CHICAGO (MarketWatch) — Those searching for the best housing bargains on the market might consider buying a short-sale property. But there’s an important qualification for buyers interested in going this route: They need plenty of patience.
In a short sale, a homeowner’s lender agrees to accept less than is owed on the mortgage for the property. It’s a useful alternative for borrowers underwater on their mortgage and on their way to foreclosure. As home prices continue to decline, short sales have become a viable option for those who need to sell.
“Over the past three to six months, the servicers have really become aware that short sales are the best way to reduce their losses… when a modification is not an option,” said Travis Hamel Olsen, president of National Short Sale Center, a company that facilitates short sales nationwide on behalf of homeowners and real estate agents. The short-sale option also is less damaging to a seller’s credit than a foreclosure, he said.
A short sale can also be attractive to a home buyer since the lender will often accept bids on the property that can be 10% or more below the market value, determined by the prices of comparable, nearby properties, Olsen said.
Although the mortgage balance is probably greater than the price a seller could expect in a traditional sale, the lender may be willing to take less than it’s owed in a short sale if it can avoid the further expenses of foreclosing and taking over the property. The savings, however, often come at the expense of a home buyer’s time.
“Short sales should be called long sales,” said Leslie Tyler, vice president of marketing for ZipRealty. “In some cases, it could take months for a buyer to hear back from a lender.”
For Kristine and John Williams the savings seem to be worth the wait.
Kristine Williams says they’ve found “the perfect house” in Brentwood, Calif., although the process is taking longer than they originally thought. The couple waited four months for an answer from the bank, and then had to revise their bid lower as the market continued to sour.
Their current bid is $550,000, on a home that was appraised at about $1 million three years ago. They’re hopeful the current bid will be successful, but realize it could be months before they find out if the offer is accepted.
“In general, it takes a minimum of two months to get a response from the bank whether they will accept or counter your offer,” said Rob Jenson, CEO of The Jenson Group, a Las Vegas-based real-estate firm. “That process could take longer.”
Are the savings worth it to you? Consider these five caveats before shopping for a short sale:
1. You’ll wait in the dark
Perhaps just as frustrating as the wait time is the fact that you likely won’t be privy to details as the deal is progressing. That could mean going months without an update.
Banks are “ramping up their capability for short sales,” said Dennis Green, general manager of ForeclosurePoint.com. But it hasn’t made the process much easier.
“Where our buyers have been the most frustrated is the lack of status or information,” Tyler said. Saying “we want an answer by this Friday or we’re going walk… doesn’t make a difference,” Jenson said.
There are reasons for the wait: A lender could be considering multiple offers. If the seller had both a first and second mortgage, that could also make the process more complicated. The Williamses ran into both scenarios, slowing their process down — and that’s not unusual. The homeowner also has to prove their financial hardship to the lender.
2. Banks will make you a deal, but within reason
There are deals to be found in short sales — but don’t expect outright steals. A buyer needs to make a fair offer, based on comparable homes that have been sold recently, Jenson said. The offer should be aggressive, but not ridiculous, he said.
“The misconception is that banks should be happy to get it off the books,” he said. “They are, but to a certain point.”
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