Every short sale deal proposes a unique surprise to deal with between offer and closing. But, there are several items that seem to come up over and over again, that even the best of us can be surprised when managing a short sale contract for a home buying client. These are items specific to California and each state has variations on how short sales are managed and the foreclosure procedure unfolds. Always consult with a local professional.
#1 - The listing agent is working for the seller to help them avoid foreclosure not the buyer. Desperate times, desperate measures. When an agent needs to stop a TRUSTEE SALE, they will lower the price under market, creating a bidding frenzy so they can submit an offer to the short sale negotiator as soon as possible to stop the trustee sale. This tactic also applies when an agent has an unreasonable negotiator or a BPO (Broker Price Opinion - mini appraisal) that is too high. The agent will price the home slightly under the BPO and try to demonstrate to the negotiator what the buyers are willing to pay. As a buyer, your agent should be able to demonstrate what is fair value through their assessment of the home and the comparable sales in the area. Don't be teased into a multiple offer crazy price war over a short sale. Whatever home you are placing an offer on, have a good feeling for the market value before writing the offer. Always know your highest bid before you write the offer and you will not have to worry about buyer's remorse or second guessing yourself when you didn't get the home because someone paid more.
#2 - Always request to see the preliminary title report before writing an offer on a short sale. Any good short sale agent has a copy of the prelim before they place the house on the market. The prelim indicates the current liens on the property. I can't tell you how many times, an agent has told me there is only one loan and I find out there are three. With that said, don't ever believe the preliminary title report to be accurate. The preliminary report is only good for the date it was issued and if it is over 30 days old, request an updated one. Not that this guarantees anything either. Why? As you probably already know, not all notes transferred (sold) within the MERS system, are recorded at the county. Therefore, if Bank of America sells its note to GreenPoint Financial, the original Bank of America loan may be on the preliminary title report but not the GreenPoint. This also means that the amount owed for Bank of America may not be the exact amount of the loan balance. Sometimes the only way to know the liens is by the seller providing mortgage coupons and utility bills. Home Owner Association delinquencies are another surprise that come in late in the game. There is no standard for what an HOA will charge in late fees and penalties.
#3 - Request to see the seller's current HUD when the short sale approval letter is received. You and your agent can double check to make sure the approved amount matches the bottom line. With the approval letter comes a closing date. Make sure the pro-rations for taxes and HOA fees are dated in accordance with the short sale approval letter. This can be very tricky as the many times the escrow officer will only request a demand at the beginning, when the offer is accepted by the seller, and if the short sale approval took longer than that pay off date, there may be significantly more late fees and penalties added. This is a hard one to manage as I have found very few HOA groups that are easy to work with. Sometimes delinquent HOA fees are passed on to collection agencies and they are even more difficult to work with when it comes to settling on a short sale.
#4 - Make sure you do everything you can not to become a landlord on the day your agent hands over the keys. It is not uncommon for short sale sellers to think selling their home is never going to happen and they can become complacent about the moving date. Write into the contract that the seller vacate the property 3 days prior to close of escrow ( 5 days even better). This way, your final walk through can confirm they have found another place to live. My rule for my clients, if the beds are gone, get ready to close. If the beds are still there, your only option is to hold up the funding and not close escrow. No agent wants to get this close and not have their sellers out of the house. I have personally hired movers to make sure sellers are out before close. Realize many short sale sellers have bad credit and can find it hard to find another place to live. My comments are not to be cruel but realistic as the moment the buyer takes ownership, if the sellers are not gone, they are now tenants. Read more about the California Eviction Process here. The fact is any seller staying over close of escrow becomes a tenant. However, in a short sale, there are no proceeds to hold until the seller vacates. During the buyer's walk through, it should be very clear the seller is moving.
#5 - Don't be surprised if the buyer, is asked to pay for something that is commonly paid for by the seller. Don't be surprised if this happens within five days or less of closing. Taxes, garbage liens, title fees, and HOA document preparation fees have all been examples of nasty surprises in the final hour of closing on a short sale. Generally speaking, it is less than $1000. However, the patience of buyers, sellers, negotiators, and agents has been exhausted and the buyer should be prepared for the fact that the seller and the short sale negotiator will not pony up. However, the gap must be covered and it either gets paid or the deal doesn't close. Most agents and buyers want the deal to close and so we chip in to make it happen.
In my humble opinion, the only reason anyone should buy a short sale is if it is the home they really, really want. Don't write an offer just because you think it is a deal (the feeling you got a deal can slip away quickly with unknown repairs and surprise closing costs). Make the offer because you think it is the best home for you. Only then will it be worth "hanging in there" and only then will you be willing to do what it takes to make the deal happen. Buying a home in a short sale takes patience, more patience, and a little bit more patience to make it happen. If it is not your personality type (or your agent's) to keep working the deal and not let the speed bumps derail your desire for the home, then don't write an offer on a short sale. It is not my intent to make you an anti-short-sale buyer but to give you just a wee bit more insight on what to prepare for when buying a short sale home. As someone once told me, "Prepare for everything and nothing will happen.".
If you have specific questions about short sales email me or call me at 408-406-6035.
CJ Brasiel, Broker Associate
REALTOR® SRES® GREEN® CDPE CHS
Fireside Realty & Mortgage
Follow me on twitter @CJBrasiel