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Short Sale Landmines
By Joe Gladden, USN (retired)
Published by Military.com
VR SAM®’s Top Ten Reasons Short Sales May be a Bad Deal!
We’ll start with the bottom line.
Based on our recent experiences, in most cases VR SAM® strongly discourages purchasing a short sale for your primary residence! Here’s why:
• You may not know you are in a short sale situation unless you read the legal disclosures in the listing very carefully and ask the listing agent.
• The entire process is weighted very heavily in favor of the lending institution. The entire process can take up to 90 days, maybe more, AFTER the purchaser has submitted an offer. More importantly, you may have no idea when the process will be complete.
• The contract must be accepted and approved by both a seller, who is upside down on the mortgage, and at least one dispassionate lending institution. It is most likely they will all have conflicting interests!
• The seller may offer the house in the MLS at a very attractive price just to dump it. However, the trustee / bank may have no intention of accepting that price.
• In many cases, these prices are low enough to attract multiple offers and result in a bidding war.
• Only AFTER the contract has been accepted by the seller, will the trustee / bank forward their non-negotiable addendums which will supersede any conflicting language in the contract. In effect you have expended a significant amount of time and resources without knowing the real terms of the contract and your only options are to move ahead on bank terms, or void the contract.
• The addendums typically (but not always) allow for a home inspection contingency, but stipulate that the house is “as is” meaning that inspections items will not be negotiated. Buyer may be required by addendum to accept a specific settlement company whose prices may or may not be competitive with other settlement companies. Again, at this juncture, the only option may be to refuse to sign the addendum and void the contract.
• Purchaser must use caution before ordering appraisals, home inspections, termite inspections, and other expenditure outlays UNTIL contract is fully accepted and ratified in writing. At this point, the lending institution may require settlement within 2 weeks with a penalty for a delayed settlement!
• During the process, you may (or may not) learn that the bank / trustee has assigned a negotiator. About the only two negotiable items are the sales price, which is a hint that they won’t accept the purchaser’s offer, and the purchaser’s broker’s commission.
• If walk through items (just before settlement) are discovered that must be paid for by the seller, it will require the approval of the seller and all lien holders, increasing the potential for a further delay of settlement.
There may be other leans on the house for unpaid items (ie. HOA / condo fees). These may not be discovered until the title company runs the title search, just a few days before settlement. You can be certain that the lender will NOT pay these, and it is most likely that the seller won’t have the money. So, if the house is to settle, it may fall to the purchaser to pay these debts. The problem is that to this point the purchaser has invested time, money for inspections, appraisals, etc. etc.
Remember if not sold within a reasonable period of time, short sales will likely become foreclosures , which have complexities to be sure. But in general they are far less complicated that short sales. Short sales may offer value to investors but we believe they almost always have way too much baggage for families purchasing for their primary residence. In all cases, VR SAM strongly encourages retaining legal counsel throughout a short sale transaction! We hope this helps and as always invite your comments and questions.
Always happy to have your questions.
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Copyright VR SAM® 2010