Michigan Home Mortgage Market Analysis

Previously I wrote a series of posts on Short Sale Legal Issues Affecting Real Estate Agents, which can be found at: Part 1, Part 2, Part 3, Part 4, Part 5 & Solutions.

There were several comments and questions on what affects buyers when they’re pursuing the purchase of a short sale.  As it’s a very important topic also, I did some research and have written this post.

MORTGAGE, EXPERT, MICHIGAN, BIRMINGHAM, BLOOMFIELD, DETROIT, ROCHESTER, ROYAL OAK, TROY 
Just about every buyer currently in the market for a home, seems to want to “steal a deal”.  With all the foreclosures and distressed sellers, it sometimes seems like buyers are in a frenzy to get a deal – just like sharks when there’s blood in the water.

While at first glance a short sale may seem like an easy way to buy a home at a great price, there are several issues that can turn a buyer’s dream into a nightmare.

Let’s take a look at some of the challenges short sale buyers should be aware of and what buyers can do to protect themselves:

•1.                  Short Sale transactions usually take 3-4 months to close – or longer.

It is not uncommon for a short sale transaction to fall apart because a buyer gets tired of waiting for a closing date.  The seller’s lender(s) don’t care about purchase contract dates and when a buyer wants to move.  They have little to no incentive to move faster than they want to.  It’s important to understand that not only is a seller negotiating with their lender(s) to accept less than what is owed, a seller may also be negotiating to avoid a deficiency amount or a 1099-C.  If the seller doesn’t get what they want, they may choose to go the foreclosure route instead of short sale.

SOLUTION:  Buyers should make sure they have a time-based out clause in their purchase contract so they can terminate the deal, with no penalties, if it drags on too long.
 

•2.                  Making an offer through the real estate agent representing the seller.

Many buyers see a property they like and contact the agent that has their name on the “for sale” sign.  Many buyers don’t realize that agent represents the interests of the seller, not the buyer.  Several states allow agents to represent both a seller and a buyer, called “dual agency”, but there’s little oversight of agents working in this capacity.  I’m also unsure of how an agent that has a commission at stake (paid by the seller), can effectively represent both sides of a transaction without leaning one way over the other.  It’d be like an attorney representing both the defendant and the plaintiff in a court case.  Would you trust an attorney to do that for you?

SOLUTION:  A buyer should either hire their own real estate agent and make sure they sign a buyer’s agency disclosure or hire an attorney to review a purchase contract BEFORE they sign it.  A buyer could seek maximum protection and do both.
 

•3.                  Determining what to offer on a property listed for short sale.

Did you know that many short sales are still listed at too high of a price?  By default, many lenders require a seller to initially list their property at close to what is owed on it.  It doesn’t matter that the actual market value of the property may be substantially less.  The lender wants to make sure they recoup as much of their loan as possible.  Inexperienced and unprofessional real estate agents list properties at these high prices just to get business.  Eventually they know they’ll be able to reduce the price and get a sale. 

SOLUTION:  Buyers should work with a very savvy agent that knows the market and researches a property’s value before writing an offer to avoid overpaying.  The agent should also be able to go over their methodology and comparables for determining what to offer.  NOTE: if a buyer’s using a mortgage to acquire a property, the appraisal process will usually (but not always) protect the buyer from overpaying.  The problem – it may take months for the buyer to find that out.
 

•4.                  A Seller’s Disclosure Statement may be worthless on a short sale transaction.

Many states require a seller to attest in writing about the condition of their property.  This is meant to prevent sellers from lying about pre-existing conditions like mold, water leaks, plumbing problems, etc.  If a seller lies, they can be sued in court by the buyer to recover damages.  The problem on a short sale is that the seller is often desperate to sell and may not be entirely truthful.  A buyer could try to sue if they find an issue after closing, but most sellers of short sales have no assets to go after.

SOLUTION:  Be sure to get an inspection, contact the city about work done at the property, if possible, speak with the neighbors to see if they’re aware of any issues with the property. A home warranty may also be advisable, just make sure to go over exactly what it will & won’t cover.
 

•5.                  The condition of a short sale property is often questionable.

People sell properties on short sales because they either can’t afford them or the property is upside down.  In either case, a seller may often stop maintaining the property and let it deteriorate. 

SOLUTION:  Hire the best home inspector possible and don’t scrimp on inspection costs.  Be prepared for unpleasant surprises.
 

•6.                  The seller’s lender(s) may not allow them to pay normal transaction costs.

A seller usually pays for a title policy to guarantee to the buyer they’ll get the property free of any liens or encumbrances.  There may also be attorney fees, transfer taxes and more.  In an effort to recoup as much of their loan as possible, a lender may ask a buyer to sign an addendum requiring the buyer to pay these costs.

SOLUTION:  Make sure to read everything and ask your agent a lot of questions before signing a purchase contact or any addendums from a lender.  Consider hiring an attorney to review documents before signing them.
 

•7.                  Spending money on inspections, mortgage application fees & appraisals.

Once a purchase contract is signed, a buyer usually only has so many days to get the property inspected and start the mortgage application process.  A buyer could easily spend over $1,000 and then months later have the seller’s lender not approve the short sale amount.

SOLUTION:  Ultimately, there isn’t a good solution for this challenge.  Inspection fees have to be paid to protect a buyer from purchasing a “lemon”.  A buyer will have to apply for a mortgage to start that process.  The only item a buyer may be able to avoid throwing money away on is the appraisal.  A clause can be added to the purchase contract stating something like, “buyer will have 30 days to close transaction from approval date of seller’s lender(s)”.  This will allow the appraisal to be ordered only once the deal is approved.
 

•8.                  Many lenders (for the sellers) reserve the right to change their terms up until closing.

It’s not uncommon for a seller’s lender to have a clause in one of their addendums giving them the right to change the terms of their agreement at anytime up until the closing date.  They could ask for more money, change the closing date or ask the seller to sign a promissory note for the balance owed.

SOLUTION: There really is nothing that can be done to contractually bind a seller’s lender to terms for the buyer.  The buyer has no say in the negotiations between the seller and their lender(s).
 

•9.                  Obtaining proper title insurance and clearing up title issues.

Sellers not paying their mortgages, probably also stopped paying other housing related items.  Besides mortgage lien issues with the seller’s lender(s), there may also be liens from associations, contractors, back taxes, etc.  There may even be real estate investors on title.  There have been many instances of title companies working solely on behalf of a short sale agent or real estate investor.  Title insurance policies may be comprised in these cases.

SOLUTION: Make sure the title company is representing the buyer fairly.  Hiring an attorney may be a good idea for the buyer.  Many states also allow “split closings” where the buyer (or their agent) may select their own title company – which will assist in making sure the seller’s title company does what they’re supposed to.
 

•10.              Condition of the property upon possession.

In a more normal transaction, it’s not uncommon for the buyer to allow a seller to occupy a property for a period of time after the sale.  Seller funds are withheld to pay the buyer rent and to insure the seller turns the property over to the buyer in satisfactory condition.  On a short sale transaction though, the seller usually receives zero proceeds.  So, there are no funds to hold back for rent and damages.  What’s more, a seller may have little incentive to move out after the closing, requiring the buyer to take them to court to evict them.  The seller may also remove items from the property in violation of the sale terms.

SOLUTION:  The only real solution is to require the sellers to be out of the property before the closing of the transaction.  The buyer should then do a final walk-thru of the property before the closing. 

Short sales can be a way to get a great deal on a property if a buyer is careful and keeps the challenges in mind.  It only takes one of the above challenges to turn a buyer’s dream into a nightmare, so hire professionals and proceed cautiously. 

Readers, please comment on additional issues you know of that weren’t covered here that you may have personal experience with.
 

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