Initially it appears that a short sale is a good deal. Although a slim margin of short sales may be profitable for a buyer—because there are always exceptions—much of the time a buyer would be better off buying a resale home. 

 

Rarely do real estate agents tell you that it’s not a good idea to buy a short sale. In part because real estate professionals earn commission and incur fewer expenditures listing short sale properties. Everyone makes money except the sellers and buyers. Realize, too, that listing agents might push sellers to list as a short sale, because if the sellers went through foreclosure the listing agents will not get the listing. 

 

The following are many reasons why buyers might not want to buy a short sale. 

 

Sellers Paid Too Much: If a home sold for $400,000 a few years ago and it is now for sale at $300,000, that doesn’t mean the buyer is picking up $100,000 of equity. It means the seller paid too much in a raising real estate market and now the market has fallen. It means the seller has no equity. 

 

Sellers Borrowed Too Much: A few years ago, banks were eager to lend money in an appreciating real estate market, sometimes allowing borrowers to over-mortgage their home. This means the borrower’s loan balance exceeded the value of the property. When the seller bought the home, appraisers were sent out to value the home and more often than not valued the home at the purchase price. If the real value of the home was less than the market value and the appraiser valued the home at the purchase price to secure the loan, then the lender and appraiser performed a disservice to the consumer and the real estate market—this practice is against the law. Appraisal laws have since changed, but the practice described was common and often resulted in home buyers securing attractive variable interest rate loans that became callable when the market declined. Many homeowners secured 125% financing at the time of purchase in the hopes of a continual increase in home values. Bottom line, in today’s market, the over valued loans were issued. 

 

Stringent Qualifications: Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify. Sellers must prove a hardship and submit extensive evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or prequalifying the short sale. 

 

Homes Sell at Market Value: Lenders aren’t naïve or unaware of the value of a home. Lenders will insist on a comparative market analysis (CMA) and a broker’s price opinion (BPO). If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value. 

 

Sold “As Is”: Traditionally, when lenders agree to a short sale they also pay a portion of the closing costs. Lenders ask buyers to purchase short sale properties in their present “as is” condition. Generally, lenders will not pay for repairs suggested on a home inspection report, pest report work, roof repairs, and home warranty plans, or deferred maintenance. Buyer beware! If you buy a resale property, these items are negotiable—banks do not negotiate. 

 

Approval Time Frame: Depending on when and if a Notice of Default was filed, the lender’s backlog of foreclosures, and how much paperwork the seller has already submitted, it can take upward of 3 months to receive the bank’s response. In addition, if two lenders are involved with the short sale because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender. 

 

Lender 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.

 

Discounted Commission: Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. Moreover, agents end up doing two to three times the work of a traditional resale transaction and don’t appreciate getting paid less to do more work. Though this rarely happens, if you have agreed to pay your agent a certain percentage under a Buyer-Broker Agreement, you could be liable for the difference between what the lender will pay and what your contract stipulates, if your agent refuses to waive the difference. 

 

Closing Costs: Lenders rarely pay for extras, as a traditional re-seller would be willing to negotiate. If you want any of those extras, you will pay for them yourself. Sometimes lenders refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket. 

 

Transaction Control: If you need to close escrow by a specific date, plan on being disappointed. A short sale closing process takes an indefinite amount of time. The seller’s lender calls the shots, not the buyer or the buyer’s lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen. 

 

Seller Motivation: Short sale sellers will receive negative hits on their credit report, close to that of a foreclosure. There is little incentive for a seller to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 years (with restrictions) on a foreclosure, most sellers have no intention of buying another home again.