We have seen an astounding number of short sale properties on the market in Tucson and the surrounding areas. There is some basic information that every buyer should understand before considering the purchase of a short sale.
A short sale is a property that is being sold by the seller “short” of what is owed on their lien. The caveat to this is the bank must approve the loss that they will be taking in the payoff of the home. For example the seller needs to sell their home as they have lost their job and can no longer make their payments. The home was purchased in 2006 for $300,000, but the current market value for the home is $200,000. The seller puts the home on the market for $200,000 and must get approval from the bank for the $100,000 that the payoff will be short.
As a buyer looking for the home in a market today, some of the short sale properties may look enticing to you. With the right agent, and some patience this may be a road you are willing to travel. Here are a few key points to keep in mind while getting started. This is just scratching the surface of the short sale process; I would recommend asking your agent to explain the process in more detail as you look for homes.
- Short Sales can take a long time to close, and rarely is it the first contract that actually ends up with the home. Some short sales have taken 6-8 months or even longer. Be prepared to be patient, you may want to continue your house hunt while you are waiting.
- The Short Sale Addendum in Arizona allows you as the buyer to back out of any contract before the agreement notice is sent by the seller. So if you do find a better home while waiting on the bank, you are free to cancel this contract and proceed with a new one.
- The seller and the buyer are party to the contract, the bank is not. The bank does not have to play by the rules of the contract. They often have forms and documents they require you to sign to proceed forward. The bank will often deal verbally with the sellers’ agent, and because your agent will not have authorization to speak to the bank directly this gets frustrating. Have a clear game plan in mind, know your maximum price ahead of time and stick to it.
- The banks are looking to get market value, or close to it for the home. They will have a BPO (Brokers Price Opinion) of the home completed to determine the value of the home. They will set their bottom line from there. Remember anything you ask for in seller concessions (closing costs) will drop that bottom line and make your offer less attractive.
- Short sales should be priced at market value, but often times are priced below to save the house from foreclosure. When the short sale is started the seller is likely behind in their payments, and the trustee sale has been set. The home will be foreclosed on if the short sale does not elicit and offer. Once an accepted contract has been presented to the bank it is likely the trustee sale will be pushed back. This is why some agents will price the home well below market value trying to buy their client some time. They have hopes that offers will come in above asking price over time and actually have a chance to make the deal work. If you are a buyer looking at a short sale that is well below the market value of the home, the odds of the bank allowing this deal to work are very slim. Your contract and time will serve the purpose of helping the seller and the sellers’ agent out, but will likely be a waste of your time. Be careful not to judge other properties on the basis of this underpriced home – remember this price may be just to get the process started!
- Short Sales are traditionally sold in As-Is condition. This means the warranted items outlined in the contract are not guaranteed to be working at the time of closing, the zoning and fitness of the homes usage are also not guaranteed. This may raise a red flag as a buyer, but with proper investigation this As-Is condition is not so daunting. You still have the inspection period as dictated by the contract; you can back out of the contract if there is anything material that comes out in your inspections which you object to. You can also ask for repairs after the inspection process the same as you would in a traditional sale. Remember again that this will affect the banks bottom line and reduce the offer, but it is possible to have the bank agree to some repairs, especially if they are health concerns.
- Have your agent do some background work before presenting an offer. A comparative market analysis of the home should give you a very good idea of what they bank will be expecting to get out of the home. Also make sure your agent inquires as to how any additional offers will be handled. Some banks only want to see one offer at a time; others will look at any and all offers that are coming in. The contract addendum that we use in Arizona may need to be altered when the offer is presented depending on this situation.
- Once the bank has agreed to the short sale, the time frames for the contract start, and the transaction progresses very similar to a traditional sale.
The short sale market is evolving daily. As agents we do our best to stay up to date with the changes as they happen. This article was designed to just give you an understanding of some of the main points involved in this type of transaction. Hopefully they will be your starting or ending point – but at very least a better informed decision as to whether these are the right type of properties for you!
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