14 Jul So I’m Buying a Short Sale. What Do I Need to Know?
One of the greatest discoveries a man makes, one of his great surprises, is to find he can do what he was afraid he couldn’t do.
– Henry Ford
What are the risks in buying a short sale?
Most short sales involve sellers who are financially struggling. That typically means the seller cut back on maintenance in recent months or years, so the property likely requires some work. For example, the seller may not have serviced the furnace, cleaned the gutters, or fixed broken items.
In a short sale transaction, a seller typically cannot or will not pay for repairs that may be customarily expected of non-distressed sellers. The property in most short sales is conveyed As-Is. A seller may even have difficulty paying for a use and occupancy inspection with the municipality or a resale certificate from a Homeowners Association (HOA).
The buyer of a short sale may end up being expected to pay for municipal inspections, HOA resale fees, repairs, and other costs. In some cases, neither buyer nor seller will pay for something like a municipal inspection, with the expectation that the buyer will handle the municipal inspection later. However, if the municipal inspection discovers violations of existing code, then the buyer takes on the cost and responsibility of correcting the violations.
In some short sales, the seller may not have the utilities turned on for the buyer’s home inspection. The buyer may be expected to incur the cost and time of activating the utilities or de-winterizing the property. If the buyer does not turn on the utilities, their property inspection will be limited in scope.
In the midst of winter, buyers have to be careful about damage from frozen pipes. If the seller stops paying for heat and does not winterize the house, the pipes could freeze. The damage could occur after the buyer’s home inspection but before the settlement. If the utilities are off at the time of the closing, it may be worthwhile for the buyer to turn on the utilities and heat prior to the purchase.
Some short sales may involve trash or junk left behind. The seller may not have the money or the motivation to clean out the property.
Short sales do involve the conveyance of the property with clear and marketable title. A buyer of a short sale is strongly encouraged to pay for title insurance. Some title agencies offer enhanced title insurance, which costs only 10 percent more than standard title insurance. We recommend that buyers of distressed property pay for enhanced title insurance.
Many short sales involve increased risk for the buyer. Many short sales are sold below fair market value. Therefore, buyers often pay less for a short sale in exchange for the risk they incur.
Can we schedule the settlement when we do not have the short sale approval from the lender?
The buyer and buyer agent should refrain from scheduling a firm closing date until short sale approval is granted for all liens and the seller expresses that they are satisfied with the approval terms. If the seller receives a short sale approval, it does not automatically mean that they are willing to accept the terms. The buyer should not be taking a day off work, nor packing up the moving truck, nor terminating their lease until they know they are cleared to purchase the property.
If a buyer picks an arbitrary closing date before the short sale has been approved, they are setting themselves up for a costly disappointment. Just because the real estate contract names a date for closing does not mean that the buyer can go ahead and hold settlement on or before that date. We have seen situations where the buyer moved out of their prior residence too early and had to live out of a hotel for many days.
If the seller has two liens that require a short sale, the buyer needs to wait until both liens grant short sale approval. A short sale approval for one lien does not mean that a closing should be scheduled in the hope that the second lien will be approved in time.
We suggest that the buyer and buyer agent stay flexible. They should only schedule a specific date for closing once all approvals are in and the seller consents to the approval terms. A buyer should also set aside some money – at least $1,000 – for unexpected costs that crop up right before the settlement.
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai has made colossal mistakes in investing (and learned some things along the way). He has owned over 200 properties with various investment partners, and he has been involved in over 200 more transactions as a real estate broker in Pennsylvania and Tennessee. In 2013 alone, Tai had 114 successful short sale closings. Tai and his wife Amira enjoy hunting for investment properties. Contact Tai if you need some consultation on real estate investing. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com. Tai is passionate about helping investors make money and avoid mistakes.
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