Don't Fall in Love (When Buying Short Sales)

It is absolutely devastating to wait for a house for five months and then finding out the deal can't happen. Many buyers in this situation will start thinking of the house as their own during the five month wait. The problem is, it's not yours until you have signed all the documents at closing.

Buyers that are looking at short sales need to be very aware of this. The list of things that can go wrong prior to closing are immense, and I feel like I have experienced a good portion of them, unfortunately.

Please, please, please, DO NOT GIVE NOTICE at your rental until you have signed the documents at closing. The extra month or two of rent should be considered part of the price of purchasing a short sale. I am dead serious about this. What is worse - having to pay an extra month or two or rent, or having to scramble to find another place to live if the short sale doesn't work out?

Here are some of the real life scenarios I have experienced so far:

1) The approved price comes back higher than the contract price. This has happened twice with Bank of America short sales. The buyers try to negotiate and come to a middle ground but Bank of America closes the case when they don't accept the original counter offer. Once the case is closed, they have to start over with another appraisal and it will be another three to five months. In one situation, the listing agent didn't even know the case had been closed and the property went to auction. In the other situation, the buyers had given notice at their apartment (that they had lived at for 8 years) so they were not able to wait another three months for approval - they had to find a new lease to sign.

2) The approval comes through for the contract price but the seller has to sign a promissory note for a large amount and refuses to sign. This was truly horrible - the listing agent had worked so hard to get full written approval for THREE trusts in five months. The buyer had done the home inspection and paid for an appraisal when we found out the seller was refusing to sign the approval letters - something about an attorney advising him to file bankruptcy. Since prices started going up after that, that family ended up settling on a townhouse instead of a single family home - which will always be a source of dissatisfaction for them.

3) Fully approved short sale with mold in the home that my client is willing to address using an FHA 203K loan (renovation loan). The listing agent tells us that the sellers have signed my client's offer, but before he sends me the ratified contract, he stops returning my calls. About a week later, he says the bank saw pictures of the mold and wants a cash offer. I write a letter about the renovation loan program and how it works but I never hear from the agent again.

4) Title issues crop up after receiving full approval on the short sale and after the seller has signed the approval letters. Apparently this is not unusual. For one thing, the title exam is not conducted until after the short sale approval comes through. For a second thing, when people stop paying their mortgage, they stop paying everything. So creditors can file a lien against the house for the amount they are owed. The owners don't show up to court for most of these so many of them are default judgments. These judgments are in the name of the owner only and if the owner has a common name, you have to obtain the social of the owner and verify that each judgment belongs to another person with the same name, and not the owner of the property. If it is the owner of the property, then the judgment will have to be paid out of the short sale proceeds(renegotiate with the banks), the owner will have to pay them, or the buyer will have to pay them (which is a little ludicrous). In my particular case, two of the former owners are out of the country and hard to get a hold of (to obtain the SSN) and many of the attorneys that filed the judgments are no longer in business. What a mess! This is still ongoing - I will update this blog if it resolves happily for the buyers.