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Tuesday, April 7, 2009

Short Sales - Not Always A Short Cut

In this new “Buyers Market” we have been introduced to a slew of new terms still unfamiliar to most people. “Short Sale”, “Pre-foreclosure” and “Subject to Bank Approval” are terms we are seeing in advertisements more and more, particularly in home markets where the properties are not selling or there is an abundance of the same type of condos or homes. In Atlantic County, it is more prevalent on the Mainland, but lately even the Island has not been immune.

Here are the legal definitions of Short Sale and Pre-Foreclosure that I found on the Internet. (They appear to be the same thing.)

Short Sale - A sale of a house in which the proceeds fall short of what the owner still owes on the mortgage.
Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes.
Pre-Foreclosure - A
procedure in which a lender allows a mortgagor to avoid foreclosure by selling the property for less than outstanding balance of the loan.

So what does it mean and is it really a good deal for the Buyer?

There is now a third component to this process that makes the entire “Short Sale” purchase a very different buying experience. That is and “Subject to Bank Approval”.

When a Seller has reached the point that they can not longer make payments on their mortgage and wants to sell their home for less than the amount that is owed on the mortgage, that amount must be approved by the bank or banks hold the loans.
Buyer’s Step #1 - An offer is made to the Seller. Be prepared to wait a very long time. Buyer’s Step #2 – Be prepared to wait some more.

So you found a property you like that “requires Bank Approval”. You write an offer and it is presented to the Seller. Now the fun begins!

The Seller’s agent prepares documentation about the property along with a Settlement sheet which shows all of the closing costs and forwards this to the bank. Regardless of how motivated the Sellers to sell their property, banks are not. Short sales can and do take a minimum of 4-5 months and most times take longer than that to get all final approvals from the banks. Many Sellers who have reached the point of needing to do a short sale have more than one loan or lien against the property. All lien holders must agree on the price and the financial arrangement for the deal to go through.

Once an offer has been presented, a bank negotiator is assigned and the bank will then send out an appraiser from the bank to determine the value of the property. Based upon that determination, the bank will eventually come back with a counter offer, requiring a percentage of the appraisal that meets their standards or the offer is rejected. If there is more than one bank involved, each bank must approve each change, and each bank may have more than one approval required. In one Short Sale I am doing right now, the offer was sent in December 2008, I received an approval from the main bank in February 2009, the first approval from the second bank in the beginning of March 2009 but we are still waiting for the final approval from the second bank now and have had to delay closing twice because of this. In the meantime, my Buyer’s mortgage lock (on their rate) has expired).

BUYER BEWARE! – in the Short Sale the Bank is now the Seller so you are buying the property “As Is”. In most cases, the original owner has been in financial distress for a while, so the property has not been well cared for and in all likelihood all things of values have been removed. Keep that in mind realize that you are still writing an agreement that includes a home inspection clause. Make sure that clause gives you an out if you find the property is not really the value you thought.

The last thing you will need is an agent that will stay on top of the situation. A short sale is not fun for an agent. It is frustrating, time consuming and requires a lot of detail work. Make sure you are working with an agent that will cover all bases.

Short sales can be a good opportunity but be sure of what you are buying and that you are willing to start this long hard road. There are many very motivated Sellers out there that can deal with you directly, that can offer a well priced property that may require a lot less work than a short sale property. A short sale can be a good opportunity for a very patient Buyer ready to invest time and money to make it into a worthwhile investment.

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