Finding the perfect home can be tricky no matter what. Throw in the words pre-foreclosure, bank approval, and short sale, and things can get even more complicated!
In urban and beachside markets, condos are often a great option for purchase, as long as you’re well-informed about the process. But what happens if the property you’re considering is a condo and a short sale? Should you cross it off your list? Or could it be a wise purchase?
The answer isn’t always so clear-cut. Ron Wysocarski, a Florida real estate agent who specializes in condos, says, “It depends. Buyers need patience and risk tolerance. There’s some delayed gratification involved.”
What is a condo short sale?
A condo short sale is a real estate transaction that occurs when the seller owes more on their condo than what it’s worth. To better understand the idea here, let’s start by defining the terms in greater detail.
What a condo is and isn’t
A condo (or condominium) is an individual dwelling that’s part of a larger, multi-unit building.
Condos are individually owned –– just like a single-family home –– but they may share walls with neighbors above, below, or on either side, depending on the layout of the condo building.
Typically, a condo differs from an apartment mainly in ownership. Each condo has an individual owner, though some condos are rented out by that owner to short-term or long-term renters. By contrast, most of the time, an apartment building has one owner who rents out each individual apartment to tenants.
A condo differs from a townhouse mainly in layout, though precise definitions vary by property. Usually, a townhouse is lower to the ground (between one and three stories), and many townhouses only share side walls with neighbors, not ceilings or floors. Townhouse owners might also own and maintain private yard and patio spaces, where condo owners may not.
What a short sale is and isn’t
A short sale is a property transaction that happens when the amount still owed on a property exceeds its current market value. Many times, short sales precipitate from an economic crisis that causes a large drop in property values. The owner of the property initiates a short sale, and their mortgage lender (or lenders) will need to approve it.
A short sale differs from a foreclosure sale in timing and initiation. A foreclosure sale happens after the owner has defaulted on their mortgage payments and the lender has seized ownership of the property. A lender initiates a foreclosure sale; buyers deal with the lender’s trustee as the seller.
How is a condo short sale similar to a single-family home short sale?
Both need approval from the seller’s lender
In a short sale scenario, the seller’s lender must sign off on the deal because often it means they’ll end up with less than the amount that they are owed. To gain approval, the lender must be assured that a short sale is in their best interest. Basically, they want to know that taking this short sale deal is more advantageous than going into foreclosure.
On the buyer’s side, the most important thing that will be required is patience. Negotiating with the lender, who doesn’t have the emotional stake to keep things moving, can take anywhere from a few weeks to several months.
“It would be unreasonable to think you’ll get the short sale offer approved in 30 days. It takes about 90 days in most cases, and then you still have to do your inspections and get your financing together.”
Your real estate agent can help guide you through this process as a buyer. When making the initial offer on a short sale, your agent may advise you to put an expiration date in the contract, so you’re not tied up with this property indefinitely.
Both require an appraisal
The seller’s lender is going to want proof that this property is really upside-down (it’s truly not worth what’s owed on it) and worthy of a short sale. The only way to do that is through an appraisal that will show the current market value.
From a buyer’s perspective, this really isn’t a problem. If you’re planning to get a mortgage loan on the property, your own lender will need to see an appraisal anyway. (And if you’re paying cash, then you’ll want to know that you’re getting a fair deal for your money!)
Some buyers think that short sales add up to great deals. But the truth is, you probably aren’t going to be able to ask for significantly under current market value. Remember, the seller’s lender is going to look at the appraisal and determine if it’s in their best interest to do a short sale or a foreclosure. For them it’s literally all about numbers. They won’t agree to a short sale when the appraisal shows they could recoup more through other means.
An inspection and title protection is best in both cases
When sellers find that they can’t afford their mortgage payments, they may be less inclined to keep up with home maintenance. That’s why an inspection is so important from a buyer’s perspective. In a short sale, you’ll most likely be buying the property as-is; lenders aren’t going to want to sign off on repairs.
With the guidance of your real estate agent, you can always include an inspection contingency in the sales contract. That way, if the inspector finds more than a certain level of damage, you have the right to terminate the deal, even if you can’t negotiate repairs.
A title review and title insurance are of utmost importance during all short sale proceedings. A title review will help eliminate any unknown heirs or other liens that could affect the sale. Title insurance will safeguard you after the sale –– a point that’s especially important when there are several stakeholders involved.
How is it different?
While the basic facets of a short sale remain the same, condo short sales have a couple extra layers to consider.
Mostly, these extra considerations come down to the condo owners association, or COA (which may also be called homeowners association or HOA in some condo buildings). COAs govern the regulations and upkeep of the condo building to varying degrees.
The COA can make or break a condo short sale … from both the selling and buying angle! Before you go too far in a condo short sale, you’ll want to make sure that the COA is not going to create any problems in the sale, and that you want to be a part of this particular COA.
The COA’s approval of the short sale
In some instances, a COA will have to sign off on a short sale deal. Yes, that means yet another layer of red tape to go through in addition to the seller’s lender. Ask your real estate agent or legal advisor early on if COA approval is necessary for this deal, since regulations differ by locale.
The most common reason that a COA would deny short sale approval is for delinquent COA dues. If the seller hasn’t been paying their dues, the COA may have already taken out a lien on the property.
The COA will want to know who will be responsible for paying the delinquent dues before agreeing to the deal; they’ll likely need to receive payment in full before lifting a lien. The seller’s lender may agree to pay the COA dues if the seller cannot, or they may issue a promissory note for the seller to repay the dues over time.
The overall health of a COA
As a buyer, you’ll want to make sure you’re comfortable with the COA before entering the short sale proceedings. Here’s a list of questions to ask before you get too far in the process. Your real estate agent can help you get these answers.
- Can I see the latest financial report for the COA? It’s common for this to be provided to you as a prospective buyer.
- Does the COA have a healthy budgetary reserve? Positive reserves are necessary to cover upcoming repairs and unexpected expenses.
- How many units are in arrears on COA dues? If several condos in the building owe the COA money, it could be a red flag.
- Are there any assessments under consideration? Assessments are expenses above and beyond COA dues that owners are required to pay. Examples might include fees for roof, balcony, or parking lot repairs.
- Is the condo building FHA approved? This means all the units in the building are approved for FHA loans. If not, you can get units individually approved.
- What are the COA rules and regulations? Look for rules on things that are important to you, such as pets, noise, visitors, and/or rental terms.
- How many units are occupied by renters vs. owners? Having more owners living onsite could indicate a greater involvement in the COA.
How can you be successful?
Buyers who are flexible with timing are usually well-suited to be successful in a condo short sale. Research and communication are key … along with a lot of patience!
Wysocarski tells buyers, “If it’s the right place and you get a great deal, then it’s absolutely worth the wait.”
Working with experienced professionals can be the key to streamlining the process from start to finish. Make sure that the real estate agent you choose has dealt with condo short sales before. Your agent should be able to construct a deal where you can walk away if necessary.
With information, adaptability, and a great team, you can definitely make condo short sale work for you!
Header Image Source: (garrett parker / Unsplash)