Are backup offers worth the gamble on short sales?
February 27, 2011
There is no simple answer to the question of whether or not you should make a backup offer on a short sale. Many factors are involved and you really need to consider them all before you make a decision. Are you looking for an investment property or do you plan to live in the property yourself? How long are you willing to wait to close on the short sale property?
As a general rule you should avoid short sales entirely if you’re in a hurry to buy a home. There is nothing “short” about a short sale, with most taking between 3 to 6 months from contract to closing. And some can take even longer. If you’re not willing to wait a minimum of 120 days you should not waste your time, the seller’s time or the bank’s time. Yes, often short sales get done in less than 90 days, but more often than not you need to expect a more lengthy wait.
If you’re considering placing a BACKUP offer on a short sale all of the relevant factors get amplified. To start with most short sale listings never sell. Most end up going into foreclosure with the owner being forced out of the home. At this point the home will go back on the market as an REO or bank-owned listing. But truthfully it will usually take 4 or more months after the seller is forced out of the house before you will see the home back on the market as a foreclosure property. And then when it goes back on the market the bank will want the house to be exposed to the market for a month or more before they will accept offers. So if you’ve got your eye on a short sale and are hoping to snatch it up after the sellers are kicked out and it becomes a foreclosure listing you will have a long wait.
If you’re an investor with plenty of time on your hands and you’re ready to wait it out then you definitely should consider short sales – even backup contracts on short sales. A large percentage of 1st position contracts fall apart during the long waiting period of the typical short sale, so if you’re an investor willing to take the gamble that the 1st position contract will fall apart I suggest going for it.
If you’re looking for a primary residence then I’d suggest you stay away from short sales and especially backup contracts on short sales. Even in 1st position the pain of a short sale is more than most buyers can withstand, but backups are far worse. Are you willing to wait several months to see if the contract in 1st position falls apart? And during this wait are you willing to not go out and place offers on other properties (unless you can afford to buy multiple properties)? Are you sure? Take into consideration that most short sales never close and the one you’re considering buying is already under contract. You’re literally counting on all the stars being aligned and they usually are not.