Photo: Flickr / ayearineurope
For more than a year, my family has sought a bigger home in our suburban Dallas neighbourhood. Now that the kids are older, we’re ready for a pool, a different layout and a fifth bedroom for my home office.It’s a hard combination to find without jumping neighborhoods, so when we saw a 3,100-square-foot home at below-market price hit the MLS (Multiple Listing Service), we jumped on it.
That was more than 40 days ago, and we’ve yet to hear if our above-asking-price offer has been accepted. It turns out the sellers fell behind on their payments, and the lender must now agree to accept less than the amount owed on the mortgage. It’s called a short sale, and it’s one of the fastest-growing segments of home sales.
Short sales also make up a market with potential pitfalls. But there are ways to ensure you don’t regret your decision. In our case, we’re not even sure if the lender has seen our offer. Apparently, lenders have hundreds of short-sale contracts on their desks; it can take weeks, months, even a year to garner a response. Less complicated deals — for example, ours involves only onelien — are supposed to go slightly faster. We’ll see.
In a sense, “short sale” is a misnomer, because time-wise there’s nothing short about it. Its name stems from the fact that the bank gets shorted. Harry Ridge, our broker at VIP Realty Platinum, said many home buyers get upset when big chunks of time go by and nothing happens. Most don’t understand that the bid has to be approved by the bank, not the seller who set the price on the MLS.
Impatience is problematic in the short-sale market. It’s hard to put your life on hold. You might be inclined to stop house shopping or buy big-ticket items, both monumental mistakes in this market. And there are other errors you can make along the way.
But there is an answer: When in doubt, don’t do it. Don’t stop house shopping. Don’t make big purchases. And there’s more.
Here are five things you should be sure not to do when making an offer on a short-sale home:
- Don’t sell your house first. There is no guarantee the lender will accept your short-sale offer, so don’t jump the gun and risk becoming homeless. You might be the highest bidder now, but the short-sale home remains on the MLS during this process. Other buyers can submit offers that trump yours, creating a bidding war. The lender can also counter your offer. In our deal, we offered $5,000 more than the asking price and agreed to pay closing costs. The house hasn’t been updated since 1996 and needs $20,000 worth of upgrades, so we’re not willing to pay much more.
- Don’t forget to sock away money for big repairs. Until you get an inspection — and you shouldn’t do that until the bank accepts your offer — you won’t know the house’s real condition. If the homeowner couldn’t pay his mortgage, he probably wasn’t making big repairs. This is called deferred maintenance. Most lenders don’t pay for repairs or extended home warranties.
- Don’t put all of your eggs in one basket. Continue house shopping. Your short-sale bid isn’t a sure thing, so don’t stop perusing daily email updates from your Realtor.
- Don’t make big-ticket purchases. We were quick to get our pre-certification letter to show lenders we were serious. But once your pre-certification is approved, don’t buy a car, quit your job or cash out stock. If you do, you have to resubmit your financial information to your mortgage lender, which messes up your paperwork. Then it’s back to the bottom of the pile.
- Don’t do it if you’re a first-time home buyer. I have owned and sold a home before, and the process was smooth like butter. Short sales have gobs of paperwork, as do traditional sales, but short sales are not smooth for the buyer or your Realtor (who, incidentally, should have experience with this type of transaction). The first time our broker, a 26-year real estateveteran, closed a short sale, it was such a pain that he swore he’d never do it again. (He changed his mind. Today, short sales account for half of his business.) They’re not for the faint of heart. As my Realtor, Regina Stockwell, said, if you’re living with your mother-in-law, paying rent or are a first-time home buyer, avoid a short sale.
There are guidelines, effective June 15, 2012, designed to improve the short-sale process. Services of mortgages backed by Fannie Mae and Freddie Mac are required to issue a final decision of acceptance or denial within 60 days of receiving a short-sale offer. I’m sceptical this will be enforced because other mandates have fallen short, but it’s a step in the right direction.
We were hoping to get into the new house this summer to enjoy the pool, but next summer might be more realistic. However, if we do get this house, we’ll get a heck of a deal on a bigger property with a stellar interest rate.
The Investing Answer: It’s critical to continue the house hunt. Attend open houses and request showings. You might not find as good a deal, but you don’t want to miss finding your dream house either.