Buying a Home in a Short Sale or Foreclosure Not Always a Bargain

With more short-sale and foreclosed homes coming on the market in Sherman Oaks, buyers might be tempted to buy what may seem at first glance a real bargain.

After all, the price has already been adjusted downward on these properties at a time when the supply of homes for sale Valley wide is scarce, around 3,000, about half the number that's typically for sale.

But realtors caution that short sales can be an arduous and frustrating process.

“There’s no guarantee when you’re in a short sale that you’re going to end up with the house,” said Jim Wagner (jimwagner.net), associate manager at Rodeo Reality in Sherman Oaks.

Waiting for bank approval can take anywhere from a couple of months to four months to sometimes as long as a year, realtors say. Meanwhile, “you’re waiting for the bank to say yes or no, so you’re not out shopping for a home,” added residential realtor, Mary Baldwin (marybaldwin.com) of the John Aaroe Group in Sherman Oaks.

The reasons for the long waits are varied, Wagner said. One reason is that the bank wants to make sure it’s not being defrauded by the owner. Owners can stop paying their mortgage, negotiate a short sale with the bank and then have relatives “buy” the property, now with a downsized mortgage and “rent” it back to the previous owners.

“This happens more frequently that you would like to think and why the short sale process takes so long,” Wagner said. “The bank wants to make sure they’re not giving the house back to the folks who couldn’t make the payments.”

Sellers who want to do a short sale have to prove hardship and justify why they can’t afford to continue paying the mortgage. Their situation needs to be investigated by the bank which includes examination of tax returns, employment, marital status and other personal information. Then the property itself needs to be compared against other homes in the area to determine actual worth. Any offer to buy is also equally thoroughly examined. 

A second reason why short sales take so long is that homes may have a number of liens on them and the other debt holders also have to agree on the sale price and what portion they will receive, Wagner said.

Previously, if a home sold in a short sale, those same debt holders could still pursue the homeowner to collect the money owned via a deficit judgment.  But recent consumer legislation banned the use of such judgments with the result that debt holders are more insistent on getting paid at the time of the short sale, slowing the entire process.

In fact, the short sale process may take so long or fail to find buyers that property owners finally are foreclosed upon. The bank may then take back the home, evict the owner or renters and go through what is basically a minimal, cosmetic rehabilitation to sell the house as is.

“Unlike an owner, the bank doesn’t know the true condition of the home,” Wagner said, adding that, for buyers, home inspections are extremely important to discover problems before the sale. Even then,  the buyer could end up correcting those problems, reducing the "bargain price"  they thought they had found.

“You’re going to end up paying for things the seller would pay for in a normal sale—the transfer tax, termites, repairs, “ Baldwin said. “Those will come out of your bank account.

“So bargain REOs (real estate owned properties) are not the slam dunk everyone thinks they are,” she said.