Short Sale Blues

The big trend in today's market is buying property via a short sale. What is a short sale? It's when you purchase a property for less than what is owed on the current mortgage. For instance, the seller owes $250,000 on his mortgage, but your offer is to purchase the home for $220,000. Obviously there's a $30,000 shortfall or loss the mortgage company has to eat if the deal is consummated, hence the term short sale.

A few things to keep in mind so you don't get caught off guard...

First, short sales can take a long, long, long time to be approved. I've had short sales which have dragged on for more than six months. The process is that you make the offer, the seller accepts the offer, but the bank which is eating the loss must approve the deal! Without the bank's approval, there ain't no short sale. Apparently the bank's committee -- or whatever other powwow group is in charge -- can drag its feet for as long as it wants to while keeping you, the purchaser, on hold and in a state of high anxiety. Then, when the committee approves the short sale, it normally wants to close as quickly as possible. It’s sort of a weird process, but it is what it is. Therefore, be very, very, very patient in a short sale transaction.

Second, in a lot of cases the subject property in the short sale transaction is sold in AS IS condition. AS IS condition means the bank or seller ain’t doing a thing to spruce the place up. If the roof is caving in, so be it--you have to deal with it! The problem, at least in many towns in New Jersey, is that you may need a certificate of occupancy for your mortgage company to approve your loan. The certificate of occupancy, or more affectionately called the C of O, is mandated by most municipalities to ensure the property is habitable. Therefore, if you can’t get the certificate of occupancy, you may run into a mortgage roadblock.

Lastly, if the property you’re trying to purchase is from a seller who is in foreclosure and you want to cash in on the short sale, watch out – there may be unexpected liens against the property. The seller may owe $250,000 on his mortgage, but there could be judgments and other noxious liens against the property which could pop up unexpectedly when title is run. Once I was involved in a transaction where the seller has $75,000 in liens against the property. Sellers who are in foreclosure oftentimes present an extraordinary challenge -- or a big pain in the you know what! Therefore, if a property is in foreclosure, expect the unexpected.