Short-sales can be a good deal for both the buyer and seller; but before entering into one, there are some important considerations for a buyer.
Am I in a rush to close? Buyers on strict timetables should think twice before signing a contract to purchase a short-sale. These deals can take 90-120 days on average to approve and sometimes much longer. Buyers should enter the transaction knowing they will need to be patient and plan accordingly.
How long am I stuck in the deal? Short-sales require the approval of the seller’s bank so the contract must have a provision making the deal contingent on receiving this. But the seller shouldn’t have an unlimited amount of time to obtain this approval. Typically, the contract should provide for a 90 or 120-day window to get the approval, after which the buyer can terminate the contract and receive a refund of the contract down payment. Without this important provision, a buyer could be stuck in a contract for a long time, with no end in sight.
Transaction costs are not refundable: In the event the short-sale is not approved, the buyer should note that the closing costs like inspection, appraisal, survey, title search and legal fees are not refundable. Basically, any money expended on the house will be lost.
Don’t Expect a Deal to Good to Be True: Although short-sales can typically be priced below a traditional transaction, the short-sale deal must be within the realm of reason. Short-sales are arms-length transactions and must be valued according to the market. While it is typical to have some price concession in exchange for the additional risk that a buyer incurs, the “short-sale discount” cannot be so large that the bank will not approve the deal. The seller’s payoff bank will either engage their own appraiser or use a broker’s price opinion to ensure that the price reflects something close to fair market. Be sure the contract contains a provision that permits a buyer to increase the purchase price in the contract if the payoff bank comes back with a counter-offer.
Is the seller really in financial hardship? Banks will only approve short-sales when the seller is in financial hardship. Simply because the seller owes more than the house is worth will not be enough. Careful buyers should inquire on the nature of the hardship and include representations in the contract supporting this.
Hidden Costs: Most buyers are unaware that just because the Short-sale lender approves a lower payoff, there may be costs not covered. The following are some examples: (1) Water: the water bill may be $5000. The lender has already lost tens of thousands of dollars so it may not want to pay this bill; (2) Seller’s Judgments: The seller may have judgments for debt that he owes such as credit cards, taxes, etc; (3) Monetary Fines from Violations: there may be violations which have thousands of dollars of fines; and (4) Taxes: The Seller may not have paid their taxes.
The above-mentioned items are just a few. These are potential additional costs to your purchase. The best way to avoid this is have your attorney order the title. This is important for two reasons: first, if the costs are extremely high, you may decide to find another house; or second, you are comfortable with the additional costs if the lender does not cover them and set aside additional monies to satisfy same.
Upon receipt of the title report, forward the title to the person negotiating the short-sale. This person will then include all the charges on the HUD-1, which is a closing disclosure of all fees. The short-sale lender will either approve or deny. If they deny, at least you knew in advance and you were not be caught by surprise.
The information I just provided is not told by realtors and some attorneys do not have the experience and knowledge to protect their clients. Choose your attorney wisely.
Who am I?
I am a Real Estate Transaction Attorney. My sole practice area is real estate purchases and sales for residential and commercial properties. I have successfully closed over 5000 transactions. I also represent local and national lenders in New York City and Long Island. My practice primarily serves the following communities in Queens, Bronx, Brooklyn, New York City and Long Island (Nassau and Suffolk): Bangladesh, Pakistani, Indian, Arab. My staff speaks Bengali, Urdu, and Hindi. We understand these communities and are sensitive to their cultural and religious diversity, in particular the Islamic/Muslim faith.