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What to Expect in a Short Sale Purchase

By
Mortgage and Lending with Jamie Russen - Greentree Mortgage NMLS ID #95705

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What to Expect in a Short Sale Purchase

 

When purchasing a short sale it is important to approach the transaction with a few things in mind, most important of which is the fact that acceptance of your offer is a decision that does not rest entirely with the home seller, the real estate agent or even the servicing bank in some cases. Therefore, just getting your offer accepted is often a timely process, requiring you to exercise patience in the unusual circumstance of a real estate transaction involving more than the traditional number of participants; and the understanding that parties with whom you are in direct contact have little control in the decision-making process.

 That having been said, while purchasing a home pursuant to short sale contractual terms may be a good (or great) deal on the surface, it is necessary to understand that some things you can count on when purchasing a home under normal circumstance cannot be relied upon in a short-sale transaction and therefore must explicitly be pointed out in the contract of sale to make sure your rights are protected. Examples of such circumstances are the condition of plumbing, heating and electrical components, all of which must be in working order; appliances which also must be in working order; and the septic system – if one exists in the home you're buying – must be operable, making a sewer inspection necessary to ascertain such condition.

 These are a few of the items that should be included in the purchase agreement, especially if the property is vacant. It also helps to keep in mind that the seller is receiving little or no cash from the proceeds of a short-sale transaction, although s/he benefits from debt forgiveness with the lender's cooperation; and relief from taxation with the IRS' cooperation under The Mortgage Debt Relief Act of 2007. This law was enacted as a result of the severity of devastation caused by the mortgage meltdown, and subsequent economic downturn which caused many homeowners to lose their homes during that period. The ensuing rise in short-sale transactions sought by homeowners, and agreed to by lenders also influenced its enactment.

 Originally the law provided relief to homeowners “whose mortgage debt was partly or entirely forgiven during [the] 2007...” calendar year, with the simple requirement that affected home owners fill out a special form (982) provided by the IRS, but it was later amended to extend through the 2012 calendar year. Based on this relief from taxes that otherwise could've become due on amounts by which the outstanding mortgage balance was reduced, the seller/homeowner was assured that s/he would have satisfied the outstanding indebtedness without being subjected to additional collection activities by the IRS.

 The home buyer however, might be entering a good situation in which s/he can look forward to equity growth at a faster rate than normal when home prices begin to appreciate again, because presumably s/he would be starting at a below market purchase price. This is of course predicated upon the careful selection of a real estate agent to handle the transaction because, unlike the straightforward process in a regular home purchase, short sale purchases require a real estate professional with knowledge of the complexities inherent in these types of transactions; and not all real estate agents are experienced in successfully consummating them. So making sure the agent is knowledgeable in dealing with short sales would be time well spent, thereby reducing the risk of losing money and/or the entire deal.

 Another caution to home buyers intent on purchasing homes via short sale route was eloquently stated by Jacqueline Cliff in her article 'What to expect when buying a short sale home...' in which s/he states, “When making an offer on a short sale, be prepared for a counter offer...” which invariably will come from the bank that services the mortgage or one that owns it. So according to Ms. Cliff, it is always necessary for the buyer to be somewhat flexible in the offer price in order to maintain his/her negotiating posture if (when?) the bank does indeed make a counter offer.

 The question which has not yet been addressed is whether or not home owners would still be willing to enter short sale transactions without assurances from the IRS via extensions to The Mortgage Debt Relief Act of 2007; and the news here is good for potential short sale home sellers and, as an indirect result, good for those buyers interested in purchasing short sale homes. The third extension of this act has already expired on January 1, of this year (2014) but there is a “proposal” in this year's budget presented by the administration that would extend it through 12/31/2014 if it is agreed to by the parties with authorization to adopt it.

 To keep things in perspective during a short sale transaction, buyers must understand that the seller is taking a huge loss (basically everything) and the bank is also taking a big loss on what is owed on its outstanding balance; so the approach must be one of cautious optimism. And only primary residences are considered for short sale transactions, so home buyers should not expect to purchase investment property through the short sale process.

 Once an offer is accepted by the seller and lender, and a contract of sale is signed by all parties, the mortgage application process can begin in earnest and, once an approval is obtained for a new mortgage, the buyer can begin to make plans for closing the transaction, taking occupancy to the property and transforming it into the home s/he envisioned. It would have been time (and money) well spent.

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