5 Things Buyers Should Know About Short Sales and REOs

Isn’t it exciting and tempting when we hear about “hot”, “amazing,” “smokin’” or “crazy” deals? We often hear and read about them in the real estate world. This is the hype that surrounds short-sales and foreclosed, bank-owned homes.

What is a Short Sale?

Basically, a short sale is an agreement between a bank and a homeowner to sell their home for less than the amount of the loan, instead of forcing the homeowner to lose the property to a foreclosure.

Today, this is becoming more common because market prices are falling below the current mortgages that are held by distraught owners. Instead of dealing with the expenses and hassles of actually throwing somebody out on the street, the bank decides to be “generous” and let them walk away from their debts for a reduced amount, given there is a buyer who is willing to pay a price that is acceptable to the bank. Theoretically, all parties involved will benefit from this:

The Seller can begin to recover economically, because he /she can finally unburden the load of problems involved with not being able to pay the debt owed to the bank. Having a short sale in a credit report is far better than having a foreclosure attached to it. After a short sale, a homeowner may be able to qualify for a new home after two years, as opposed to one who goes through a foreclosure (It may take the latter 7 – 10 years before he / she can qualify for a new home).
The Buyer gets a great deal – he / she may get a discount at around 10 – 50 % off on what the Seller originally paid for that home.
The Bank gets rid of all the problems associated with having a troubled asset and gets some of their capital returned.

Wouldn’t it be better if all short sales could be this simple? But there are times when purchasing a short sale can be everywhere from mildly to extremely tedious and frustrating. Here are 5 facts that I think we should discuss for you to understand it better:

1. Short sales are anything but short

It takes around 60-120 days on the average for a short sale transaction to be completed starting from the date of “mutual acceptance”. The Seller must agree to the initial offer (mutual acceptance), but in reality, it is the Bank who decides. Sometimes, it can be very difficult to get a response from them. They usually take weeks, even months to acknowledge a file, and it will take longer for them to respond to an offer because the process is highly bureaucratic and administrative. If they don’t like your offer, most probably you won’t get an answer from them. If they do like it, it may still take weeks to negotiate inspections, closing details, etc.

2. There is no guarantee

It is very common for Buyers to wait for weeks without a response, and then find out that the Bank either did not see their offer, or got a better offer and took it. This is unfortunate and stressful because buyers are uncertain whether their offer gets accepted or not, especially those who are buying a place to live, not an investment.

3. Banks aren’t as motivated as you think

Even with tax write-offs for losses, the insurance covering those losses, and Government cash payments, Banks aren’t in a hurry to change their behavior or do any favors. It would seem to make sense for Banks to cut whatever deals they could with struggling homeowners. You may think they would want to stop the bleeding, put some money back into circulation, slow the accelerating depreciation of home values, etc. Good for everybody, right? Unfortunately, many of the banks are being rewarded for their greed and failure, rather than common sense and good business practices.

4. You don’t really know what you’re getting

This one is more applicable to foreclosed, Real Estate Owned properties, but it is also pretty common with short sales. Obviously, people who are about to be kicked out of their homes tend to be a little frustrated and distraught. Sometimes, they don’t want to leave the place looking the way it did look 6 months earlier in the pictures the listing agent took. Basically, the condition of the house will largely depend upon whether or not it is still occupied. If the Sellers are still living there, the home will most probably still be in reasonbly to very good condition. Or, at least, in a condition the Sellers are used to. Once a home has been vacated, then you may have a problem. It is common for vacating Sellers to take everything with them. Another problem is that it doesn’t take long for a structure to deteriorate in the absence of maintenance. Problems with plumbing and wiring may arise. Leakages, mold, and pest issues are very common. Sellers of an ordinary listing will continue to maintain their property, even after they have left the home, but when it comes to Sellers of short sales, that may be a whole different story.

5. The sellers are real people

In considering a buy of a short sale property, you may want to understand that the “great deal” to you is someone else’s lost dream. These Sellers are also normal, kind and hard-working people who just caught an unlucky break, like being laid off from work or losing money on a business, going through a divorce or an illness – or maybe all three. These seemingly desperate people just want to move on with their lives with what little remaining dignity they have left. Please don’t take advantage of that. If it’s a short sale, sure, you might be able to haggle down the price a little. At that point it is the bank’s money, after all. Although most of the time, a homeowner will try to sell before they are totally below the surface. In these cases, they have almost no room, if there is little, to negotiate. I suggest prospective buyers to be as sympathetic as possible.

I know some of this information is a little daunting, but I would like to make up for it by inviting you to read my other articles which highlight the benefits of buying or investing in short sales.

It would also be of great benefit for you to watch these fantastic videos that highlight the fun that can be had when buying foreclosed, bank owned homes, and short sales.

For complete and comprehensive information about short sales and how you can purchase one, please visit our Westside LA website. Feel free to contact me with any of your real estate or mortgage related questions and I will be more than happy to answer them. Call me at (310) 487-0099 or email me anytime.