How to buy a short-sale, and home-buying tips

Lately I’ve been getting some great questions from you lovely reader friends. For the next few Fridays I will feature some of them, in hopes of helping others at the same time!

Here’s the question:

Since we recently moved from a 2 bedroom townhome to a 7 bedroom “forever” short-sale home, I have learned a lot and have a lot to share!

Here is my response:

I have a few questions for you –

Where do you live currently? I’m most familiar with the Utah market but many circumstances apply everywhere. Also, what are the specs of the home? (Square footage, bedrooms, year built, and price they are asking). All of those things will make a big difference.

Ok! Now here’s my advice for you…(now, remember that this is simply advice based on my personal experience with home-buying in Utah! It is very different everywhere). We started looking at houses about 6 months before even finding this one, so our process from start to finish was about 18 months of hard-core hunting. That being said, here’s the advice I will give you on short sales:

Talk to friends who have bought short-sales, agents, read articles, talk to bankers, learn everything you can about short sales. Let me tell you…SHORT SALES ARE COMPLICATED!!!! Once in a while you will come across someone who got an “easy” short sale in just a few months, but it’s very rare any more because things with the banks are soooo complicated.

A home will become a short sale because the owner can no longer pay the full amount for the house, thus it needs to be sold. It’s an alternative to foreclosure where the lender (bank) agrees to accept a discounted pay-off and will accept a sale for less than is actually owed on the house. It’s more of a win-win than a foreclosure – the bank will get more money for the house than a foreclosure, and the owner can spare completely shattering their credit while they try to get in control of their financial situation.In a short sale, the owner STILL owns the house and has some control of the sale. At one point the previous owner of our house decided he didn’t want to sell us the house because he didn’t want to move…and he totally had power to do that! He figured he’d be able to live for free for another year or so longer before the house went to foreclosure and he got kicked out. After lots of negotiating he finally decided to move forward with the sale.

That brings me to my next point – foreclosure. This is the process where the owner’s right to the house is legally terminated due to default, this it becomes “bank-owned”. At this point the home most times goes to auction, in which case you have to pay cash for the home and the sold amount is applied to the mortgage debt.

Now, please keep in mind that short-sales and foreclosures are MUCH more complicated than this, I’m just giving you a super brief overview for sake of answering your question  as best I can 🙂

There are some great things about buying a short sale. For one, you can certainly get a good deal on a home, especially if you have time on your side.

• Just because it’s a short sale doesn’t always mean it’s a great deal. You need to familiarize yourself with what a good price per square foot is in your area, and find out why it’s been on the market for so long. For us we learned through years of looking that $90 or less per  sq ft was a pretty good deal. Our home ended up being about $85/sq ft including closing costs, down payment, etc. Homes in Utah are big and cheap, though.
  • You also need to factor in the repairs/updates needed. Often times short sales/foreclosures are in rough shape – even if you can’t see it at first sight. We bought a 2003 home that was updated and basement finished in 2007, and we STILL have had to put hundreds and hundreds of dollars into fixing things, updating electrical, fixing potential water problems, etc. And simply cleaning up after the last owner and touching up things he messed up while living here has sure drained us! So just make sure you know what you’re getting yourself into.
  • As for it being on the market for 400 days, that’s great news and potentially bad news. Ours had been on the market about that long too. It had many offers throughout the duration of the short sale, but because it was SO complicated (ugly divorce, lots of liens put on the house that WE had to pay off in order to buy the house :(, bankruptcy, the whole 9 yards) all the other offers dropped out and we got lucky. Some other buyers came in at the tail end and thought about putting an offer in, but since we were in “first position” they backed off because they didn’t have time to wait. Sometimes a home is in short sale for that long because there is a “cap” on the number of houses that can be foreclosed on each month in Utah. They simply had met their cap so it sat in short-sale mode for much longer than usual.

• That being said…My advice is…put an offer in! It doesn’t hurt (you don’t have to accept if they come back and accept your offer, you have a window of time that you can back out before losing any earnest money). Plus, if you are in “first position” they will be more willing to work with you. (The order offers are received matter. If your offer comes in before anyone else’s they may put more consideration into yours…but not always.) Plus, if a buyer in a hurry comes and sees that there is already an offer pending on a house, they might move on to something else. You can have multiple offers in on multiple houses at once, so it sure doesn’t hurt!

• With the offer…LOW-BALL, LOW-BALL, LOW-BALL. It’s just about guaranteed that they will counter, so do NOT start at the top of your budget. You want them to take your offer seriously so do your research to see if there are other offers on the home or not. If there aren’t, low-ball. If there are offers already, just ask your agent what they would recommend.
  • The good news with a house being on the market for so long is that once a foreclosure date is set, they might be more likely to accept your low-ball offer because they’d rather get something than nothing!
  • The bad news with it being on for so long is it most likely means A) there’s something wrong with the house or the situation is so complicated people just haven’t wanted to bother, or B) the price just really isn’t that good of a deal. Most likely it’s not a big deal that it’s been on for so long, which is great news for you!

• Make sure you get an agent that is really savvy with short-sales and foreclosures. The market is very different now and just because someone has been an agent for 30 years doesn’t mean they know what to do with a complicated short sale. It takes a lot of savvyness to navigate through them any more. Here in Utah my agent is Craig Colette. He is absolutely amazing with short sales. At closing, the title company said she had never seen such a complicated sale in 30 years of her working there. Craig is amazing and has an amazing team working with him.

• Don’t look at price per sq ft only. The most important factor is always… LOCATION, LOCATION, LOCATION! There could be a big, huge, amazing, fabulous house – but if it’s on a busy road, on a fault line, next to older homes, the biggest one on the block, etc….big fat good luck and selling it for the next while! We learned that the hard way with our townhouse that we still own. The economy will take years to re-build and even if you think you will be in a house for a long time, you just never know. The value of your home is determined most by location than anything else. No matter how nice your house is, if it is in even a slightly undesirable location/lot/neighborhood/street, your value will never be as good as it should/could be. Trust me, this is very important! I’m so happy that you found your dream home in your area, what a blessing! Just make sure the neighborhood and schools are what you want.

 

• Be patient and don’t become emotionally attached (much easier said than done!). This was soooooo hard for me. The biggest lesson I learned is: you MUST be willing to walk away.
  • I “fell in love” with a few houses in our house-hunting process, and sadly most of them were just slightly out of our price range, were on busy streets, had funky layouts which would make it hard to re-sell, needed a lot of work, or something else. I became so disappointed and angry when my husband wouldn’t let us put an offer in, or if it sold out from under me. It was unnecessary emotion because hind-sight, it’s a huge blessing we didn’t buy those houses.
  • I don’t know if you are religious or not, but I promise that God has a plan and everything happens for a reason. Your home is so important, just trust that everything happens for a reason and if you are patient, the perfect home for you will come along. It might not be your dream home (in fact, it most likely won’t be…) but it will be the perfect home for your family right now.
  • Don’t make any rash decisions based on pure love for a home. I promise, an even better one will come along if you are patient! 🙂 The good news is, if you really love a home and you’re willing to wait and it’s exactly what you want, it just might work out if you are willing to wait long enough. Exciting!!!

 

• Take your time. Look, look, look, and look more. Even if you think you won’t be interested in the house, walk through it! You need to learn WHY you love what you love, and why you don’t love what you don’t love. We thoroughly researched over 500 homes and walked through just under 75 of them before finally settling on this house. It is the biggest investment you will make in your life, don’t make it lightly! You want to make sure there is no buyers’ remorse when buying a home! 🙂

• Exercise discipline. Don’t buy what you can’t afford. NO MATTER WHAT. You don’t want to end up in a short sale or foreclosure yourself! Set a firm budget and stick to it. No matter how amazing the house, how great the deal, just don’t go there. It can be easy to justify…”It’s only $100 more each month…you will get a raise soon…I will cut back on my grocery budget…” don’t do it! Exercise discipline. It will all work out…trust me 🙂

• Always over-estimate the amount of money you need to buy a home. In buying a home you will ALWAYS ALWAYS ALWAYS need more cash than you think. Always.
  • You need cash for the down payment (sometimes up to 10% or more of the cost of the home!), agent fees (usually 3-5% for the selling agent, and another 3-5% for your agent too), closing costs (depends)…and that’s just to close on the house! You also have moving costs, inspections, appraisals (all coming out of your pocket usually, but must be done to close on the home), paying a locksmith to change your locks when you move in (basically necessary with short sales), time and money to clean your home and the new home you want, repairs, new furniture, painting, cleaning the carpets…the list goes on and on.
  • We complained our heads off that it took 12 months to close on our house, but now looking back, some unexpected expenses came up at the last minute that were pretty substantial. If we hadn’t had 12 extra months to save up, we would’ve had to walk away from the home from lack of cash. That brings me to my last point…

• TIME IS HELPFUL! Expect a short-sale to take longer than you’d like. It’s hard, it hurts, it’s frustrating, but if you are not in a rush, you WILL get a better deal. I promise. The longer you have to hunt, look, dig, save, and plan…the better. Trust me, I know 🙂 Be patient, and remember that time (as frustrating as it is…) is on your side!

 

• Enjoy the ride! House hunting can be stressful, time consuming, and worrisome…but is so exciting! Have fun daydreaming about the home, picturing yourself in the home, planning how you will design the home, etc. The more you feel “at home” in a home, the better the investment will be.

 

Good luck, and I want to see pictures when you find the right place!!!!

Jordan

Thanks again for your question, Melissa!

To reiterate, I am no agent or expert, but… we own two homes, built and lost a home (my story about that HERE), house hunted for the last 18 months, and waited an entire year for the home we are in now. By reason of experience only, I am now somewhat of an expert…whether I like it or not 🙂 haha.

I hope that helps!