What are the risks in buying a short sale?

 

 

 

 

 

 

 

 

Many short sales involve sellers who are financially struggling.  That typically means the seller cut back on maintenance in recent months or years, so the property likely requires some work.  For example, the seller may not have serviced the furnace, cleaned the gutters, or fixed broken items.

In a short sale transaction, a seller typically will not or cannot pay for repairs that may be customarily expected of non-distressed sellers.  The property in most short sales is conveyed As-Is.  A seller may even have difficulty paying for a use and occupancy certificate inspection with the municipality or a resale certificate from a Homeowners Association (HOA).

The buyer of a short sale may end up being expected to pay for municipal inspections, HOA resale fees, repairs, and other costs.  In some cases, neither buyer nor seller will pay for something like a municipal inspection, with the expectation that the buyer will handle the municipal inspection later.  However, if the municipal inspection discovers violations of existing code, then the buyer takes on the cost and responsibility of correcting the violations.

In some short sales, the seller may not have the utilities turned on for the buyer’s home inspection.  The buyer may be expected to incur the cost and time of activating the utilities or de-winterizing the property.  If the buyer does not turn on the utilities, their property inspection will be limited in scope.

In the midst of winter, buyers have to be careful about damage from frozen pipes.  If the seller stops paying for heat and does not winterize the house, the pipes could freeze.  The damage could occur after the buyer’s home inspection but before the settlement.  If the utilities are off at the time of the closing, it may be worthwhile for the buyer to turn on the utilities and heat prior to the purchase.

Some short sales may involve trash or junk left behind.  The seller may not have the money or the motivation to clean out the property.

Short sales do involve the conveyance of the property with clear and marketable title.  A buyer of a short sale is strongly encouraged to pay for title insurance.  Title agencies offer enhanced title insurance, which costs only 10 percent more than standard title insurance.  We recommend that buyers of distressed property pay for enhanced title insurance.

Many short sales involve increased risk for the buyer.  Many short sales are sold below fair market value.  Therefore, buyers often pay less for a short sale in exchange for the risk they incur.

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