Short Sales & Bank Owned Purchases

Many prospective buyers are hearing about great “deals” to be had by purchasing a “Short Sale” or Bank-Owned property. While purchasing a property under these conditions may provide a unique buying opportunity, there are also certain challenges with these types of transactions.

SHORT SALES

BANK-OWNED PROPERTY

  • Stringent Qualifications. Some sellers may advertise a short sale when in reality they don’t qualify for one with their lender. Unfortunately, whether the lender will approve the seller’s hardship is often unknown until the seller and a buyer reach agreement and that agreement is presented to the lender.
  • Property Condition. Most bank-owned properties are sold “As Is”. As a result, buyers assume the risk of most property condition defects that may not be discovered until after closing. Even if the buyer discovers a defect in their inspection, many times the bank will not consider paying for any repairs.
  • Lenders aren’t naive. Lenders will usually require a broker’s price opinion, known as a BPO, before agreeing to a short sale price. If a lender believes they will lose less by taking the property back in foreclosure over a short sale, the lender may hold out for a higher price or just refuse to approve the short sale offer.
  • Buyer Financing. The buyer’s lender may require the property to be repaired (e.g. a new roof) as a requirement of the buyer’s new loan. As stated above, this cost will fall on the buyer since the bank that owns the property has little appetite to pay for repairs.
  • Many Homes Sell “As Is”. Since most short sale sellers have little or no cash, it is common for the seller to refuse to pay for any repairs or work orders found during the buyer’s inspection.
  • No/Limited Form 17 Disclosures. While banks are not exempt from providing Form 17, most will condition the sale on the buyer’s waiver of the right to receive a fully completed form.
  • Length of Time to Close. Lenders are overwhelmed. Depending on a particular lender’s backlog, it could take anywhere from weeks to months to get a response to your offer. If multiple lenders are involved, the process gets longer and more difficult as all of the lenders must mutually agree on the short sale.
  • Length of Time to Negotiate the Offer. Banks are not typical sellers, may be in a different time zone and closed on weekends. They are overwhelmed and it may take days or weeks to respond to the buyer’s offer. Further, there can be little sense of urgency to respond, especially if it is not at or near the price the lender expects to receive
  • Loss of Control. Because the sale cannot close without lender approval, the lender(s) essentially control the timing of closing thereby making it difficult for the buyer to plan a move and market conditions may change while the buyer waits.
  • Onerous Terms. The bank will provide their own addendum to the Purchase Agreement that will contain non-standard terms and conditions that are mostly unfavorable to the buyer. This may require the buyer to engage a lawyer to review the forms.
  • Lenders Can Change Conditions. Some lenders reserve the right to renegotiate the terms of the short sale at the last minute which can cause the buyer’s purchase to fail.
  • Inspections. Since the buyer is likely purchasing “as-is”, inspections are critical and sometimes it makes sense to have more than one inspection. This can increase the buyer’s costs.
  • Little Seller Motivation. Most short sale sellers will receive no money at closing. Sometimes this can affect their motivation to communicate, cooperate and even to close the sale.
  • Earnest Money. Some banks are requiring a larger earnest money deposit than would a typical seller. The bank may also require the buyer make the deposit even before the bank accepts the offer.