Hidden Costs of Short Sale ‘Bargains’
Original Post Date: November 19, 2010
By: June Fletcher
Q: I am interested in buying a short sale, but wonder if there are any unusual or unexpected costs associated with such a sale, compared to buying a regular house.
A: It’s possible to get a great deal on a short sale–where a home sells for less than is owed on the mortgage–but whenever a seller is in a financial bind, you should be prepared to pay extra costs.
Expect to pay for many of the expenses that a seller would normally pay in the transaction—because the lender, who is taking a loss, may refuse to approve the deal if you don’t.
Just what those costs will be varies. For instance, some lenders will agree to assist with a buyer’s closing costs; others won’t. Some will pay broker’s fees—others won’t. (If you agree to pay your buyer broker a certain fee for finding the house and handling the deal, and the lender doesn’t pay it, it will come out of your pocket.)
Among the other expenses you may have to shoulder: unpaid homeowners association dues, appraisals, inspections, mechanics and other liens, a second deed of trust, transfer and other fees and even the seller’s back taxes.
If the price you and the seller agree to is lower than what the bank will accept, you will be asked to make up the difference—though it’s worth trying to negotiate this point.
On top of that, if there are any repairs to be made—and since sellers under financial stress often let maintenance slide—you will have to make them. Short-sale homes are almost always sold “as is,” although some lenders will agree to pay for termite damage, or to correct safety or building code violations.
Though lenders may take months to decide whether to approve your offer, when they finally respond, beware of a clause that asks for “liquidated damages.” That could put you on the hook to pay a daily penalty if you cannot close in a certain period of time after the bank’s approval.
Of course, just because you will be asked to assume more of the expenses that traditionally are paid by the seller doesn’t mean that you should try to cut corners on items that protect you, even if it means more money out of your pocket.
Specifically, don’t buy a short-sale home without springing for title insurance, which will cover you should there be any clouds on the title–always a possibility in any sale, but even more so in a distressed situation when there may be liens or other claims on the property.
And spring for a home warranty, since after laying out all this cash, you shouldn’t have to lay out more money to repair a leaky washer or growling dishwasher once you move in.