A Buyer’s Dilemma: The Short Sale Backup Plan

by Marcus Fleming on April 18, 2011

Today, 39% of homes for sale in the Phoenix Valley are short sales. In the past 6 months 20% of the homes sold were short sales. Which means, home buyers looking for a home in today’s market will find it impossible to avoid them. The question becomes, are you ready and willing to deal with the complexities involved with buying a short sale?

In the best case scenario, a short sale is nothing more than a traditional transaction that takes 90-120 days to complete. The buyer purchases a home in good condition below market value. In the worst case scenario, a home buyer could be looking at any of the following:

Top 6 Concerns with Short Sales

  1. It could take 6 months to buy the home
  2. The home could be trashed by the owners (with no recourse)
  3. The endless uncertainty about the deal ever closing
  4. Home could go to auction before getting bank approval
  5. You might be missing out on other great opportunities (homes)
  6. What if you have to start the process all over again in 6 months

When a home buyer decides to go under contract on a short sale they have to be willing to deal with all the uncertainties involved. All too often home buyers don’t ask the right questions and they don’t get enough information and education about the short sale process to feel comfortable waiting for the banks to respond. Their lack of comfort with the process leads them to continue looking for homes. Initially looking for additional homes sounds like a good idea. After all we all like having a backup plan especially when the odds are stacked against us.

Against my advice I’ve had home buyers go under contract on a short sale and continue looking for homes. As they continue their search guess what they find? Another short sale, priced below market and looking as good or better than the home they already have under contract. So let’s play this scenario out for a moment.

The Short Sale Backup Plan

Let’s say you get 2-3 short sales under contract within a couple weeks and you decide you can stop house hunting because you know within 3 months you’ll have at least one home to purchase.

Here are the Homes

  • Home #1: You loved the gated community, so we refer to this one as “Gated House”
  • Home #2: You kids fell in love with designer pool so we refer to this one as “Pool House”
  • Home #3: You loved everything about this home, except the power lines in the backyard. So we lovingly refer to this home as “Power Lines”

The Gated House

3 months goes by and your offer on The Gated House gets approved. Before making your decision about the home you want an update on the offer/approval status for the Pool House and Power Lines.

As it turns out, both homes appear to be close to receiving approvals. The question is, do you buy the Gated House or do you roll the dice and hope the other two come through? After all the Pool House and Powerlines are slightly better homes and you might get a better deal on those homes.

Since you like the other homes better, you decide to pass on the Gated House.

Side Note: Don’t forget the home owners you decide not to proceed with will have to start this entire short sale process all over, continue paying for the mortgage they can’t afford and have their lives put on hold until they can get the home sold.

The Pool House

A week goes by and your offer on the Pool House gets approved by the banks. Since you’ve had some time to think, you’ve decided Power Lines would be the better home. Once the very large trees you are going to plant grow tall enough to hide the power lines (in 10 years) the home will be perfect. So you pass on the Pool House, confident Power Lines will also get approved.

Twisted Power Lines

A month goes by and you’re starting to wonder when the Power Lines home will get approved. Furthermore, what happens if it the bank doesn’t approve your offer? You’re down to one home and all your eggs are in one basket (or mailbox if you will). You realize you are running out of options and that initial uncertainty and fear that led you to write multiple offers comes back. You’re wondering, should I start looking for homes again?

So of course you start the home search again while you wait for a response on Power Lines home.

The following week, you find out the Power Lines home was approved for a short sale, but there is a twist. The bank is requiring you pay $35,000 more for the home than you were planning on paying. Suddenly the Gated House and Pool House look like far better deals, unfortunately they already went back under contract. Not to mention the Sellers are so frustrated with your cancellation they wouldn’t be open to considering your offer.

The thought of paying an additional $35,000 for the Power Lines home has you feeling like you’re paying too much for the home. After all you’ve waited months and months for this approval, watched other homes sell for less and you passed up two other excellent homes that we less expensive. No matter how you look at it, this feels like you’re getting the short end of the stick.

Quick Reality Check

In reality this new price is most likely well below the market value for the home. Not to mention the home will have to appraise in order for you to obtain financing. You have to separate your emotions from the facts and just focus on deal as if you just made the offer yesterday.

Pay More or Start Over?

Most home buyers give up at this point and reluctantly pay the higher price because they don’t want to go through all that stress again. From my viewpoint, your’e getting the home you want and your’e paying at or below market value for the home. From your viewpoint, you waited 4 months to pay $35,000 too much and you just want to be done with this home buying nightmare, so you accept the offer. I don’t think anyone should buy their new home with that mindset, its just not healthy.

My Advice…

Here is my advice, treat a short sale like a traditional transaction. 85-90% of short sales get approved in today’s market (especially in Phoenix) and the home prices are always below market value. Ask lots of questions and make sure your agent knows a lot about short sales.  When you decide to go under contract, have your agent qualify the listing agent and get all the details of the short sale. Make sure your agent can explain the short sale situation in detail and don’t hesitate to ask for the listing agent’s information. The listing agent might be able to explain it and answer a lot more of your questions.

Most importantly, STOP HOUSE HUNTING. Looking for more homes will only increase your anxiety about your deal not coming together and it will only complicate your situation. If you can’t deal with the uncertainty of a short sale, thats alright. You just need to avoid them at all costs, stick to the bank owned homes and traditional sales.

Related posts:

  1. The Disappearing Time Table for the Home Buyer Tax Credit
  2. Time's Quickly Ticking for the $8,000 Home Buyer Tax Credit
  3. Top 10 Myths Shared by First Time Homebuyers
  4. Three Approaches to Real Estate Value
  5. Market Value vs Market Price

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