How Does a Short Sale Work – What Can Go Wrong?
Avoid some common short sale mistakes when buying a short sale property with these tips to keep you from getting stuck with a money pit.
Buying a short-sale home can be a good idea and can be profitable. It can also wind up costing you a lot of money, which is why you want to avoid these common short sale mistakes.
A short seller may fill out a disclosure form, announcing any known problems. However, the soon-to-be-former owner may not list some problems.
A house could also have issues the current owner doesn’t know about. A lot of states exempt banks, and hence the seller, from providing a disclosure form in a short sale.
To avoid common short sale mistakes, here are a few tips on how to get the most for your money AND not wind up with a house full of trouble.
How Does a Short Sale Work – Mistake 1: Not Getting An Inspection
Even a cursory inspection can save you money. Walk through the house. Some obvious damage, like wire ripped out of the walls, can’t be seen from the outside.
If you see that on the inside, that’s a guarantee that you’ll be replacing paneling or sheetrock as well as the electrical grid in the house.
It’s also an indicator that the homeowner trashed the house in other ways before deciding to have a short sale, or vandals came in to steal what they could.
If the power is on, test outlets and the HVAC. Since the house is up for a short sale, it’s likely the power won’t be on. So, you can’t test, unless you have a portable generator to supply power.
You can do a visual inspection. Make sure nothing appears to be damaged.
Get under the house. Check for termite damage. Termites often stay hidden until they cause substantial problems. A quick check on the Internet can show you what to look for.
If the house has been sitting vacant for any amount of time, vandals and thieves could have caused damage to things the seller really does not know about. Pipes could leak, causing water damage and give mold time to establish.
Having a professional inspect the home can be a very good idea, especially if you are looking at a sizable purchase amount. If you do hire a professional, ask to accompany him. Tell him the house is a short sale.
Not inspecting the house, or not having a professional do it for you, is one of the most costly and common short sale mistakes.
How Does a Short Sale Work – Mistake 2: Not Reading the Paperwork
Read and understand all the paperwork, including a disclosure if one is provided. Not doing all your homework on the property is among the more common short sale mistakes.
Find out the status of taxes, insurance and other fees like homeowner association dues where applicable.
If the property has past due taxes or fees, you will have to settle them as part of a short sale purchase.
Association dues also have to be paid, but that could be more negotiable than taxes. A short sale does not set these obligations aside.
Sometimes property comes with covenants. Find out what these are. Only you can decide if the deed restrictions will matter.
Zoning should also be considered, especially in mixed-used areas. In a lot of cases, property taxes are based on use.
While a home may be in a commercial district and zoned commercial, taxes might be based on residential use. If the property is converted to commercial, that will affect taxes. Otherwise, zoning should have little effect on a short sale.
If the home needs repair and you’re willing to do that, find out what permits are needed and what they will cost.
Be especially sure to find out what the repair requirements are. Can you do it yourself? Do you have to hire a contractor? What’s the policy for debris removal?
Proper research and then planning accordingly will do a great deal to save you from making common short sale mistakes that could cause an unpleasant surprise to someone who did not do their homework.
How Does a Short Sale Work – Mistake 3: Unrealistic Expectations
Another one of the common short sale mistakes that you don’t want to make is to assume the sale will necessarily close quickly. Some short sales may close fast although a lot of times they do not.
This can be because of bank delays. It can be because of legal issues that have the deed tied up. Regardless, don’t expect to do a home inspection, make an offer and take possession the next week.
The bank is looking at losing money, something financial institutions hate. It will be entertaining bids from other buyers and looking for someone else with more money to close a short sale.
That said, stick with your offer. You might not get that home, but another will eventually become available.
How Does a Short Sale Work – Mistake 4: Making an Emotional Decision
Don’t let emotion make the decision for you. Don’t make the common short sale mistakes. Think about what you are buying.
Is it really worth the money? Can you sell it fairly soon for a profit? Can you rent it out and make a profit? If the home value drops, will you still be happy?
If repairs are needed, how much can you spend, and how much are you willing to spend?
Be willing to walk away, no matter how much it hurts, if the economics and finances don’t add up.
How Does a Short Sale Work – Conclusion
The most common short sale mistakes are 1) not inspecting the property. Even a cursory inspection or a walk through could reveal some serious issues.
2) Not reading all the paperwork is another one of the common short sale mistakes. It’s important to do your homework on the zoning, taxes, association dues and possible restrictions before purchasing the property.
3) Prepare for possible delays in closing, and 4) don’t get too emotionally involved; be willing to walk away.
Avoiding these common short sale mistakes could save you a lot grief and money.
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