What is a Short Sale?

A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.  Any unpaid balance owed to the creditors is known as a deficiency.  Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties.

A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower.  Both often result in a negative credit report against the property owner.

Know what you’re getting into before you buy a short sale or foreclosure property and be mindful of these common mistakes:

  1. Ignoring Property Problems

Empty foreclosure properties may suffer from issues that arise from neglect, leaks, mold, termites, thieves, squatters and filth, because the property sat vacant for weeks, months or years before purchase.

Yet in many states, banks are typically exempt from providing the disclosure statement typically required of a traditional seller.  The statement outlines the condition of the property. The buyer of a foreclosure is essentially starting from scratch when it comes to determining the property issues.

For example, a bank won’t reveal whether the house is constructed from defective materials.  Most claims by homeowners in these lawsuits are subject to strict deadlines.  You won’t know whether the previous homeowner missed the deadline for court-ordered remediation or if the faux stucco is bad.

Short sellers will fill out the disclosure form.  But while short sellers are motivated to sell and repair their credit, they could have skimped on essential maintenance of the roof, furnace, air conditioner and hot water heater. If a house is between 15 to 30 years old, there’s a very good chance it needs some expensive maintenance.

Also, it’s unlikely the cash-strapped seller has given the home a cosmetic facelift for years.  So the buyer might have to update a bathroom featuring orange shag carpet, a wooden toilet seat and gold-foil wallpaper.

  1. Skipping the Home Inspection

Clear your calendar and make time to tag along on your home inspection.  Ask for repair estimates when an inspector notes a problem, or do some research online later that night. Every homeowner underestimates how much renovation costs.  Some buyers are even doing an inspection before making an offer.  While most inspections are done after the initial offer, with the sale contingent upon mutual agreement of remedies, a pre-offer inspection allows house shoppers to walk away and find a better buy.

You may wish to call in specialized inspectors to look for expensive problems such as termites, mold and structural damage, particularly if it’s a common problem in your area.  Mold gets more expensive to remediate the longer you wait, and it can severely impact your health and the property’s resalability.

If you note sloping floors or cracks in walls around doors, windows and basement walls, bring in a structural engineer for a full report and repair recommendations. Then do something not on the inspector’s list: Knock on neighbors’ door.  They may know something you don’t.

  1. Ignoring Legal and Insurance Information

A typical disclosure statement would indicate if a house was in a flood plain or had any unpermitted renovation.  Because bank-owned properties often sell as is without disclosure, buyers need to do a little extra research on the home’s status.

If the property is in a flood zone, you may pay thousands yearly in additional insurance costs, and you may find it difficult to resell the property.  Ensure that all renovations have been permitted and approved. If not, and there is a problem, the city can cite you.

Check with the local planning department and make sure there aren’t any neighbors with plans to build an enormous house or to demolish an existing one. Any nearby plans or work would normally be known and disclosed by the seller, but not in the case of a foreclosure.

  1. Leaving too Little Time

Short sale and foreclosure homebuyers need to be aware that the sale won’t necessarily close as quickly as it would for a traditional home.  The short seller’s lender must grant approval of either foreclosure terms or a short sale price which is less than the short seller owes.  Even so,troubled banks may be overwhelmed with foreclosures and slow to respond.

Banks are taking huge losses so they are going to do their best to get their money back, get the most amount of money or go after the seller to try to recoup something. They aren’t just going to let the house go.


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