Sunday, March 23, 2008

Short Sale Risks

There are many risks involved when purchasing a short sale home. I'm going to discuss the four most important risks when buying a short sale home here in Los Angeles County.

The four biggest difficulties with helping buyers purchase a short sale is working with an agent who doesn't know how to handle a short sale, sellers who abandon the property, lien-holders or lenders who reject the agreed upon amount, and worst of all, the property gets foreclosed on and you can't get your initial deposit back without an attorney.

Working with an agent who doesn't know how to handle a short sale:
As many of you already know, there are agents who will list a short sale home in the San Fernando Valley and not know how to handle the transaction to a successful close. The only person who really loses is the owner who trusted this agent who really didn't know what he/she was doing. This can leave the owner in financial ruin and a possibly legal action from lenders and tax liability to the government.

It's important when choosing an agent to list your home as a short sale or when buying a short sale home that you are working with an agent who specializes in this type of transaction.

Sellers Who Abandon the Property Before Escrow Closes:
This was a topic of discussion on my last office meeting. Keep in mind when buying a short sale home, it's possible the owner is also in default (hasn't paid their mortgage payment for over 3 months) which can also mean they're in financial disaster. If you place an initial deposit in escrow and the seller abandons the house or the lender forecloses on the house, you will have to possibly hire an attorney to get your initial deposit back. The cost of suing would probably cost more than the money you placed in escrow (in most cases).

An example: You find a short sale home in Sherman Oaks listed at $500K which the real market value is $650K. Your agent tells you this home is a short sale and also advises you if the home is in default and when that default occurred. You negotiate the price of the house and place 3% in escrow which equally $15,000. Knowing that the owner is losing their home and hasn't made payments for many months, you move ahead with the escrow. After escrow is opened and all lien-holders accept the deal, the owner disappears and nobody can find them - even the listing agent. Unfortunately, your $15,000 is in escrow and without the other party, your money will not be released.

How can you prevent this from happening to you? Work with a professional. A professional will do their due-diligence and not put their clients in a risky situation.

Lenders Who Reject the Deal:
Just because the owners accept your offer, doesn't mean the deal is going to happen. The final word belongs to the lenders. In a short sale, it's the lenders who are going to lose money so they will either accept your deal or counter you a higher amount based on what they think the house is really worth.

The Property Get's Foreclosed On:
Before writing an offer on a short sale which is also in default, it's important to know how far along the owner is in the pre-foreclosure process. It's fairly easy for a professional real estate agent to check the status of any home. This can be done online and also through a preliminary title report. Before writing an offer on any short sale, be sure you don't buy a home that's going to be foreclosures within the next 60 days. Their are some instances where the lenders will agree to postpone foreclosure.

Written by: Richard M. Johnston
RE/MAX OTB Estate
Short Sale & Bank Owned Specialist

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