Buyer Beware: When Considering a Short-Sale and your Tax Credit

This is a topic I have been intending to write about for several weeks — But I have been so busy working on deals with my current clients I have not been able to throw out this bit of caution to some of my readers, and hopefully soon-to-be customers. My prediction after gauging the temperament, price ranges of starter homes, and the quest for a “good deal” by first-time homebuyers is that many hoping to take advantage of this short-sale market may miss the opportunity of receiving their First Time Homebuyer Tax Credit.

I have not really written or even mentioned much about short-sales on this website; simply because there are plenty of other sources, and acquiring customers who may buy a short-sale simply comes with the real estate landscape for the time being.

First, let’s make it perfectly clear what a short-sale is:

• A short sale is the sale of real estate in which the proceeds from the sale fall short of the balance owed on the loan secured by the property being sold. The Bank agrees to take a lesser amount than is currently owed, and could be more or less than the current market value.
• A Lender has final approval on the sales price, including a 2nd Lien Holder if applicable. The Seller can accept an offer but the bank makes the final decision.
• A Seller in negotiations with their lender for a short sale is not allowed to make a dime on the transaction.
• A Short Sale can take up to 30-120+ Days to get accepted. That is accepted, not executed, not closing — accepted! Just to find out if you will Win the offer.

So this last bullet point is the topic for this article. There are many other things that should be considered before entering into an offer to purchase a short sale. Working with a experienced, knowledgeable and assertive REALTOR is your best chance of having a successful and as smooth as possible transaction.

A typical real estate transaction involves:

1. A Seller
2. A Buyer
3. A Lender
4. At least 1 Real Estate Agent (Typically)

Even when a Buyer has been pre-approved for a mortgage, or when the banks were slow at lending out money last year, a single family home could go from contract-to-close in 30-60 days. In a short sale deal the it can and most likely will take 30 – 120 days to be acknowledged from the negotiator, or asset manager handling the short-sale file. Herein lies the problem — I personally have 3- 5 prospective clients who are waiting to get out of a lease, or anticipating some issues with their credit to be cleared up, or whatever the case may be causing them to wait till August or later to actively start searching for a new home. My fear is that even though the $8000 First Time Home Buyer Tax Credit does not end until December 1st, 2009 it may be too late in the fall.

With some projections saying that up to 70% – 80% of the starter homes on the market are either Short Sales, REO Foreclosures, or HUD Foreclosures — What do you think the chances are that many first-timers are going to fall in love with one of them? I know first-hand it is very likely.

In Corinth, Lewisville, and the rest Denton County I classify this market to those that are under $150,000 3 Bedroom 2 Bath homes, you can see them all here.

In order to be eligible for the $8000 Tax Credit you have to close on the house by December 1st 2009, not have it under contract, or be waiting on acceptance. All indications, as of right now, point to this tax credit will not be extended. For Example if a First Time Homebuyer has put in a offer for a property in September, there is actually a high probability that by the time of acceptance (30- 120 Days) it will be too late to complete these must-do’s by 12/1/2009:

• Mortgage broker bringing your file up to date
• Home Inspection
• Termite Inspection
• Survey
• Appraisal
• Underwriting

The Solution to Avoiding Losing Your Tax Credit

Of course I believe the first thing you should do if you are concerned about this happening to you and are looking to buy a home in Denton, Tarrant, Collin or North Dallas County is to contact me or a member of my team, and allow us to work for you. But for the rest of you reading I believe you should start looking now rather than later. The only thing you will really have to lose is time if the bank comes back before you are actually ready to buy. You will not lose any money if your offer is written properly. I would also encourage Buyers to look at and continue to put in offers on other short sales, or even seller owned homes. The escrow deposit is totally refundable all the way up until the point before the offer is accepted regardless of how a offer is written. Since a Seller is not allowed to make any money on a property that is in negotiations with a lender for a short sale the Option Fee is not even required to be put in on a property in most cases.

Naturally, this short sale market may be the perfect opportunity to a buyer who is not working within the time constraints of the tax credit, or can go on a month to month lease, or waiting to sell their current home. I have many suggestions for those that I will try to write about later, or feel free to call me to hear my thoughts sooner.

What all buyers need to realize is that their Buyers Agent really has limited control on the negotiations on any purchase until the line of communications is opened up. Buying a short-sale is not everybody, a ton of patience is involved, living with uncertainty must not stress you out. Oh! and did I mention it takes a lot of time. You will be told one thing on a Monday, and told something else on a Wednesday, but something totally different may be said that contradicts both on a Friday. Your Buyers agent is not lying to you, they are just telling you what they were told in most cases from the Sellers agents. Oh! did I mention you may wait?

A Sellers Agent for the short sale rarely has any better communications with the Negotiator, because they are not assigned till weeks after a written offer is submitted. The Asset Manager who the listing agent has been talking to is typically not the negotiator. So, just as in a typical transaction it is still best to work with an agent who is working for you. Besides that listing agents commissions are so chopped and split-up they just want the deal to close, possibly not looking out for your best interest as much as they should. They may also:

• Discourage you to put offers in on Multiple Properties
• Suddenly not be as flexible to show you new listings that come on the market
• Not have any more information than any other agent

Ever wondered why so many foreclosures, and short sales are listed by the same agents in Denton County?

I by no means am discounting or demeaning those listing agents who concentrate on short sales or foreclosures. In fact I have said on multiple occasions I do not want to try to break into the listing side of that market, and am fine leaving that to those that are better suited for it!  They should have a system in place, and do dozens of transactions a year for each lender in order for it to be profitable. Too much paper to push for my liking, I am more than happy being the one out showing those houses to buyers.

So as always, please feel free to contact me with any questions, comments or concerns. You may leave a comment here, contact me by phone or  email or with the chat box if I am available to the right. I am always happy to give my honest and experienced opinion.

Related posts:

1. The Extended First Time Home Buyer Tax Credit There is really not a whole lot more that needs to be said that my other article here has not already covered. Other than the dates, some changes to the...
2. The Move-Up or Repeat Buyer Tax Credit Also referred to as the Homeowners $6500 Tax Credit follows all the same income and qualifying date requirements as the FTHB tax credit. This credit is intended to be used...
3. $8000 First Time Home Buyer Tax Credit Now it is my tun to break down the $8000 First Time Home Buyer Tax Credit. I must admit, when the bill was being negotiated in the Senate, before moving...
4. Monetizing the Tax Credit for a Down Payment: Clear as Mud Ever since the May 12th announcement from HUD1 that the $8000 First Time Homebuyer Tax Credit was going to be able to be used as a down payment I believe...

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