In the Chicago area, many homeowners continue to be underwater in regards to their mortgage. This is reflected in the percentage of short sales to total available homes in the Chicago metropolitan area. In February 2015, short sales were 14% of total available. This is significantly lower than the 30% level of two years ago. However, for homes priced below $200,000, the percent is 26%. This is lower than previous levels (44% in February 2013) but still very significant. For this reason, buyers have to consider whether a short sale is a good option for them. This is especially true given the overall shortage of homes available in our area.
Not all buyers are good candidates for purchasing a short sale. Here are some issues you should be aware of if you’re looking to buy a home that is a short sale:
- It is important that your agent determines the market value vs. list price before submitting the offer. If the list price is significantly below market value, it is unlikely that the bank will approve the short sale. The bank will be ordering its own BPO (similar to an appraisal) and use that value in determining whether to approve the offer price. Remember a short sale means that the bank is considering whether to accept a sales price below the loan amount owed by the seller. This is sometimes a significant deficiency. Short sales may offer some discount to market value but they should not generally be viewed as a lowball opportunity.
- Short sales can take months to be approved by the bank. If you have a short timeline for moving, a short sale is probably not for you.
- Short sales are unpredictable. If you have a hard type “A” personality, you may not be able to handle a short sale. There are several common complications that can derail the approval: multiple liens, a BPO higher than the market value (the bank may ask you to raise your offer), the bank may press a reluctant seller for a financial contribution toward the sale, or the bank sometimes will transfer the file mid-approval process (at which point everything starts all over). Surprises are the norm for short sales. Know your own tolerance for the unexpected.
- If your loan is an FHA or VA, you have to be choose your property wisely. These loans have strict property condition standards in qualifying the borrower’s loan. Generally, the seller does not have the resources or inclination to do repairs. Make sure that you are not waiting through a lengthy short sale approval process only to be denied your loan. Of course, you can secure a 203k or other rehab loan to fix the property conditions.
- I also usually advise my client to do their home inspection as usual after the offer is accepted by the seller. It is better to find out right away about structural problems or a leaky roof than wait for months for short sale approval.
- Finally, make sure your agent is familiar with the short sale process. It’s just easier if at least one of you has been through this before and can anticipate the twists and turns.
The challenges are definitely there for short sales. However, so are the benefits. As mentioned, short sales are a material percentage of the supply of homes available. They are often less likely to need extensive repairs because the sellers are still in the home. Finally, there tends to be at least some discount to a traditional listing. These can be a great option for the right buyer.
Millie C Lumpkin
Broker
EXIT Strategy Realty
Phone: (312) 217-5644
Email: millie.lumpkin@gmail.com
Website: http://ChicagoSouthHomes.com
Chicago South Real Estate 