Should I Buy a Short Sale in the Santa Clara Valley?

by vbrasil on January 22, 2009

santa clara foreclosure, santa clara home, santa clara short saleShort sales happen when home values fall and sellers do not receive enough cash from a buyer to pay off their existing mortgages, providing lenders agree to take less than the amount owed to them.

On the surface, it may appear that a short-sale buyer is getting a good deal. Although a slim margin of short sales may be profitable for a buyer — because there are always exceptions — much of the time, a buyer would be better off buying a home that is not in default.

In Santa Clara County, where I work, for example, many agents ignore short sales like the plague.

Here are 9 Reasons Why Buyers Should Not Want to Buy a Short Sale:

1) Sellers Paid Too Much.

If a home sold for $500,000 a few years ago and is now for sale at $400,000, that doesn’t mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.

2) Stringent Qualifications.

Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.  Thus this results in a waste of time for the buyers who are attempting to buy the short sale home.

3) Homes Sell at Market Value.

Lenders aren’t naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value.  In the Santa Clara Valley where some areas still have held on to their home values, like Cupertino, Sunnyvale and Saratoga lenders are less likely to take low offers. 

Lenders will accept short sales when the home is worth the short-sale price, which means market value.  Many buyers feel that they can get a deal on a short sale and in some cases they do, but that is more to do with the properties condition and frustrating process then the fact that the lender is relinquishing the property for a better price. 

4) Homes Sell "As Is".

If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:

    * Suggested repairs disclosed on a home inspection.
    * Pest inspections or work necessary to issue a clear pest report.
    * Roof certifications or roof repairs.
    * Home protection plans for the buyer.
    * Deferred maintenance.

In a regular sale, sellers may be motivated to sell and offer up incentives and improvements to get their properties sold.

5) Length of Time to Close.

Depending on when the Notice of Default was filed, the lender’s back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.

6) Lenders Can Change Conditions.

Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender’s desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.

7) Higher Buyer Closing Costs.

Because lenders rarely will pay for any extras, like a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.  Expect to pay higher transcation costs for short sales.  You will have to pay for inspections to have the property inspected, and it has been my experience in areas like Santa Clara, Sunnyvale, and San Jose rarely will the lender agree to make any repairs or offer up any credits.

8) Lose Control of Transaction.

If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller’s lender calls the shots, not the buyer nor the buyer’s lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.

9) Little Seller Motivation.

When the seller discovers that the short sale effect on credit is identical to that of a foreclosure, there is little incentive for a seller to cooperate with a short sale. There is no benefit to a seller to consider a short sale and move out before the foreclosure is concluded, except for peace of mind that the nightmare is over.

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