Short sale volume has significantly declined over the past two years in the San Francisco market. But such sales are still popping up; I’m actually in the process of representing sellers on a short sale listing. And based on the questions I’ve been asked at my open houses, I think it might be a good time for a blog post for prospective home buyers about short sale basics.
Buyers and sellers both take on risks when they get involved with short sales. The seller risks having the short sale denied, or approved and then cancelled by the buyer. And the buyer risks waiting for short sale approval and then being informed that the sale won’t be approved by the seller’s lender(s).
But if you understand the basics, you can make an educated decision on whether the risks are worth it. Here are the most important things to know:
1. Short sales happen because the seller owes more on their loan(s) than the home is worth. Some homes and neighborhoods don’t hold their value in a downturn in San Francisco, and it turns out the seller paid far above the current value. Combined with selling costs such as broker commissions and transfer tax, the sale proceeds will not cover all costs.
2. Short sales require patience. A seller’s lender(s) may take two or more months to decide whether it wants to allow a sale to occur that will result in the lender getting paid less than is owed on the property. Buyers are expected to commit to waiting for short sale approval for a specific period of time (typically, a minimum of 45-60 days). This means that if you see another property you also like that comes on the market two weeks after your offer is accepted by the seller and sent to the lender for approval, you will honor your contractual commitment and not pursue that property.
3. Lenders could ask the buyer to pitch in money. As funds aren’t available on the seller side, the lender could ask the buyer to cover city/county transfer tax ($6.80 per thousand dollars for properties up to $1M; $7.50 for $1M+ homes). There are also other costs that crop up during escrow that the buyer may be asked to cover, such as reports the seller usually pays for.
4. Don’t count on negotiating credits during escrow. The seller is not in a position to provide credits or pay for repairs during escrow. Such requests will have to be approved by the lender—the same lender that’s already taking a loss, and has approved the sale based on the contract price. Attempting to negotiate during escrow will most likely not result in the buyer getting a credit; moreover, there’s a good chance the approval will have to start all over again. Best advice: Do as much due diligence up front, including a preinspection. And assume that you will have to spend a reasonable amount of money on maintenance and repairs if the systems are not all brand new.
5. The lender(s) can pursue foreclosure on the property during the short sale approval process. It’s a good idea to find out whether the seller has stopped paying his or her mortgage. Foreclosures don’t happen overnight, but if the lender has already taken steps toward foreclosure, it could significantly complicate your purchase.