A Short Course in Short Sales
With the slumping real estate market in Orlando, Florida, and record numbers of foreclosures making news every day, you may have seen or heard the term "short sale" and wondered what it means and how it relates to a foreclosure. A home foreclosure is a legal process used by a lender to regain ownership rights to a property after the homeowner defaults on their payment agreement. A short sale occurs prior to a foreclosure when the lender agrees to accept less than the remaining mortgage amount, effectively eating part of the loss. The lender avoids the legal procedure of foreclosure and the seller doesn't have a foreclosure on his credit record (though a short sale is still a serious credit ding). For a homeowner struggling to make mortgage payments and unable to work out a loan restructuring modification with the lender, a short sale may be a better option than a foreclosure. For a buyer looking for a bargain, a short sale may appear to be a better route to home ownership, but the process itself is complicated and there are pros and cons to consider before placing an offer.
1. Sales Price Is Not A Bargain
During the real estate market bubble of 2005 and 2006, many Central Florida home sales were based on local buyer frenzy with buyer bidding against buyer which resulted in exorbitant sales prices. Appraisals for refinances were based on those high sales prices. When the market cooled, homeowners found they owed more than their homes were worth and, thus, were upside down on their mortgages. While a lender may agree to a short sale and take less than the mortgage balance, they may insist on pricing the property at fair market value which means it may not be the smoking bargain you're looking for.
What to do: Work with an agent who's experienced in short sales in the Orlando area, and ask for a comparative market analysis (CMA) so you can make an informed decision about price.
2. Homes Sell "As Is"
Most lenders will not make any repairs since they're already taking a financial hit. They expect a buyer to accept a short-sale property in its current condition. It is in your best interest to retain the right to order and pay for a general home inspection or specific inspections such as roof, pest (especially important in the Orlando area), and sewer, but consider the reports for-information-only. Such reports have value in alerting you to potential problems with the home, but will not provide you with leverage to barter with the lender.
What to do: Order inspections so you're prepared for any additional investments you may need to make after you close.
3. Lenders May Renegotiate Anytime
Lenders do everything possible to mitigate their losses, so they frequently include a clause in the short sale contract that allows them to renegotiate at anytime. They may want to take advantage of an upturn in the Orlando market, a new law passing, or any other change that might enable them to increase the sales price.
What to do: An agent who specializes in short sales can keep you apprized of changing conditions that might affect your short sale agreement.
4. Discounted Real Estate Agent Commissions
Agents working with short-sale properties may be accepting a reduced commission from the lender instead of what's customary for your area. While this may not seem to affect you, it might come into play if you are working under a Buyer-Broker agreement and have agreed to pay a certain percentage to your agent. Your agent may expect you to make up the difference between what the lender pays and what you agreed to in your Buyer-Broker contract.
What to do: Before signing a Buyer-Broker agreement, discuss an adjustment to the commission rate for a short-sale property and include a clause or add an addendum later to cover this situation.
5. Higher Closing Fees
In the Orlanda area, certain closing fees are traditionally paid by or split with the seller. In a short-sale transaction, the lender will not be so generous and you could find certain fees on your side of the escrow at closing.
What to do: Be aware upfront of all fees the lender expects the buyer to pay.
6. Complications from Multiple Loans
If the homeowner took out a second mortgage or line of credit on the property, a short sale can get even more complicated. The lender with the first mortgage may have to offer some payoff to the lender in second position.
What to do: Make sure your agent is experienced with short sales in the Orlando area and understands the potential consequences with a multiple-loan situation. Your agent can research the title so you know what lenders are involved and the existing loan amounts.
7. Length of Time to Closing Date
Depending on the lender or lenders involved, they may be overwhelmed with foreclosures and may take a couple of weeks or months before they address a short-sale purchase offer. Lender response times throughout the purchase process can vary and drag out the transaction for months. The buyer has little recourse and must wait out the lender's time constraints.
What to do: Although the lender may be bogged down with foreclosures, an experienced short-sale real estate agent will know the best way to work with the lender to minimize delays and can include a deadline for the lender's response in your sales offer.
Summary
With all the above negatives of a short sale, why should a buyer even consider this approach to home ownership in the Orlando area? Because you may find the perfect property at a great price! Buying a home is more than purchasing a property: It's a personal decision about where and how you choose to live your life. When you find that special home in Central Florida where you can picture yourself making memories and enjoying a particular lifestyle, you'll know you've found the right place, and the benefit of realizing those dreams outweighs potential pitfalls of buying through the short-sale process.
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