In the best case scenario, a short sale is nothing more than a traditional transaction that takes 90-120 days to complete; you purchase a home in good condition below market value. But in the worst case, you could be looking at any of the following:
- It could take up to 6 months to close, it also might never close
- The home could be trashed by the owners (with no recourse)
- The home could be foreclosed upon and go to auction before your short sales gets bank approval
- You might be missing out on other great opportunities (homes)
When you decide to go under contract on a short sale you have to be willing to deal with all the uncertainties involved. All too often buyers don’t ask the right questions and they don’t get enough information and education about short sales to feel comfortable waiting for the bank to respond. Often buyers will continue looking for homes. Initially this sounds like a good idea, we all like having a backup plan especially when the odds are stacked against us. However, continuing to look at homes, while you have one short sale under contract, might not be the best idea. As buyers continue their search guess what they find? Another short sale, priced below market and looking as good or better than the home they already have under contract.
Offering on Many Short Sales; A Cautionary Tale
Let’s say you get a couple short sales under contract within a couple weeks and you decide you can stop house hunting because you know within a few months you’ll have at least one home to purchase.
- Home #1: You loved the gated community, so we refer to this one as “Gated House”
- Home #2: Your kids fell in love with the designer pool so we refer to this one as “Pool House”
- Home #3: You loved everything about this home, except the power lines in the backyard. So we lovingly refer to this home as “Power Lines”
The Gated House
Three months go by and your offer on the “Gated House” gets approved. Before making your decision about the home you want an update on the offer/approval status for the “Pool House” and the “Power Lines”.
As it turns out, both homes appear to be close to receiving approvals. The question is, do you buy the “Gated House” or do you roll the dice and hope the other two come through? After all the “Pool House” and “Power Lines” are slightly better homes and you might get a better deal on those homes. Since you like the other homes better, you decide to pass on the “Gated House”.
Side note: Don’t forget the home owners you decide not to proceed with will have to start this entire short sale process all over, continue paying for the mortgage they may not be able to afford and have their lives put on hold until they can get the home sold.
The Pool House
A week goes by and your offer on the “Pool House” gets approved by the banks. Since you’ve had some time to think, you’ve decided “Power Lines” would be the better home. Once the very large trees you are going to plant grow tall enough to hide the power lines (in 10 years) the home will be perfect. So you pass on the “Pool House”, confident “Power Lines” will also get approved.
Twisted Power Lines
A month goes by and you’re starting to wonder when the “Power Lines” home will get approved. Furthermore, what happens if the bank doesn’t approve your offer? You’re down to one home and all your eggs are in one basket (or mailbox if you will). You realize you are running out of options and you’re wondering, should I start looking for homes again?
So of course you start the home search again while you wait for a response on the “Power Lines”.
The following week, you find out the “Power Lines” home was approved, but there’s a twist. The bank requires you pay $35,000 more than your initial offer. Suddenly the “Gated House” and the “Pool House” look like far better deals, unfortunately they already went back under contract. Not to mention the sellers are so frustrated with your cancellation they wouldn’t be open to considering your offer.
The thought of paying an additional $35,000 for the “Power Lines” home has you feeling like you’re paying too much for the home. After all you’ve waited months and months for this approval, watched other homes sell for less and you passed up two other excellent homes that were less expensive. No matter how you look at it, this feels like you’re getting the short end of the stick.
In reality this new price is most likely well below the market value for the home. Not to mention the home will have to appraise in order for you to obtain financing. You have to separate your emotions from the facts and just focus on the deal as if you just made the offer yesterday.
Pay More or Start Over?
Most home buyers give up at this point and reluctantly pay the higher price because they don’t want to go through all that stress again. From our viewpoint, you’re getting the home you want and you’re paying at or below market value for the home. From your viewpoint, you waited four months to pay $35,000 too much and you just want to be done with this, so you accept the offer.
Treat a short sale like a traditional transaction; 85-90% of short sales are getting approved today in Phoenix and the prices are at or below market value. Ask lots of questions and make sure your agent knows a lot about short sales. When you decide to go under contract, have your agent qualify the listing agent and get all the details of the short sale. Make sure your agent can explain the short sale situation in detail and don’t hesitate to ask for the listing agent’s information. The listing agent might be able to explain it and answer a lot more of your questions.
Most importantly, resist the urge to keep shopping. Looking for more homes will only increase your anxiety about your deal not coming together and it will only complicate your situation. If you can’t deal with the uncertainty of a short sale, that’s alright! You just need to stick to the bank owned homes and traditional sales .
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