If you’re shopping for a home in San Diego County, you might consider short sales and foreclosures. Here’s what to expect when shopping for and buying short sales.
What is a Short Sale?
When a seller owes more on the mortgage than the home is worth, the seller’s mortgage servicer needs to give permission to sell it. In a traditional sale, the seller pays off the mortgage balance from the net proceeds of the sale. If the home’s value has dropped, though, that might not be possible.
For example, if the principal balance of the mortgage is $500,000, but the net proceeds from a sale will be only $400,000, the seller will be $100,000 short of paying off the debt. If the seller qualifies, a mortgage servicer can grant permission for a short sale. The seller can sell the home for the lower price, and the mortgage servicer will agree to settle the debt. The lender won’t pursue the seller for the outstanding $100,000.
Once the seller has permission from the mortgage servicer to short sell the home, the property goes in the MLS with all the other homes for sale. When you’re shopping for homes, you may not even notice that the listing is a short sale.
What’s the Difference Between Buying Short Sales and Traditional Sales?
The good news is that in the past 10 years, the process of buying short sales has become more streamlined. If the mortgage servicer has already approved a sales price, even the timeline is similar to a traditional sale. You can read my article about the escrow timeline for home buyers.
In many cases, buying short sales can still take longer than a traditional sale. The mortgage servicer may need to approve the short sale, once the seller accepts your offer. If you’re flexible with time, this may not be an issue.
If you want a concurrent sale, in which you must sell your current home to have the funds to buy this new home, you can’t buy a short sale. You will need to sell your current home first and collect the proceeds, in order to qualify to buy a short sale.
Can I Get a Good Deal? Can I Write Lowball Offers?
Lenders won’t approve lowball offers. Even though the lenders agree to accept less than what is owed on the mortgage, they still want fair market value for the property. Fair market value is the price the both a buyer and seller will accept under reasonable and ordinary conditions.
Sometimes, short sale properties are listed with a lower price, with the expectation of a bidding war that brings up the final sales price. Even if a seller accepts a lowball offer, the lender will likely reject it, and there will be no sale.
Buying Short Sales “AS IS”
Most short sales are sold “as is.” Neither the seller nor the lender will complete any repairs. Once your offer is accepted and you open escrow, you should still hire a home inspector. You want to be aware of any structural defects and other issues to fix once the home is yours. Read more about Home Inspections.
Once you complete the home inspection, if you decide to continue with the purchase, then you can ask your lender order the appraisal. You don’t want to pay for the appraisal unless you’re sure that you want to buy the property.
You may need to pay for the home inspection and appraisal before the mortgage servicer approves your offer. Here’s where you’ll need to be patient. You may need to be willing to wait a month or two for the mortgage servicer to approve your accepted offer, and give final approval for the sale to proceed.
Choose Your Representation Wisely
For a real estate agent, negotiating a short sale purchase is more complicated than a traditional sale. The mortgage servicers have many paperwork requirements and deadlines to follow. Be sure to hire a buyer’s agent who understands how short sales work.
I have earned the Short Sales and Foreclosure Resource certification from the National Association of REALTORS®. Read about my Home Buyer Services. Be sure that your agent is up-to-date on short sales protocols. You want to work with someone who will work closely with seller’s mortgage servicer to ensure that everything goes smoothly.
As always, good luck, and contact me with any questions.