How Short-Sales Affect Your Credit and Other Ramifications

A question on many people’s minds that are considering a short-sale is, “How will a short-sale affect my credit and what are some of the other ramifications?” There is no one right answer because every short-sale negotiation is different, every seller’s situation is different and every bank is different.

Sarah Stelmok, a Realtor in the Fredericksburg, VA area and an expert in short-sales did a great job summing it up in one of her latest blog posts…

How will the short sale affect my credit score? – This is a tricky question. I’ve seen some credit scores hit as little as 90 points. I’ve seen others hit a couple of hundred points. It will really depend on how the bank will report the short sale to credit agencies and how delinquent you already are on your mortgage payments. An agent experienced agent will know that this is a case-by-case answer and won’t make any guarantees or promises.

Besides my credit score going down, what are some other ramifications of a short sale? – Many banks are now trying to mitigate their losses by having the defaulting party sign a promissory note. Each promissory note is different, there are no standards. Your agent may be able to help you negotiate your way out of signing a promissory note. It will depend on your situation. We’re not quite sure how lenders will look at credit histories with short sales on them. Some people may be able to obtain a home mortgage in as little as a year; others will have to wait much longer than that. There could also be tax penalties for short selling your home.Your agent should recommend a good real estate attorney to you, as well as an accountant to go over all the pitfalls of short sales.

Though this may give you a general idea of what Sarah and I have seen personally, remember that Sarah, myself and all other Realtors are only Realtors - you should contact a real estate lawyer, accountant, bank employee and/or the credit bureaus for guidance in this matter. And every person’s situation is different so just because someone else got “XYZ deal” doesn’t mean you will and vice versa.

If you have questions regarding short-sales, whether as a seller or buyer, contact me at any time (click here for contact information).

What is the Usual Condition of a Foreclosure/Bank-Owned or Short-Sale?

If you haven’t bought a foreclosure/bank-owned or short-sale property in a while (or ever), you probably don’t know what the typical condition of such a property is. Here’s an idea of what to expect…

I’m working with a buyer who is buying a foreclosure/bank-owned property and did a home inspection this past Tuesday - here is what the inspection revealed:

1. Exterior wood rot on upper rake and gutter boards, front window and door
2. Gutter is falling - re-secure nails and gutter
3. Re-wire attic fan
4. Re-connect dryer vent in attic
5. Repair 2×4 lateral brace by chimney
6. Replace leaking interior hose bib shut-off valve
7. Upper bathroom has loose toilet and tank - repair
8. All windows are currently painted shut (thank you to Cheryl A for catching my previous typo - oops!) - free up for operation
9. Repair small leak on lower powder room vanity trap
10. Replace house roofing - interior attic system has severe black mold buildup - replace shingle and plywood - treat or clean attic trusses

How does this inspection compare to others? I have seen much worse and greater items on foreclosure/bank-owned and short-sale properties than this. Items 1 through 9 are typical if not less-than average. Item #10 is big item that is cause for serious concern though it’s not the end of the world. Check out photo of the mold below…

The good thing is that, even though foreclosure/bank-owned and short-sale properties are sold “as is”, banks are typically willing to fix mold issues. And once the necessary repairs have been made, the mold will no longer be an issue. The word “mold” is very scary to banks for a variety of reasons. Banks may either repair the mold issue or credit the buyer the amount to fix it themselves.

This home inspection is just one example of what issues you will come across. Here’s a partial list of some other common items you may see…

• water damage in ceilings/walls from leaky/busted pipes
• water damage in basement due to sump pump not working because property has no electricity
• missing appliances/fixtures
• electrical outlets not functioning
• window seals broken/leaking
• AC condensation line is leaking
• hot water heater is leaking
• bath tub stopper not working properly
• shower diverter not working properly

In the end, you have to add up the cost to purchase with the cost to fix and see whether it’s still a deal or not in the end. Foreclosures/bank-owned and short-sale properties should already be discounted to reflect the cost of fixing them up, but do the math and double check yourself before proceeding with the purchase of the property. Better safe than sorry.

One more thing…if you’re looking for the “perfect” foreclosure/bank-owned property or short-sale with no issues, good luck. If it were in that good of a condition, it would be more expensive to reflect the repairs and condition. You’re not going to get a foreclosure/bank-owned or short-sale property (or any property for that matter including new construction) that does not have at least a few issues that need attention.

Hope this helps. Let me know if you have questions or concerns or if you would like me to go into more detail about anything.

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