Buying a short sale comes with its share of risks that can be rewarding, like getting the home of your dreams at a very reasonable cost. However many home buyers make these 5 mistakes that can cost them a large amount of money. Make sure you are prepared and that you know what you are getting into when buying a short sale.
1. Ignoring property problems
As homeowners are facing foreclosure, they don’t want to leave their homes. And some take their anger out on the home or completely ignore structural and safety issues that should be addressed immediately.
“They’ll often take that frustration out on the property,” says J. Scott Steinhorn, a real estate investor with experience in foreclosures and short sales.
“I’ve seen a couple foreclosure properties where the previous owners clearly took a sledgehammer to the nice hardwood floors, the tiled showers and the cabinets, just to be spiteful,” he says.
Empty foreclosure properties may suffer from issues that arise from neglect — leaks, mold, termites, thieves, squatters and filth — because the property sat vacant for weeks, months or years before purchase.
2. Skipping the home inspection
Tag along on your home inspection. “Most of what we do is education,” says Kathleen Kuhn, president of New Jersey-based HouseMaster, one of the largest home-inspection franchisers in North America.
Ask for repair estimates when an inspector notes a problem, or do some research online later that night. “Every homeowner underestimates how much renovation costs,” Kuhn says.
You may wish to call in specialized inspectors to look for expensive problems such as termites, mold and structural damage, particularly if it’s a common problem in your area. Also make sure to choose an inspector that’s highly rated. Ask for recommendations from friends, or weigh online user reviews heavily. Just as with any other industry, there are great, marginal and bad inspectors.
You are also allowed a certain period of time to inspect the home, known as an inspection period. While shortening an inspection period may get you leverage in a regular real estate situation when you’re placing a bid, don’t skimp or skip on the inspection period when you’re about to purchase a foreclosed or short sale home. Use this time to make a decision.
3. Ignoring legal and insurance information
A typical disclosure statement would indicate if a house was in a flood plain or had any unpermitted renovation, Steinhorn says. Because bank-owned properties often sell as is without disclosure, buyers need to do a little extra research on the home’s status.
Ensure that all renovations have been permitted and approved. “If not, and there is a problem, the city can cite you,” says Brendon DeSimone, a San Francisco-based real estate agent.
4. Leaving too little time
Short sale and foreclosure homebuyers need to be aware that the sale won’t necessarily close as quickly as it would for a traditional home. The short seller’s lender must grant approval of either foreclosure terms or a short sale price that is less than the seller owes. Even so, troubled banks may be overwhelmed with foreclosures and slow to respond.
“They aren’t just going to let the house go,” says DeSimone.
It’s not always possible or even desirable to get a home loan from the bank that has a mortgage on the short sale you’re buying.
5. Falling hard for a bad home
Don’t assume you’re getting a great deal, says Jim Randel, real estate investor and author of “The Skinny on the Housing Crisis.” “Think of yourself as an investor,” he says. Consider the house’s condition, inspection, price and value dispassionately.
He suggests that you ask yourself these common sense questions:
- If you were to buy this property, could you afford to rent it out for as much as, or less than, your mortgage payment?
- If the home’s value drops another 20%, will you still feel satisfied with your purchase?
- How much money will you have to pour into the property to make it habitable?
Kuhn says that sometimes HouseMaster inspectors provide bad news, but homebuyers just won’t listen. She says buyers declare, “This is our house and we love this house,” despite a broken sewer line, rats in the basement or a collapsed (and rotting) roof.
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