Ten Pitfalls of buying a short sale home - Part 1 of 2

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Industry Observer with Retired
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Ten Pitfalls of buying a short sale home - Part 1 of 2

I am working with a lot of buyers right now. Some of the best bargains on the market are short sales. Can they be a good deal? YES!

Might there be complications and pitfalls? YES!

I am often asked the following question: “I notice this is the best priced house on our list, but it is a short sale. What exactly does that mean?”

I am always happy to show and sell a short sale house, but there are some pitfalls that you need to be aware of.

1. The first pitfall of buying a short sale home?
The seller is getting no money at closing. Any transaction that is put together is contingent on the seller getting nothing at closing. Nothing. Zip. Nada.
Ten Pitfalls of buying a short sale home
How does this affect you as the buyer? Well, in our free market system, we are motivated to perform based on the financial reward at the end. When there is no financial reward, the motivation is low. In fact, the seller gets more benefit from staying in the home several months with no payment and no rent, then he will get from closing the sale and transferring title to you,.

2. The second pitfall of buying a short sale home?
The bank is in control of your purchase.

Remember the first point? The seller will get no money at closing. But they are the legal owner of the home. So they will sign as the seller on the purchase offer you make. The one who really decides whether your purchase goes to fruition or dies, is the bank. Why? Because the sale cannot close until they are paid off in full. And they will not be paid off by your offer. The funds you bring to closing are “short” of paying off the mortgage. So the bank has to decide whether to let the sale close, and agree to take less than full value for the mortgage.
Ten Pitfalls of buying a short sale home
3. The third pitfall of buying a short sale home?
The bank is making a decision.

They do not have your best interests in mind. They only have their own best interests in mind. Their decision has little to do with the offer you are making, and little to do with the seller. Their decision is simply this - “Will we lose less money by accepting this short sale offer, or will we lose less money by taking the property back in foreclosure?”

4. The fourth pitfall of buying a short sale home?
A short sale has a long closing.

Banks have been set up very well for making loans, and collecting and tracking payments. They were not at all set up for the exercise of determining how much money they are willing to lose on a particular loan. They got overwhelmed with a demand they were not at all prepared for. No staff, no infrastructure, no systems in place. Who makes the decision of how much exactly they are willing to lose? How do they decide if the offer they have is a market priced offer? The chaos is beginning to get better over time but this is new for everybody.
Ten Pitfalls of buying a short sale home
5. The fifth pitfall of buying a short sale home?
The seller is the legal owner of the home, but is not the primary one making the decision.

This is part of what makes short sales so complicated. The seller still owns the home. They alone have the legal right to decide if to sell the home or not. Once they have decided to sell the home, they alone have the legal right to accept your offer and make a legal contract to sell. However, in a short sale, after the seller has signed, the bank then gets to decide if the sale will go to closing or not. You as the buyer have no input into that decision.

So your fate - your future - is decided somewhere in Colorado (or some other state) by people you will never meet. Is this to be your new home? Can you really get it as cheaply as the contract says? Should you start packing to move? Should you enroll your kids in the school district?

I would invite you to read part 2.

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Re-Blogged 1 time:

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  1. Gabe Sanders 11/21/2010 11:43 PM
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Rainmaker
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Ron Marshall
Marshall Enterprises - Saint Michael, MN
Birdhouse Builder Extraordinaire

Very interesting, Phil.  I will pass this one along to some of my realtor friends.  And, look forward to Part 2.

Nov 21, 2010 11:05 PM #1
Rainmaker
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Phil Leng
Retired - Kirkland, WA
Phil Leng - Retired

Thank you Ron

Phil

Nov 22, 2010 08:57 PM #2
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Phil Leng

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