1. Sellers Paid Too Much (and Borrowed Too Much)
If a home sold for $300,000 a few years ago and is now for sale at $200,000, that doesn’t mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. The seller has no equity and owes too much on the house.
2. Stringent Qualifications
Not all Sellers qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
3. Short Sales Will Sell at Market Value
Lenders aren’t naive or unaware of the value of a home. And, they are already taking a huge hit. Lenders will insist on a comparative market analysis (CMA) from the listing agent, and an appraisal, or a broker price opinion (BPO). If a lender believes a better price can be obtained, the lender may reject the Buyer’s offer and hold out for a higher price. Or, they may come back to the Buyer, and ask for a higher purchase price. That price will be close to market value.
4. Homes Sell “As Is”
If a mortgage company agrees to a short sale, it is most likely also paying the Seller’s closing costs in the transaction (i.e. Realtor commissions, title fees, etc.). Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for any inspection items.
5. No Buyer Closing Costs
If you are a first time buyer, or have limited funds for closing costs, it’s very unlikely that you’ll get a lender to agree to pay your closing costs. The lender needs to “net” as much money out of the deal as possible, and will likely not agree to pay for any “extras” like closing costs, inspection issues, or a home warranty.
6. Lenders Reduce Agent Commissions
Not many Buyers realize this, but most lenders want a discount. Moreover, agents end up doing two to three times the work of a conventional transaction and don’t appreciate getting paid less to do more work. While this typically doesn’t affect the Buyer’s bottom line, it is something to consider, as agents begin to stand up for themselves. Some agents will now ask the buyer to pay the difference.
7. Length of Time to Close
Depending on if/when the Notice of Default was filed, the lender’s back-log of other short sales and foreclosures, and how much paperwork the seller has already submitted, it could take anywhere from a few weeks to 6 months (or more) to get a response from the bank. In addition, if there are multiple lienholders involved (i.e. a 2nd mortgage, or HOA lien), it could take longer to satisfy the demands of the other lienholders.
8. Lenders Can Change Conditions
Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender’s desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.
9. Lose Control of Transaction
If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller’s lender calls the shots, not the buyer nor the buyer’s lender. If you are trying to close escrow concurrently with the sale of your home, it likely will not happen.
10. Property Goes to Foreclosure
After months of waiting, and jumping through hoops, and negotiating with lienholders, the lender may come back and decide it’s not worth it, and they’ll just let it go to foreclosure.
In this market, everyone has a story about a Short Sale. Yes, in many cases short sales do work out, and the Buyer gets the house (at fair market value), and Seller walks away with nothing but bad credit. But was it all worth it? Only the Buyer and Buyer’s Agent can determine if going after a Short Sale is a good idea or not.
Colorado Real Estate 