KCRag Forum

pitfalls?  issues?

we love our house, but are considering jumping on a short sale.  what's the deal here?  from what i can tell, it's where a bank owns the home and is willing to accept less than the note in order to avoid going through foreclosure.  does this mean the bank might accept a dramatically lower offer than asking? 

just curious.

chrizow wrote: pitfalls?  issues?

we love our house, but are considering jumping on a short sale.  what's the deal here?  from what i can tell, it's where a bank owns the home and is willing to accept less than the note in order to avoid going through foreclosure.  does this mean the bank might accept a dramatically lower offer than asking? 

just curious.

I had experience with a residence being sold short this past year.  The original mortgage company had failed.  Another lender purchased a block of mortgages, or notes, for as they said "pennies on the dollar".  The existing owner wanted to sell the property but could not get offers at or above their payoff amount and foreclosure was a possibility.  The new mortgage holder, the lender, agreed to consider a "short sale". 

The property end up being sold to a new owner for 37 percent below the pay-off amount for the existing loan.

As long as the bank is willing to accept your offer the sale should be handled much like any other sale.  What might be different is that you will probably be buying the house "as is".  In other words don't expect the owner or the bank to fix any problems that may exist that you see or may not tell you about problems the house may have.  Make sure you have a very good home inspector and be there when it is inspected so that you can ask any question that you might have.

just read the contract carefully and make sure you're getting the type of deed and title insurance to the property you want.  (in a normal transaction, you'll get a full warranty dead, but the bank may only want to give you a quitclaim deed.) 

i'd really recommend you get a lawyer (not me) to look it over.  we bought a bank-owned property, and our real estate agent was clueless about the contract terms.  (she thought it would be fine for us to indemnify the bank for any errors it made in issuing the original loan or prosecuting the foreclosure.)

It isn't magic and if you don't like being disappointed don't do it.  It can be a very long process with hundreds of bumps in the road.  It can also blow up in your face or you can be shut out in the blink of an eye or an hour before closing.

http://homebuying.about.com/od/buyingah ... rtSale.htm

My understanding is that in a short sale the bank does not yet own the house.  It is very close to foreclosure and the bank has agreed to let the owner sell it for less than the balance of the mortgage in order to avoid foreclosure and a bigger loss.

I studied short sales alot before I bought my house last December. You can find bargains but the major problem is the bank will work on it's own pace and on it's own terms. You need to make sure your are pre-approved (not pre-qualified) for them to consider your offer. Short sales can often take over 6 months to close from the day you make the offer so don't get your hopes up or make any plans to leave your current place until you've closed. And as someone else just mentioned, it can fall apart at the last minute. If you hang an offer out there it's difficult to move on until the bank answers.

Also, they will not make any repairs or let you readjust your offer because of something you find during the inspection. I found out I needed some mild work to the foundation of mine that was going to cost 2k to fix after I put in the offer. They would not let me adjust my offer or request them to make repair, I had to stay with it or drop it completely and move on. The crappy part is they aren't tied to any owner disclosure laws. Say the sewer line is busted and they know, they don't have to tell you like an individual owner is required by law to disclose anything they know.

Rambling, and I forgot alot of the terminology, but let me know if you have questions. I actually educated my realitor through out the whole process because she never dealt with foreclosure or short sale (and she had plenty of experience). I'm obsessive compulsive about research before I buy anything, I probably spent over a 100 hours researching bank owned and short sale properties.

dangerboy wrote: My understanding is that in a short sale the bank does not yet own the house.  It is very close to foreclosure and the bank has agreed to let the owner sell it for less than the balance of the mortgage in order to avoid foreclosure and a bigger loss.

I am nowhere near an expert in this area, but I think I've heard it also depends on the bank involved.  Some banks will use a short sale to make someone think they are getting a good deal, when it really isn't that much of a discount, especially banks that don't mind holding a number of properties.  Other banks want to get rid of these problems ASAP and will accept a sizeable loss, so it sounds like it is important to consult someone who knows the bank's history in these situations.

and make sure you ask if the short sale has already been approved by the bank when you stumble into one. Alot of the times they aren't which makes the whole process take longer.  I also knew someone who closed in 2 months. Mine took almost 4 months and I had to pay to re-winterize the house after I tested the plumbing. It sucked...

My recommendation is a get a structural engineer and have roto rooter scope the sewer lines. Home inspectors don't know how to check foundations and can't scope the sewer line. These are the two most expensive repairs that can hide behind the banks non-disclosure.

wow, thanks for all the great info everyone!  the rag knows all. 

dangerboy wrote: My understanding is that in a short sale the bank does not yet own the house.  It is very close to foreclosure and the bank has agreed to let the owner sell it for less than the balance of the mortgage in order to avoid foreclosure and a bigger loss.

You are describing a process descriptively known as "Deed in Lieu of Foreclosure".  Some realtors are specializing, with the mortgage companies approval, in getting in there just pre-foreclosure and brokering a sale somewhere between the mortgage payoff and the mortgage payoff minus the expenses of foreclosing and maintaining a foreclosed property while they find a wholesale buyer from accross the country.  The seller walks away without a foreclosure or bankruptcy on their record and the bank closes out a problem loan faster and cheaper than if they had to take the property back.  Buyer has a reasonably priced house and the realtor pockets the commish.  Everybody happy.

Lately it seems like Banks have not been in a hurry to move on short sales.  If you are interested in trying to acquire a home through a short sale it's definitely in your best interest to have flexibility in your living arrangement in case it takes forever.  Then there's always the chance that it falls through.  If you don't have the living arrangement flexibility and need to get transitioned it may just be good to try to find a home that's already been foreclosed on, though there can be issues there too.  While it's great to get a deal, the important thing is to find a home that meets your needs, in the price range that you can afford (and not be house poor!).