Buying a short sale home in Charlotte, North Carolina can seem like a good deal because of the reduced price and reduced buyer competition.
However, it’s easy to fall victim to the risks of buying a short sale home, especially since many of these situations are out of the buyer’s control:
- More parties are involved
- Lenders can counter, reject, or ignore your offer
- Opportunity costs associated with short sales
- Inaccurate maintenance disclosures
- Listing complications
- They’re often fixer-uppers
- Unpaid liens and mortgages
- Lenders prefer cash and large down payments
Because of these risks, the short sale process can drag on for months, and there’s no guarantee that the lender will agree to your offers. If short sale risks aren’t mitigated, you can waste time and thousands of dollars while pursuing the deal.
While short sales can be daunting, they can also be rewarding for buyers who have the guidance of certified short sale real estate agents.
In this article, let’s discuss the risks of buying a short sale home. Take a look at our tips and advice, and you can figure out if a short sale home is right for you.
What Is a Short Sale?
In a short sale, a homeowner in financial distress sells their home for less than what they owe on the mortgage.
In this situation, the original lender gets the entire proceeds of the home sale. According to the deficiency judgment, the difference owed is either forgiven by the lender or paid by the borrower.
Sellers and lenders often prefer this arrangement over a foreclosure to prevent a bigger loss, so it’s often possible for buyers to benefit from the deal. However, buyers should practice caution. There are financial risks that can make short sales a poor investment.
How Does a Short Sale Work in NC?
In North Carolina, all short sale sellers must disclose that the transaction is indeed a short sale. When a buyer negotiates an offer, the buyer and seller must sign a short sale addendum.
If the seller agrees to the offer, the seller’s listing agent must get approval from the lender for sale to push through. Short sale transactions often take several months, and it’s not unusual for the deal to fall through when the lender rejects the offer.
While it is possible to score a good deal on a short sale, the lower the buyer’s offer, the higher chance that the lender will reject the offer. This is because the lender wants to recover as much of the mortgage as possible.
Often, the lengthy process can be frustrating. This is a result of dealing with single or multiple lenders.
What Are the Advantages of a Short Sale?
Before we discuss the risks of a short sale, we’ll get into the advantages of the transaction first.
As mentioned, buyers can find a good short sale deal. If you are prepared to face the risks of a short sale, you can benefit from these advantages:
Lower Home Sale Price
Remember that the lender wants to recover the mortgage owed on the property. Rather than letting the property sit and devalue, there’s a big chance they will accept an offer close to the appraised value.
Compared to conventional home sales, short sale homes typically have a lower price tag. As a short sale buyer, you can make a lower offer than usual, but this shouldn’t give you the green light l to make a lowball offer.
Avoid expecting too much from the transaction since the lender can still reject your offer. However, an experienced local real estate agent can help you determine a fair amount that will benefit you while keeping the lender happy.
Less Buyer Competition
There’s a higher chance that another buyer will outbid your offer with a traditional home sale.
Since short sales are more complicated and have a lengthier process than conventional sales, you’ll have less competition.
Since the short sale occurs due to failed mortgage payments by the seller, the lender will still prefer it if the payments continue. This means that the lender might offer financing to the buyer if they have a good credit score.
The buyer can benefit from a faster short sale process and lower interest rates if this happens.
What Are the Risks of a Short Sale?
It bears repeating: short sales entail many risks to the buyer. If these difficulties make the process unnecessarily complicated for your situation, you may have to reconsider your involvement in a short sale transaction:
1. More Parties Involved
In a conventional home sale, negotiations occur only between the buyer and seller or their agents. However, in a short sale, the seller’s original lender has the final word in all decisions.
In most cases, financing is managed by a mortgage servicing company that’s entirely separate from the mortgage lender. This means that your servicing company will be the one making negotiations with the mortgage lender, complicating the process even more.
If the property has multiple mortgages, each lienholder needs to allow the short sale. The primary lienholder is entitled to the first payment, but if secondary lien holders don’t agree to the negotiation, the latter can order a foreclosure.
Because more parties are, there is a higher risk that the buyer’s requests will be ignored or rejected altogether. This makes the short sales process unusually long and complicated.
2. Lender Counters or Rejects Your Offer
Remember, the lender orders an appraisal in a short sale to ensure that the property is listed at fair market value.
This means a strict threshold for negotiations makes it even more likely for lienholders to counter or reject your offer. When the lender does counter your offer, you can’t get a guarantee that they’ll offer a price within your budget.
On top of that, it can take lenders several months before they arrive at a decision. There are also instances when lenders don’t respond to offers at all.
And as mentioned, some properties have multiple lien holders. While the primary lender might approve your offer, the secondary lien holders might order a foreclosure.
The slow process of getting a response, coupled with the high probability of a rejected offer is a real risk to short sale home buyers. Not only is it a waste of time, but you might spend hundreds of dollars to get to this point, as well.
3. Opportunity Cost
Opportunity cost refers to the profit lost after choosing one alternative over another. Missed sales opportunities due to the long short sale process is another risk for buyers.
The short sales process will occupy all your time, attention, and resources, so you’ll likely miss a better deal on a home sale deal.
4. Inaccurate Maintenance Disclosures
Sellers are required to list all the essential repairs and maintenance that the short sale home needs. However, desperate sellers might omit some large issues.
This means that short sale home buyers might get an inaccurate account of the home’s true condition. In the end, this will cause a financial headache for buyers.
To avoid this issue, it’s best if you and your real estate agent are present at the home inspection. This will help you understand the full extent of the damage and how much you need to expect for repairs.
Buyers should also look for information about high-risk zones. Is the area prone to flooding or earthquakes?
Lastly, ask the local development planning department if your area is zoned for development projects.
5. Listing Complications
Home sellers need to submit a financial hardship letter to their lender before pushing through with a short sale. However, there are times when an inexperienced or unethical real estate agent lists the home as a short sale before getting approval from the lender.
If the lender rejects the short sale request, buyers end up wasting time and money, especially if they are already a few steps into the short sale process.
There are also instances wherein a lender might list the home with a very low price to get the attention of buyers. However, the actual asking price might be thousands of dollars over the advertised price.
Especially since the North Carolina real estate market is strong, there’s a large probability that the lender will extend the sale for more money.
6. Buying a Fixer-Upper
Remember that the low price tag of short sale homes comes at a price. Homeowners who can’t pay their mortgages aren’t likely to be able to afford repairs and maintenance for their homes.
Short sale homes are sold as-is, meaning that most short sale homes on the market are fixer-uppers.
If you buy a short sale home, there’s a huge probability that you need to shell out a significant amount of cash to make the home livable. Most fixer-upper homes cost $15 to $60 per square foot, but some projects can set you back $250 per square foot.
According to experts, home buyers need to set aside 20% of their renovation budget for any unplanned renovations. A fixer-upper home might not be for you if you can’t meet this condition.
Most fixer-uppers will usually have these minor issues, but you don’t have to worry because these usually require cheap and easy fixes:
- Refinishing flooring or fixing tiles or carpets
- Fixing trim and baseboards
- Replacing doors and fixing broken windows
- Patching or repainting walls and cabinets
- Installing new light fixtures, outlets, and switches
- Inspection for pests, infestations, and contamination
Aside from cosmetic repairs, most fixer-uppers require major structural improvements that can be costly. These contingencies require expensive fixes, so you might need to rethink buying a short sale home if the home has these issues:
- HVAC system replacement or central air conditioning installation
- Unstable foundation
- Plumbing issues and water leaks
- Septic and well condition
- Faulty electric wiring
- Mold, lead, radon, and other toxic substances
- Kitchen and bathroom overhauls
As a buyer, make sure that your agent takes a look at the results of your home inspection before closing the sale. This should include an estimate of how much you need to pay for repair costs.
7. Unpaid Liens and Mortgages
There are times when buyers are surprised by unexpected liens and mortgages on the property. This can add thousands of dollars to the total cost of the home.
To avoid this issue, you must ask your real estate agent to do a preliminary title search. This will determine the extent of any unsettled liens on the property.
Additionally, getting an owner’s title insurance policy may be more beneficial to you than a lender’s title insurance policy. The former will protect the insurance older from any undisclosed title liens, while the latter will only protect the lender.
8. Lenders Prefer Cash and Large Down Payments
Banks and lenders prefer to deal with buyers who can pay in cash and put down larger down payments. These buyers are seen as less risky compared to buyers who need to take out a large mortgage to purchase the short sale home.
If you cannot prepare cash or large down payments, the seller’s lender might not prioritize your offer.
Conclusion – Is Buying a Short Sale a Good Idea?
Short sale homes can be advantageous for buyers who can spare the time and the money. There is less competition from other buyers, and you can purchase the home at a reduced price. Some lenders will even offer a good mortgage deal if you have a good credit score.
However, multiple risks outside of the buyer’s control can lead to the transaction falling through:
- The lender may back out of the short sale if the seller can’t fulfill the deficiency judgment.
- The short sale can be interrupted by a foreclosure deadline or when a seller files for bankruptcy.
- A seller’s financial status might improve, and they can back out of the sale.
The short sale process is also lengthier and more complicated than the traditional home sale transaction. More parties are involved, and the lender must approve all requests. This can cause buyers to miss out on better investment opportunities.
Inaccurate maintenance disclosures, unpaid liens, and listing complications can also cost the buyer significant financial losses.
Lastly, buyers who pay in cash or put down large down payments are prioritized by lenders. This means that short sales are very risky for buyers who need to get a mortgage because they can be disqualified without notice.
If these risks put you in financial hardship, then a short sale might not be a good idea for you. However, it is possible to protect yourself from these risks with the guidance of a short sale agent in Charlotte, NC.
To ensure that you benefit from a short sale, get in touch with an experienced short sale agent in North Carolina.
My name is Nancy Braun, a Certified Short Sale Seller Designee (CSSS) and Certified Short Sale Buyer Designee. As the first and only North Carolina CSSS and CSSB designee, I guarantee that you can trust us at Showcase Realty for a successful short sale transaction.