Buying a Short Sale

Many of our buyers at Wasserman Realty Associates, Inc. are in the market to purchase a short sale. They've heard about some great deals and are looking to buy a home for as little money as possible. When I first meet with a buyer, I explain that there are generally three types of homes for sale in this market; conventional listings, short sales, and bank owned properties or REO'S. I try to explain that each sale is different and comes with a special set of circumstances. This article will focus on short sales.

According to the latest statistics from Realty Trac, short sales rose 15% in the last quarter of 2011 over the previous year. Short sales comprised 10% of all homes sold in Q4 of 2011 and REO, or bank owned, sales dropped 12% over the same period. These statistics point out that the banks have become much more aggressive in pursuing and allowing short sales. In fact, the process has become much easier and quicker over the past year. That's good news for sellers facing foreclosure and presents great opportunities for buyers in the future.

According to a recent article in Yahoo Finance, "short sales are starting to become the preferred method for banks to dispose of properties in default. In short sales, borrowers who owe more on their mortgages than their homes are worth agree with their bank to sell their homes at the lower market value. In return, the bank agrees to absorb the loss."

“Short sales have become a more attractive option since all parties agree on the terms, leading to fewer legal issues, said Daren Blomquist, RealtyTrac’s director of marketing. During the quarter, the average short sale sold for $184,221, while the average foreclosure sold for $149,686. And banks typically don’t have to spend a mint maintaining a short sale home like they do a foreclosure, where they have to pay more in legal fees, property taxes, maintenance and insurance," said Blomquist.

“During the fourth quarter, it took an average of 308 days, to complete a short sale. Foreclosures, meanwhile, can take years to complete. And, quicker approvals mean fewer buyers get discouraged and withdraw their offers. Some banks even pre-approve prices so deals close very fast," added Blomquist.

There are some challenges when buying a short sale and it's important that buyers understand them. Here are some of the issues you'll face when purchasing a short sale:

1. There's Nothing Short About a Short Sale - In our experience, the average length of time it takes to complete the short sale transaction is about 4 months. It's important to consider the length of time it will take when buying a short sale. Buyers need to be patient and understand that there are many twists and turns involved in the process. The paperwork involved in a short sale is lengthy, the bank will require an appraisal, and investor approval can take several weeks. Be patient when buying a short sale. If you're in a hurry to purchase a property, then a short sale is not for you!
2. It's a Fixer Upper - A short sale is sold "as-is". This means that the seller (the distressed person selling the home) and the bank will not make any repairs to the property. So, if the roof leaks, the microwave blew up and the carpet is stained, they're your responsibility. Buyers need to consider the cost of making repairs to the home. Typically, these repairs include new paint, new carpet or flooring, drywall repair, and other standard maintenance items. You must consider these costs when buying a short sale. 
3. Paperwork - The banks demand a lot of paperwork from the seller and from you as the buyer. As a buyer, be prepared to provide the bank with your name, address, phone number, and the first five of your social security number. Also, the banks will typically ask you to sign an arms length affidavit. This states that you have no relation to the seller and that the sale is an "arm's length" transaction. Also, understand that the distressed seller is also required to provide a great deal of documentation to the bank. They have to provide bank statements, tax returns, pay stubs, etc. The collection of these documents can take the listing agent, or short sale negotiator, time to collect these. It's important to understand the process so you do not become impatient and walk away. 
4. Inspections - I always advise my clients to obtain a home inspection from a licensed home inspector when purchasing a short sale. I believe this is a critical inspection because you want to know what you're walking in to. Keep in mind that the sellers have been in default for some time; sometimes up to, and longer than a year. Many of these people face financial hardships and simply do not have the money to properly maintain the property. Since you are buying the property "as-is" you must know if any of the critical (and very costly) systems are functioning properly. These include the air conditioning and heating systems, water heater, garage door and window functions, etc. The average home inspection (in the Palm Springs area) costs about $275. It's money well spent to avoid costly repairs in the future. It's no guarantee, but it will give you some peace of mind that the major systems in the house are in good repair.
5. Your Offer is a Balancing Act - The amount you offer for a short sale property is a critical decision you'll need to make. In our market, inventory is low, and good properties move quickly. The listing price of a home is not a guarantee that the property will sell for that amount. It's critical that you discuss a buying strategy with an experienced Real Estate professional who has experience buying and selling short sales. Make sure you ask your agent if he or she has been successful in selling and buying short sales. The amount of your offer is a balancing act and you don't want to offer too much and you don't want to come in too low and end up as a fourth back up offer either.
6. Don't be Discouraged if You're a Backup Offer - In our experience, the first buyer is usually the first to walk away from the transaction. If you're a second or third backup, be patient. Chances are you'll be in first position if you hang in there!
   
7. Be Patient - This is the BEST advice I can give you when buying a short sale. As I mentioned, there are many twists and turns, paperwork gets lost, distressed sellers are slow to provide critical data, etc. But, a short sale may provide you with a wonderful opportunity to purchase a great home for less than you can imagine. Be patient, be strategic and don't get too attached to the property. If it's meant to be, it's meant to be. Good luck!

Mark and Pam Wasserman are short sale specialists with Keller Williams Realty in La Quinta, California. Mark Wasserman represents buyers interested in purchasing distressed properties. For more information, please visit our website at www.teamwasserman.com, or contact Mark at 760.397.3270.