Things You Must Know When Buying a Short Sale
A short sale at its best can be a way to pick up a great property at a bargain price. Unfortunately, not all short sales are worth the time and trouble. New regulations, which apply to the five largest banks, make short sales quicker and somewhat more transparent. This is not a panacea, however.
Not every short sale is a bargain.
A short sale simply means the seller is trying to sell the property for less than the outstanding mortgage balance. If the seller paid too much, the price could be way too high—especially if the property needs a lot of work.
Short sales may be speeding up.
Widespread fraud and abuse in the field of loan servicing is finally getting some attention. The five largest loan servicers of 49 states (Oklahoma opted out) entered into an agreement with the federal government and state attorneys general to remedy some of these abuses. In effect on June 1, 2012, the agreement requires the lender to respond to 90% of their borrowers' requests for short sales within 30 days and to notify the borrower about the possible requirement of a deficiency payment. If the servicer agrees to waive the deficiency payment, it cannot sell the collection rights to a third party. Prompt notification of missing documentation is also required, discouraging the sort of deliberate delays that made short sales so difficult in the past. Finally, if the short sale is denied, the lender must give written notice of the reason for denial.
Good news for borrowers and buyers.
While clearly intended to protect borrowers, these rules are good news for buyers as well. If it applies to your property, the settlement means the days of waiting and waiting while the bank drags its heels may be over. (Your real estate agent can advise you on whether your transaction is covered by the new settlement rules.)
Since the rules require lenders to give assistance and pricing guidance to borrowers seeking a short sale, pre-approved sales should be more common. Nevertheless, your deal will probably take longer than a conventional sale, and chances for failure are considerably higher, especially if you fail to offer the full pre-approved price. For those with a little flexibility, short sales can be a great deal. Those who need a contract immediately should look elsewhere.
More than one loan complicates the picture.
When more than one party's loan needs to be satisfied, prospects for failure and delay are correspondingly greater. If your funds are limited or your patience short, avoid situations where the property has unsatisfied liens or a second mortgage with a third party lender. Do your research before making an offer to avoid becoming entangled in deals that have little chance of being approved.