Five Common Risks when Buying a Short Sale Property

  1. Unpaid liens

 

  • Property tax liens are quite common, and they take priority over every other claim on the property, including the primary mortgage.
  • Mechanic’s or contractor’s liens can be placed on a property when a contractor has not been paid for the work that they have completed on the property.
  • The IRS can also place a lien on a property, usually when the taxpayer doesn’t have enough income to pay back taxes but does have ownership rights to the property.
  • Sometimes we find a “surprise” second mortgage, usually when a homeowner takes a second loan out against the property without telling their spouse.
  • A judgment lien can be placed against a property if a homeowner has been successfully sued in court and the homeowner fails or refuses to pay the entire judgment amount.

 

  1. Deferred maintenance

 

The seller is required to fill out a disclosure form listing everything they know about the condition of the property. Sellers who have been struggling with financial difficulties for a long time have usually ignored maintenance and repairs issues, which may not be readily apparent. They’ll need to list as many of those as possible in order to convince the bank that the house will not sell for much more than the offered price.

 

  1. Incomplete information about the property

 

Bank-owned property disclosure requirements are different than that of an individual seller. Because of that, some buyers take an MLS “short sale” and find out later that it’s on a flood plain or that the neighbors are allowed to build right up against the property line with no setbacks required.

 

  1. Closing drags on

 

Short sales can take much longer to close than any other type of purchase. Legal problems can pop up when trying to resolve liens and can cause a lot of delays. Understand that it may take six months or more to close.

 

  1. The deal falls apart

 

In a short sale situation, the lenders need to approve the sale. The seller may accept your offer but that doesn’t mean that the lender will. The lender will require a lot of documentation from both the seller and the buyer to determine if they want to take the deal or not. If the accepted offer is less than what the lender wants in order to release the lien, then they’ll simply deny the sale. This happens quite often after both parties have done a lot of “hoop jumping” to try and make the deal work over a fairly long time.