Thinking About Buying a Short Sale?

Thinking about buying a short sale? You may not like the bank's short-sale conditions, but any deviation from the rules can be risky. If you fail to agree to the terms-the sale can be put into jeopardy. There could also be civil and criminal actions if the terms are violated.

The buyer must be an owner occupant
The acceptance of a short payoff is sometimes conditioned upon the buyer living in the home. In lenders' eyes, this rule is based upon the theory that an investor would be interested in buying the home only if there were some undisclosed equity in the property-and that equity should be going toward the payoff. Even if buyers come into the transaction with the legitimate intent to become owner-occupants but then end up renting out or reselling the property soon after closing, this could be in breach of the lender's terms.

The purchase price must be highest and best
In certain instances, a practitioner might be aware at the time of the short sale that the buyer is under contract to sell the property to another party for a profit. While this may make business sense for the buyer, it would violate a condition in which the parties certify the purchase price to be the highest and best price obtainable. In transactions that are part of the Affordable Foreclosure Alternatives program, the federal government prohibits a sale by the buyer of the short-sale property for 90 days after the purchase.

Proceeds received by seller
To help the seller net more money than permitted by the lender, the buyer might make a side agreement to move in early and pay rent or the purchase personal property such as furnishings. But if the lender's terms include a condition that the seller net no more than a stated amount, then the seller cannot use these side agreements to circumvent that restriction. Payments to the seller for rent or personal property should be disclosed to the lender on the HUD-1 settlement statement, and any amount over what's stated on the HUD-1 would violate the lender's terms. Also, the short sale may not be approved in time and the home goes into foreclosure or to an auction. What if you were living in the home?

Even if the lender has already issued an estoppel letter or short-sale agreement, it could legally refuse acceptance of the negotiated payoff if its conditions aren't met. And considering how much effort and energy go into a short sale transaction, that is an outcome no one would like. The bottom line: Once the lender has made clear what it's willing to take to accept a short sale payoff, anything a buyer may do to get around those terms can spell big trouble.

There are some short-sale bargains on the active market at this time and these are important things to think about before writing an offer on one.