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The Most Frequent Mistakes to Avoid When Buying a Short Sale

We all want to succeed in what we do but sometimes we have to listen to other people’s advice to know the difference between right and wrong. Buying a short sale can be a great way to make a smart real estate purchase, given the conditions in today’s market. More frequently, homebuyers want to look at nothing but foreclosures, REOs, and short sales during their real estate search. However, just because a property is being sold as a short sale or some other form of a distressed asset, does not mean that it is necessarily a good purchase. This article will focus on the top three mistakes to avoid when buying a short sale as a residence.

1. Don’t Make Emotional Purchases

Real Estate is an emotional purchase. As a matter of fact, most purchases are emotional purchases. When we make emotional purchases, we do a funny thing. Many people don’t realize this, but when we make emotional decisions we tend to justify those decisions with logic.

For example, I want to buy a 4-door Jeep Wrangler. I like them. I want one. I started thinking that I could probably get a really good buy right now. I even started thinking that if I end up waiting a few years that I will probably end up paying more for the same Jeep that I could buy now. So I should buy one now. In my head, I am trying to logically justify an emotional decision.

2. Think of the Future

The same thing happens for homebuyers, only the emotions when buying a home are a lot stronger (typically) than when buying an automobile. Some common logical justifications for emotional homebuying decisions that I hear are:

The house is pretty expensive but it is closer to work and we can save money on gas
You might lose money on your current home now, but we can make it up on the purchase of a new home

• The house is smaller, but that makes it easier to clean

• That extra bedroom would be great if (fill in the blank) ever had to come to live with us

• If you fall in love with the short sale that you want to buy, you will lose your ability to negotiate because you will not be prepared to walk away.

3. Take Your Time Buying

It is not uncommon for short sales to take 90 days or more to complete. Short Sale acceptance depends on any number of the following factors: the amount of unpaid balance, the balance of the first lien, balance of the second lien, type of borrower hardship, the lender’s policy, the mortgage insurance policy, state foreclosure law, seller willingness to “participate” in the loss, etc…

Contrary to popular belief, there is no universal system in place for lenders when determining which offers will be accepted and which won’t. And to make it even more frustrating, loan servicers are completely overwhelmed with short-sale applicants. Some of the larger lenders will immediately tell you that your file will sit in review for a minimum of 30 days from the time of submission. Therefore, as a buyer, if you are in a hurry to get your family in a home, a short sale may not be a solution to your problem.

Furthermore, you cannot threaten, intimidate, or even incentify most lenders. They are just simply too big and too overwhelmed to really care that much. The following tactics will do you no good when negotiating your short sale:

• “Tell the lender that we are paying all cash” – they don’t care if you get a loan or not, it’s all cash to them

• “Tell the lender that if they don’t decide in the next week then we will walk” – in this case, it’s not that they don’t care, they just don’t have a method to leapfrog your file in front of tens of thousands of other files

• “Tell the lender that we will purchase it as-is” – that is fine with them, they weren’t going to fix anything anyway

These transactions can be severely frustrating for the buyers. No one likes to wait unnecessarily. However, smart investors know that they have to go at an even pace, and if they pursue enough deals, one will work out. Methodical follow-up with the lender is far more effective than annoying insistence.

4. Avoid Over Paying

Real estate riches are commonly created when people buy real estate below market value. Market value is easy to determine if you have the data. If you do have the data, market value can be found by looking at two factors: what is currently for sale, and what has recently sold. If you don’t have the data (or are working with an incompetent agent) then the market value may be determined (or mix determined) with false data sets. For example, here is a list of things that don’t affect or indicate value, but are commonly referenced by “experts”:

• Unpaid principal balance: what is owed on the property has nothing to do with what it is worth

• The Tax Assessment: what the property appraiser says a property is worth means nothing (unless he is buying the property)

• Property sales that are more than 90 days old: the current real estate landscape changes so fast, a comparable sale from six months ago is no longer comparable.

I suggest considering the home values from 2002-2003 when buying a home. The values from these years generally indicate “pre-boom” values. They are closer to “normal”. These values should not be solely considered but should be referenced as a sanity check. If you can buy today, at the price from 2002, then you are most likely looking at a relatively good buy. This happens fairly regularly in a short sale transaction. Lenders know to discount the properties to a point that makes them attractive to buyers. This usually means discounting them to “pre-boom” values.