Northern New Jersey Short Sales: What You Need to Know
Before you look into a short sale, you should read this Northern New Jersey Short Sales page. A short sale occurs when a homeowner needs to sell his property and the monies received is not enough to pay off the existing mortgage. It is not the best situation; however, it is better than a foreclosure. The term “short sale” or sometimes called “short pay” comes from the fact that the lender must agree to accept a lesser payoff in order for the sale to take place. The short sale price must include all sale costs and the Seller will receive nothing (other than release from mortgage debt). The Seller does not have much say in the transaction.
Although short sales are not optimal scenarios, I do not want to discourage you from buying such a home. You just need you to know what you are getting into: short sales can come with a lot of frustration because lenders may decline the offer after months of work and waiting. Understand that there are no guarantees and if you are willing to take the risks, I promise to do my best to acquire the property for you. The good news is that lenders are getting better about completing sales transactions because there are more and more short sales on the market. Although lenders do not want to receive less payoff, they do need to sell the homes and get something rather than get nothing.
If you are interested in a short sale, here is a possible scenario for you to be aware of. A Seller accepts your offer and you pay approximately $1000 for an appraisal and a home inspection. But, just when things are looking good, the mortgage company decides to decline your offer and give you a counteroffer. At this point, you would have spent about $1000 and 3 months of time on this property. If you reject the counteroffer, you will lose your money and wasted your time. Although the lender is not apart of Buyer and Seller agreement, the lender can make decisions that will affect the outcome of the transaction. The risk you face as a Buyer is: the loss of time, the loss of appraisal/inspection fees. On the other hand, if the mortgage company reviews the short sale proposal and agrees with it, you could purchase a home at a very good price.
Many short sales fail because the mortgage companies do not understand the local market and demand more than is reasonable for a home in that location/condition. Don’t expect a quick transaction when buying a short sale and don’t expect the lender to respond favorably. Lenders will find reasons to increase the price or demand that the real estate agent decrease their commission. They may even request the Seller to sign a personal note to pay the shortfall at a later date. A mortgage company’s goal is to minimize their losses and if the property goes into foreclosure, well that’s another department’s problem.
Some home loans have PMI (Private Mortgage Insurance). The PMI will compensate for a portion of the losses so the lender may not be as motivated to close a deal because the PMI will cover some of the losses. It may be necessary to negotiate with the PMI Company which takes time. If you enter a short sale, be sure to have an escape provision which will allow you to cancel the contract with no penalty if the process takes longer than you are willing to wait. During this time, another suitable property may become available.
Again, I do not want to discourage you from buying a short sale property, however, you should be informed before you enter. Here are 11 reasons why you should avoid a short sale property.
1) Seller Overpaid At the Onset.
If a home sold for $500,000 a few years ago and is now for sale at $400,000, it probably means the Seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.
2) Seller Over Borrowed.
Banks are eager to lend money during “good times” and sometimes end up allowing home buyers to borrow more money than what the home is worth: they have over-mortgage the home. In theory, buyers get a house appraised so they know how much it is really worth. But appraisals are subjective and different appraisers will value a home more than others. It is against the law, but some banks pressure appraisers to appraise a house at a different value than its true value.
3) Short Sale Not Qualified.
In order for a Seller to sell his home as a short sale, he must prove that he is under financial hardship and he is eligible to sell his homes as a short sale. Some unethical realtors may suggest to a Seller to sell his house as a short sale even if he is not qualified to do so. This will lead to trouble when lenders discover that the short sale had not been approved. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
4) Homes Sold at Market Value.
Lenders are experienced in the art of buying and selling homes. Lenders will do everything to establish the true value of the home by obtaining comparative market analysis (CMA) and broker price opinion (BPO). Depending on which is more favorable, a lender may choose to take a property back into foreclosure instead of accepting a short-sale offer. Lenders do not want to lose money, so they will try to sell the house at market value and this may not be the dollar amount you thought of when you entered a short sale.
5) Homes Sold “As Is”.
If a lender agrees to a short sale, it is most likely also paying for the closing costs too. Because of this, mortgage companies will ask the Buyer to buy the home “as is”. Lenders may refuse to pay for:
- Repairs suggested after a home inspection.
- Any work needed to find or remove pests (eg. termites).
- Roof inspections, repairs, or certifications.
- Any home protection plans the Buyer may want to have.
- Deferred maintenance.
6) Takes a Long Time to Close.
It can take anywhere from 2 weeks to 2 months before you can get a response from a lender regarding a submitted offer. The length of time needed depends on when the Notice of Default was filed, the number of foreclosures before your case, and how much paperwork the Seller has submitted. There is much that is outside your control. If the house was bought with two loans, then it will take even longer for the transaction to progress because you will need to negotiate with two lenders instead of one.
7) Changing the Deal.
Some lenders reserve the right to change the terms of the short sale even after the transaction has progressed significantly. Lenders often have attorneys working for their office so documentation is written so the lender can change things at the last minute. Reasons for last minute changes include fluctuations in the market, new laws, or new information which may affect their view of the sale.
8) Agents Receive Lower Commissions.
Most lenders will pay less commission to a real estate agent even though the agent may do 2 to 3 times harder compared to a traditional buy/sell transaction. Although a good agent will always work diligently so you can achieve your goals, it is only fair that a person is paid what they deserve.
9) Higher Closing Costs for Buyer.
In a traditional buy/sell transaction, you can negotiate with the Seller to see who pays for services. Lenders rarely pay for services so if you want any extra services like inspections, you will pay for them yourself. Some lenders will even refuse to pay for standard closing costs which are usually paid by the Seller (such as transfer taxes).
10) Lack of Control.
If you need a short sale to be completed by a certain date, it is unlikely you will achieve your goal. For example, you are selling your current home and wish to close the short sale so that you can move into your new home, it is probably not going to happen. A short-sale home-closing process can take as long as it takes with no time limit. The Lender is in control; not the buyer, not the buyer’s mortgage company.
11) Seller is Not Motivated.
For a Seller who is in financial distress, there is very little incentive for the Seller to cooperate. The Seller earns no money from the transaction so there is no need to make an effort to sell the house. The only benefit for a Seller is peace of mind that the nightmare is over.