Adventures in Short Sale Purchasing
Many investors and potential home buyers who have been reluctant to enter the housing market in recent years are starting to perk up now at the thought buying a discounted property through a short sale.
What is a short sale? This is when the borrower owes the bank more than the sale value of the house. For example, suppose Joe and Jane Smith bought their home in Sunnyvale for $700k with a no-money down loan from Countrywide in 2005 and then two years later could no longer afford to make their payments. The Smiths get behind in their mortgage payments and property values have started to level out or decline slightly. Now they still owe $700k on their loan, or more if their loan had negative amortization. A listing agent has done a comparative market analysis and concluded that the home could be listed for $675k to help it sell quickly. However, that is not enough money to cover the commission, the escrow costs and certainly not the $700k loan. That is the typical short sale situation.
The Purchase Offer:
How do you make your offer more desirable to the seller? Well, aside from the highest price of offers presented, the sellers are looking for speed. If you are the highest offer, the seller will then counter with an addendum that says the offer must be subject to lender approval. This is when things start to sloooooooooooooooow down. The lender (in this scenario, Countrywide) has many such offers piling up on their desk, and they cannot turn around a counter offer very quickly. Expect to wait weeks for a response.
If you do not have a home of your own that you are trying to sell, then you are in a better position to wait out the lender. If you have a higher down payment you can make, then your offer looks more desirable to the lender. However, beware of plunking down such a big amount into escrow before lender approval–you may have trouble getting the buyer to agree to release your deposit if the deal goes south.
Advanced Short Sale Issues:
What if the seller has judgment liens against the property? These may appear on your preliminary title report. It is a good time to consult with an attorney to evaluate these liens and their effect on the likelihood your escrow will close.
What is the house is in foreclosure? This is a complex timing issue as the foreclosure process in California has strict timelines. Additionally, California has strict laws protecting homeowners in foreclosure situation, and separate contractual rights of rescission. Are you or your Realtor TM using the right contract? It’s time to consult with a real estate attorney.