Foreclosures and Short-Sales - Mystery Unveiled Part 2 - Short-Sales
When a homeowner finds themselves in a situation where they are having difficulty making their payments, the bank may agree to a short-sale.
The terms "short-sale" and a "pre-foreclosure" are used interchangeably and should be considered the same for the purposes of seeking this type of purchase.
The differences being that a home is in "pre-foreclosure" when the borrower has not followed through with the terms of their loan contract with the bank.
Any actions after that point would be considered "pre-foreclosure" actions.
This could include negative credit reporting, collections actions, court action - or an approved "short-sale".
In short, a short-sale occurs when a bank agrees to allow a borrower to place their home on the market for less than what the borrower owes on the note.
For instance, Joe Borrower owes $250,000 on his home.
He contacts his bank and tells them that he can no longer make the payments and asks the bank if he can "short-sale" the property.
The bank agrees and tells Joe to submit any and all offers to them and they will determine if it is an amount that is acceptable to them.
The banks have a method by which they determine the value of the home and for our purposes here, it is really not that important to know.
The point is that the bank makes the decision on what they will accept.
Joe can put that home up for $150,000, but that does not mean the bank will accept it - on the other hand, they just might.
You simply do not know until you try.
So on the up-side; you can get a pretty good deal here.
The problem is that short-sales are known to take an extraordinary long time to close.
This process can be streamlined somewhat if the house is being sold by an experienced real estate agent who has already negotiated with the lending institution's Loss Mitigation Department.
If not, then you are looking at anywhere between 4 weeks to 6 months to even get an answer from the bank as to whether or not they will accept or decline your offer.
Then the process starts all over.
So, if you are considering short-sales you must first have time, then much patience...
and you should absolutely continue looking at other properties.
You should also always have a real estate agent representing you in these transactions to protect your best interests.
Time lines need to be established and addenda must be in the contract to protect your best interests in all real estate transactions - but short-sales and foreclosures in particular.
Consider the services of an Accredited Buyer's Representative (ABR) when selecting an agent for any home purchase.
The Real Estate Buyer's Agent Council defines an Accredited Buyer's Representative as: "The Accredited Buyer Representative (ABR®) designation is the benchmark of excellence in buyer representation.
This coveted designation is awarded to real estate practitioners by the Real Estate BUYER'S AGENT Council (REBAC) of the National Association of REALTORS® who meet the specified educational and practical experience criteria.
" There are two other issues to consider with short-sales.
You absolutely must be pre-qualified for a loan amount within your offer's price range.
This must be documented and provided along with your written offer.
There are no exceptions here.
In addition, pre-qualification can help you to understand which homes you can afford and those which you cannot.
Lastly, these homes are sold "As-Is" - usually with a "Right-to-Inspect".
"As-Is" means that the bank is not going to make any repairs or provide any credits whatsoever.
Simply put - the home is being sold as it is, with no warranties and no guarantees of any kind.
A "Right-to-Inspect" means that although you (as the potential buyer) accept that you are buying a home "As-Is", you retain the right to inspect the home prior to purchase.
If the inspection reveals significant repairs that you are not willing to make to the home - you have the right to walk away from the offer.
So, here again - you really need a competent real estate agent who can represent your best interests.
There are a couple of reasons for this; If you go it alone, you may not have that "Right-to-Inspect" in your contract and you are going to be bound to a contract to purchase that home.
Also, a competent real estate agent may actually be able to negotiate certain credits with a bank - even with a home being sold "As-Is".
As an example, the home's air conditioner compressor may have been stolen.
A home without an air conditioner is essentially uninhabitable in a sub-tropical environment like Florida.
Many home buyers are now obtaining their financing through the FHA.
The FHA requires the home to be habitable, so the bank may bend their rules a bit to get the A/C in there and keep that house off of their books.
Some banks may even pay certain title fees on these homes.
You must have competent representation to achieve these types of concessions from a bank.
Remember something; the agent's name that is on that sign represents the seller - in these instances that would be the bank.
Do you really think that the seller's agent is going to have many fiduciary duties to the buyer? Not likely, and think about it - the bank is providing them with several homes to sell.
They want to keep those listings coming...
and you don't bite the hand that feeds you.
The terms "short-sale" and a "pre-foreclosure" are used interchangeably and should be considered the same for the purposes of seeking this type of purchase.
The differences being that a home is in "pre-foreclosure" when the borrower has not followed through with the terms of their loan contract with the bank.
Any actions after that point would be considered "pre-foreclosure" actions.
This could include negative credit reporting, collections actions, court action - or an approved "short-sale".
In short, a short-sale occurs when a bank agrees to allow a borrower to place their home on the market for less than what the borrower owes on the note.
For instance, Joe Borrower owes $250,000 on his home.
He contacts his bank and tells them that he can no longer make the payments and asks the bank if he can "short-sale" the property.
The bank agrees and tells Joe to submit any and all offers to them and they will determine if it is an amount that is acceptable to them.
The banks have a method by which they determine the value of the home and for our purposes here, it is really not that important to know.
The point is that the bank makes the decision on what they will accept.
Joe can put that home up for $150,000, but that does not mean the bank will accept it - on the other hand, they just might.
You simply do not know until you try.
So on the up-side; you can get a pretty good deal here.
The problem is that short-sales are known to take an extraordinary long time to close.
This process can be streamlined somewhat if the house is being sold by an experienced real estate agent who has already negotiated with the lending institution's Loss Mitigation Department.
If not, then you are looking at anywhere between 4 weeks to 6 months to even get an answer from the bank as to whether or not they will accept or decline your offer.
Then the process starts all over.
So, if you are considering short-sales you must first have time, then much patience...
and you should absolutely continue looking at other properties.
You should also always have a real estate agent representing you in these transactions to protect your best interests.
Time lines need to be established and addenda must be in the contract to protect your best interests in all real estate transactions - but short-sales and foreclosures in particular.
Consider the services of an Accredited Buyer's Representative (ABR) when selecting an agent for any home purchase.
The Real Estate Buyer's Agent Council defines an Accredited Buyer's Representative as: "The Accredited Buyer Representative (ABR®) designation is the benchmark of excellence in buyer representation.
This coveted designation is awarded to real estate practitioners by the Real Estate BUYER'S AGENT Council (REBAC) of the National Association of REALTORS® who meet the specified educational and practical experience criteria.
" There are two other issues to consider with short-sales.
You absolutely must be pre-qualified for a loan amount within your offer's price range.
This must be documented and provided along with your written offer.
There are no exceptions here.
In addition, pre-qualification can help you to understand which homes you can afford and those which you cannot.
Lastly, these homes are sold "As-Is" - usually with a "Right-to-Inspect".
"As-Is" means that the bank is not going to make any repairs or provide any credits whatsoever.
Simply put - the home is being sold as it is, with no warranties and no guarantees of any kind.
A "Right-to-Inspect" means that although you (as the potential buyer) accept that you are buying a home "As-Is", you retain the right to inspect the home prior to purchase.
If the inspection reveals significant repairs that you are not willing to make to the home - you have the right to walk away from the offer.
So, here again - you really need a competent real estate agent who can represent your best interests.
There are a couple of reasons for this; If you go it alone, you may not have that "Right-to-Inspect" in your contract and you are going to be bound to a contract to purchase that home.
Also, a competent real estate agent may actually be able to negotiate certain credits with a bank - even with a home being sold "As-Is".
As an example, the home's air conditioner compressor may have been stolen.
A home without an air conditioner is essentially uninhabitable in a sub-tropical environment like Florida.
Many home buyers are now obtaining their financing through the FHA.
The FHA requires the home to be habitable, so the bank may bend their rules a bit to get the A/C in there and keep that house off of their books.
Some banks may even pay certain title fees on these homes.
You must have competent representation to achieve these types of concessions from a bank.
Remember something; the agent's name that is on that sign represents the seller - in these instances that would be the bank.
Do you really think that the seller's agent is going to have many fiduciary duties to the buyer? Not likely, and think about it - the bank is providing them with several homes to sell.
They want to keep those listings coming...
and you don't bite the hand that feeds you.