Mortgages

What I Learned From Buying a Short Sale Home

Comments 0 Comments

Home Short SaleOne Saturday morning, my husband and I shadowed our inspection agent as he scrutinized the 4-bedroom house we’d bid on several weeks before.

I scribbled furiously in a notebook as we came upon a dead mouse next to the furnace, the gap beneath the front door and the mold growing on the roof.

All easy fixes, I told myself.

I didn’t negotiate with the sellers regarding the small issues we’d found because it was a short sale, so it came as-is, and we’d known this going in. Plus, it wasn’t even the biggest gamble we were making.

In reality, short sales can be anything but short: They can take anywhere from one month to several years to wrap up, and these deals fall apart entirely in many cases.

short sale is when a homeowner in financial distress sells a house for less than the mortgage value, so the bank can erase the remaining loan balance. Let’s say that you own a home with a $300,000 mortgage, but post housing crash, it’s now only worth $250,000. It will be a short sale if you sell it at the market value of $250,000 and let the bank take the proceeds in order to wipe out your debt.

From the perspective of the buyer, it means you can get a house for a low price, but it also comes with more hoops to jump through, like waiting for the bank to approve the transaction—if it ever does.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

So despite the fact that my husband and I had just spent $550 on a home inspection, we had no clue when (or if!) we’d ever close on the house.

A report from RealtyTrac reports a 33% increase in pre-foreclosure sales (that generally means short sales) in January 2012 compared to a year earlier, with annual increases in 32 states.

In other words, short sales are growing in popularity.

We Didn’t Want to Deal With a Short Sale, But …

We hadn’t intended to put ourselves through the agita of a short sale. When we first saw The House, it was the fourth stop on a marathon home-viewing tour. The neighborhood was quiet. The lawn was perfectly manicured. Sun glinted off two sets of to-die-for bay windows.

On the steps leading up to the front door, our agent shuffled her papers. She squinted against the sun, and looked closer at her paperwork. “Oh, you guys,” she said. “I didn’t realize, but this is a short sale.”

Free Credit Check ToolMichael and I glanced at each other. “Well, this is a total wash,” I thought to myself. Out loud, I tried to sound cheerful: “That’s okay. It doesn’t hurt to look, right?”

When we walked through the door, I was immediately dazzled by the bright feel of the living room. To our right was a fairly spacious formal dining room. Behind the kitchen, the house had been extended to create a family room. In the kitchen, I marveled at the new granite countertops and the oversized herb window.

We made our way through the rest of the house: four bedrooms, three bathrooms, a finished basement that would obviously end up as Michael’s man cave.

We didn’t intend to place a bid—we didn’t want to deal with the uncertainty. But the minute we stepped inside, we were goners. “We’ve waited this long,” I said to Michael, referring to the two years our condo had sat on the market. “Who cares if it’s a short sale? We can wait a little longer.”

Buying (and Waiting for) Our Dream House

With the asking price set at $419,000, The House was already a steal, but we decided to place a bid of $385,000. We made it through attorney review and had an inspection done, despite the risk we were incurring by spending money with no guarantee that we’d get the house.

After that, all we could do was wait.

The waiting wasn’t easy. I became obsessed with the idea of moving into The House. I watched HGTV marathons, gaining inspiration from shows like “Love It or List It” and “Property Brothers.” I even drew up a spreadsheet with a different tab for each room of the house, listing repairs that needed to be done, and furniture that needed to be bought.

I didn’t understand why the bank would take so damn long to accept our offer when it was in their best interests to close. I had no control, and that drove me crazy. I knew that we could always start over if things didn’t work out, but I envisioned myself in that house. I wanted it so badly.

[Featured Products: Research and Compare Mortgage Rates at Credit.com]

Once we finally heard back from the bank, I was completely neurotic. They counter-offered. I wanted to accept it right away, but our lawyer and mortgage broker both thought that we should negotiate. My husband agreed, but I was terrified that not accepting their counteroffer would make everything fall apart. In the end, we got the house for $395,000.

The underwriter kept contacting us about last-minute things that we needed to pull together: extra money we didn’t realize we needed in our account (because we would still own our condo, we needed to show that we had enough money to cover both mortgages for at least six months), a report on the oil tank inspection, a signed copy of the carbon monoxide test results, etc.

I spent those last few weeks feeling angry at everybody: Why couldn’t you tell us this before? Why couldn’t you be more organized? We would have had it all together months ago if you’d only asked!

But we finally got our happy ending: We’ve now been living in our new house for almost three months. The process—from placing a bid to actually closing—took six months, which is actually good for a short sale, and a sign that the listing agent knew what she was doing.

All in all, despite the frustrations, the process went smoothly. Still, we made some mistakes as buyers. Here’s how we could’ve done it better:

1. Qualify the Listing Agent

The listing agent is the seller’s agent. Since we were working with our own agent, we didn’t think to talk to the other agent before placing a bid. Because of this, we never found out her track record with short sales. It worked out in the end, but I spent most of those six months wondering what we’d gotten ourselves into.

“The listing agent will be the driver of the bus,” says Greg Markov, a real estate agent who teaches realtors around the country how to properly handle short sales. “Before you even place a bid, you have to ask the difficult questions: How many short sales have you done? Which properties have you sold?”

“Having a disorganized listing agent can drag out a short sale,” adds Sep Niakan, a Florida-based realtor. “Certain banks are notorious for canceling the process if the listing agent doesn’t get things in on time.”

2. Think About the Seller

Don’t just think about yourself when placing a bid. “The seller wants someone who’s going to be committed to the property,” says Markov. “How can you make your offer exceptional? Did you do an inspection up-front to show your commitment? And don’t ask the seller for repairs. The seller probably doesn’t have any money, and may even be embarrassed by the transaction.” In our case, we actually did fine in this area—thanks to great guidance from our agent.

[Related Article: 19 Confusing Mortgage Terms Explained]

3. Understand How the Bank Works

“The bank wants to minimize their losses,” says Markov. “Making a lowball offer on a short sale goes against the very basic reason they’re actually doing a short sale. Only offer less if you actually believe it’s worth less.”

This is why I was furious when Michael gave our lawyer the go-ahead to counteroffer their counteroffer. The deal went through, but counteroffering lengthened the process, leaving things up in the air for even longer.

4. Manage Your Expectations

“The beauty of a short sale,” says Niakan, “is that the seller doesn’t care how much it goes for. They’re not making any money, so you can get a pretty sweet deal. Still, while they’re in financial distress, you’re in emotional distress wondering when this thing is going to close.” So take a look at your personal values. Is getting a good deal more important than your timeline? If you can’t be patient, perhaps a short sale isn’t for you.

WANT MORE FROM LEARNVEST?

5 Times You Should Use a Real Estate Broker

Housing Projected to Drive Economy in 2013

Selling Your Home? Do This First

This piece originally appeared on LearnVest, the leading personal finance site for women. Need help managing your money? Our free Money Center will help you create a budget. Our free bootcampwill help you take control of your money, cut your costs or get out of debt. And you might even be interested in one of our premium financial plans–managed by LearnVest Certified Financial Planners.

Image: iStockphoto

Find out where you stand.
Get your FREE personalized credit report card.

Sign Up Now
X

Stay connected to our experts

Please submit your email address to get credit & money tips & advice
from our team of 30+ experts, delivered weekly to your inbox.