders, it can take four months or longer for
the lenders to approve the sale.
- Your financing is in order. Lenders like cash offers. But even if
you can’t pay all cash for a short-sale property, it’s important to show you
are well qualified and your financing is set. If you're preapproved, have a
large down payment, and can close at any time, your offer will be viewed more
favorably than that of a buyer whose financing is less secure.
- You don’t have any contingencies. If you have a home to sell before
you can close on the purchase of the short-sale property—or you need to be in
your new home by a certain time—a short sale may not be for you. Lenders
like no-contingency offers and flexible closing terms.
If you're serious about purchasing a short-sale property, it's important for
you to have expert assistance. Here are some people you want to work with:
- Experienced real estate attorney. Only about two out of five
short sales are approved by lenders. But a good real estate attorney who's
knowledgeable about the short-sale process will increase your chances getting
an approved contract. Also, if you want any provisions or very specialized
language written into the purchase contract, a real estate attorney is essential
throughout the negotiation.
- A qualified real estate professional.* You may have a close
friend or relative in real estate, but if that person doesn’t know anything
about short sales, working with him or her may hurt your chances of a
successful closing. Interview a few practitioners and ask them how many
buyers they've represented in a short sale and, of those, how many have
successfully closed. A qualified real estate professional will be able to
show you short-sale homes, help negotiate the purchase when you find the
property you want to buy, and smooth communications with the lender.
(All MLSs permit, and some now require, special notations to indicate that
a listing is a short sale. There also are certain phrases you can watch
for, such as “lender approval required.”)
- Title officer. It’s a good idea to have a title officer do an
initial title search on a short-sale property to see all the liens attached
to the property. If there are multiple lien holders
(e.g., second or third mortgage or lines of credit, real estate tax lien,
mechanic’s lien, homeowners association lien, etc.), it's much tougher to
get that short sale contract to the closing table. Any of the lien holders
could put a kink in the process even after you’ve waited for months for
lender approval. If you don’t know a title officer, your real estate
attorney or real estate professional should be able to recommend a few.
Some of the other risks faced by buyers of short-sale properties include:
- Potential for rejection. Lenders want to minimize their losses as
much as possible. If you make an offer tremendously lower than the fair market
value of the home, chances are that your offer will be rejected and you’ll have
wasted months. Or the lender could make a counteroffer, which will lengthen
the process.
- Bad terms. Even when a lender approves a short sale, it could
require that the sellers sign a promissory note to repay the deficient amount
of the loan, which may not be acceptable to some financially desperate sellers.
In that case, the sellers may refuse to go through with the short sale. Lenders
also can change any of the terms of the contract that you’ve already
negotiated, which may not be agreeable to you.
- No repairs or repair credits. You will most likely be asked to
take the property “as is.” Lenders are already taking a loss on the property
and may not agree to requests for repair credits.
The risks of a short sale are considerable. But if you have the time, patience,
and iron will to see it through, a short sale can be a win-win for you and the
sellers.
< About Buying Real Estate
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