There are very few short sales of luxury homes in the DC real estate market compared to other parts of the U.S. but they do come along on occasion. However, 2012 is projected to see greatly increased short sale activity throughout the nation. In 2011, short sales were in short supply due to the robot-signing legal issues but now the banks have settled with the Federal government so they are finally loosening up their tight grip on the inventory and simplifying the process somewhat in order to encourage buyers and agents to make offers. Understand, however, that if you are thinking about trying to purchase a short sale assuming you can find one, it is a very different type of sale than the traditional resale model. There could be several parties involved and issues that are unknown to the buyer and buyer’s agent can affect the outcome of the final transaction. Short sales are subject to third-party-approval by the lenders/lienholders so the path, timing and outcome can be completely unpredictable.
As an extreme example, I personally represented the buyer in a short-sale transaction that went on for months and the bank insisted on negotiating a sales price at the last minute that exceeded the ratified contract amount and the appraisal value by 5% so the buyer would have been paying ABOVE the ‘retail’ market value. This was an astonishing eye-opener about how illogical the short sale process can be depending on who is handling the transaction for the lender. In this case, there were two lienholders who had to agree on the terms and the one in the second position insisted on receiving a certain amount that ended up killing the deal.
Short sale approvals usually take approximately 60-90 days from ratified contract plus 30 days to closing.
The many layers of getting a short sale approved typically includes the mortgage insurer, an end investor like Fannie Mae or Freddie Mac as well as the loan servicer, which means it has to go through three different processes and a fourth if there is an additional lienholder from a second trust etc. Buyers need to be prepared to wait at least 60-90 days for an approval and then another 30 days to go to settlement. Banks are promising to shorten the timelines but all you need is one slow party in the mix to tie up the entire process.
Banks expect to sell for a slight discount from market value
The bank will usually be willing to negotiate from the list price (assuming they have already bought in to the market value), but will not reduce the price dramatically. Some experts suggest that short sales are typically 10-25% under market value whereas REO (foreclosed properties) are generally discounted much deeper. In January of 2012, a home sold via short sale sold at a 21 percent discount on average nationwide compared to the average price of a non-distressed home, according to RealtyTrac. So buyers may be able to get a reasonable deal on a short sale, though it will not be, in most cases, as much of a deal as on an REO foreclosed property. Plus short sales are typically sold in better condition than an REO so buyers of foreclosed homes can look forward to major renovations and repairs in most cases.
Short sales are very challenging for the parties so agents on both sides need to understand the process and be prepared to work diligently
With this type of transaction it takes a very experienced agent on the listing side as well as the buying side. Both the buying and listing agent need to have ample experience dealing with these types of transactions, or buyers can be tied up in a contract for months that never gets to settlement. There are several different types of short sale processes and each bank is different so it takes a real professional to keep the transaction on target.
Most short sale homes are sold strictly “As Is”
Although there are some exceptions to this rule, generally short sales are sold “as-is” and no repairs will be made … period. In fact, the bank will often require both the buyer and the seller to sign an addendum that states the fact that it is being sold in ‘as is condition’.
These are just a few facts for buyers who are considering the purchase of a short sale. Those who have the patience may be able to get a great home at a discount but be prepared for delays and potential disappointment.
Contact me if you are interested in purchasing a luxury short sale property in the Washington DC metro area.