Short Sale and Foreclosure Primer
The price of Short Sales and Foreclosures can be perceived as an opportunity of a lifetime but they can be complicated and come with hidden costs. Real estate industry analysts say there are several factors to consider when making an informed buying decision on these two types of properties.
Buying a foreclosure or short sale is a complicated legal transaction involving contracts, warranties, titles, appraisals, assessments, inspections, a review of property taxes and clearance of liens. “As is” sales often requires help from a real estate attorney, whose fees can range from $750 on up depending on the complexity of the deal. Additionally, buyers of these distressed properties often need an advocate to assist in the closing of the deal, especially if the contract is drafted by a bank and isn’t the standard home sale contract recognized and used by the Florida Association of Realtors and The Florida Bar.
There’s also the risk of buying an “as is” foreclosure that has sat vacant for months without the utilities turned on or has been stripped of all its fixtures, appliances, wires, plumbing, cabinets, pipes and air conditioning units. Be prepared to invest additional monies in repairing a foreclosure property.
With short sales there is often a piggy back or second mortgage on the property. Piggy back mortgages were popular during the housing boom; the two payments stacks one small secondary loan on top of a primary one to make one mortgage payment for the new homeowner. Piggyback mortgages, sometimes from two different lenders, were a way someone could buy a home without the standard 20 percent down payment. Basically, the price set by a seller in a short sale relies on the approval of the home’s lenders. Sometimes the second mortgage holder decides they don’t want to settle for less than the face value of the loan and since both lenders need to agree the deal often ends up in foreclosure in the long run.
“SHORT SALE PRIMER”
A short sale exists when the proceeds from a sale will be insufficient to pay the mortgage(s) and other encumbrances on the property in order for the seller to transfer title free and clear. Basically the seller owes more than the property’s present market value. In order for the sale to take place the institution (usually “The Bank”) must approve all aspects of the sale.
This situation is often also referred to as preforeclosure. The reason is, The Bank will not even consider a short sale unless the mortgagee is 60 or 90 days behind in their payments. When this happens it triggers the process that ultimately will lead to foreclosure. A short sale is the only option prior to foreclosure that will help the Seller and The Bank while possibly being advantageous to the buyer.
In a short sale, the lender agrees to discount a loan balance because of an economic or financial hardship. Negotiation is done through the lender’s loss mitigation or workout department.
- Possibly getting the property for less than the home’s fair market value.
- There is more time to get a comparable market analysis, research the title, and have the home inspected in a short sale than a foreclosure.
- The seller may be very accommodating in the sale.
- The home is owner-occupied and isn’t vacant or stripped like some foreclosed properties.
- Since the property was not sitting vacant, there is usually little cost to fix up the property.
- Short sales can require more work on the part of the buyer.
- Often the buyer must be able to pay for the transactions entirely in cash.
- The lender (s) ultimately have the final say on whether the sale is approved.
- Weeks can go by without any response from the lender on whether a sale price was accepted.
- Because the seller has a financial hardship they may not have been maintaining the property properly.
- The lender can refuse the final sale price or ask the seller for a promissory note for money at the end of the negotiations, which could be a deal breaker. (A promissory note is a signed legal agreement that guarantees a debt)
A foreclosure is a legal proceeding in which a lender obtains a court-ordered termination of a mortgagor’s rights and ownership on the property after the borrower defaults on payments. The property is then repossessed and sold by the lender, often below what was owed on the previous mortgage.
- Profitability is high because of the highly discounted price and the estimated value for which you can sell the property.
- The bank is not an emotional seller trying to make a profit, so the homes often are priced under market value.
- Banks want to move fast on a transaction, so you may be able to secure a home extremely fast.
- The time frame to buy a vacant foreclosed property from the lender is short so appraisals and inspections can’t be scheduled before a closing.
- The home might have been stripped of appliances, wires, plumbing, cabinets, pipes and air conditioning units.
- The home might have costly pest control issues.
- Fixing up the home might be costly if it has sat vacant for a long period of time.
- If you are financing the purchase, the lender might require a working kitchen, no exposed wires and a working pool. If the property is trashed, your lender might back out of the deal.
- “As is” contracts with no warranties are risky and need to be reviewed by professionals in the industry at a cost.