Buying Canadian real estate is a major investment. It is an asset that will grow in value, allowing you to make a purchase that you don’t have to pay in full. Even when you hold a mortgage for a property, you can still build equity. Often, even within a short period of time, you can see a profit for Vancouver real estate.
The lower the purchase price regarding comparable prices in an area, the faster you can see equity. This is where shorting Vancouver real estate comes in. Finding a short sale in Vancouver allows you to find a home at a lower price when the seller is underwater.
Here, we take a look at short sales and how to short Vancouver real estate.
What Is a Short Sale in Real Estate?
When considering a short sale in real estate, you are looking at a home that is being sold below what is owed by the homeowner. Although this sounds like a bad deal for the owner, it has a benefit for both the bank and the owner.
For the bank, it allows them to avoid foreclosure and repossession of the home. That is an expensive process and also takes a lot of time. For the owner, it also allows them to avoid foreclosure, which leaves a mark on their credit rating. As well, foreclosure is often followed by the need to claim bankruptcy.
There is one more player in the short sale, and that’s the buyer. When a buyer enters a short-sale scenario, they reap the most benefits. Because the homes are sold below market value, buyers can get a very good deal on a perfectly fine house in a highly desirable area. However, even though the buyer is the winner, it tends to be a very long and drawn-out process.
Why Would an Owner Choose a Short Sale?
A short sale in British Columbia is a financial option for distressed homeowners who are behind on their mortgage payments. Adding to the misery, their home is also underwater, meaning their home is worth less than the outstanding balance on the mortgage.
In these cases, the owner usually only has two choices depending on how long they have been missing their payments:
- The bank will foreclose on their home.
- They can short sale the home.
The bank will foreclose on a home when the terms of the mortgage indicate the owner has defaulted. Warnings are sent to the owner, and if payments or an agreement is not made, the bank will start the foreclosure process.
Foreclosures don’t take as long as short sales as the lender is anxious to liquidate the asset quickly. Homeowners will be evicted from their home and see a drop in their credit rating, which also means they have a minimum five-year wait to purchase another home. The foreclosure remains on their credit report for seven years.
A homeowner will usually decide on a short sale when the value of their home drops by 20% or more. Although this seems like a lot of money to lose, from the homeowner’s standpoint, a short sale is the only way to avoid repossession and eviction from their home. It also allows them to maintain their credit rating and avoid being charged higher interest rates for future loans.
How Does a Short Sale Work?
A homeowner can’t proceed with a short sale unless the lender who holds the mortgage agrees.
Short sales can take a full year to get through the transaction process. The process for a short varies but does require some common steps, including:
- Short-sale package: The seller must submit a financial package to the lender, including financial statements, a letter outlining their financial hardship, and copies of financial records.
- Short sale offer: The seller can accept an offer from an interested buyer, but the sale could not go through without the listing agent sending the lender the listing agreement, an executed purchase offer, the buyer’s preapproval letter, and a copy of the earnest money check.
- Bank processing: The bank will review the offer, and a sale cannot go through without their approval. This step alone can take several weeks to months before approval (or denial) is received.
With the additional steps involved with the bank, buyers have to be prepared to wait. In many cases, it is worth it because, for the right price, you will see improved equity in the short and long term.
The Short-Sale Buyer
Buying a short-sale property does have some similarities to any other home purchase in the real estate market. However, where it differs is the contract, which must specify the terms of the offer are subject to the mortgage lender’s approval.
Buyers should beware, as short sales are always purchased “as-is.” You can still have a line item that says the purchase won’t go through if there are issues discovered during the inspection. However, unlike a regular sale, where you can then negotiate a lower price to cover repairs, this is not likely to happen with a short sale.
Another factor is the lender. Although this is not like a foreclosure, where the lender owns the property, you are also negotiating with an institution in a short sale. They are not likely to agree to make repairs. The seller is already underwater on their home, so they are not about to invest any money towards repairs either.
Because of the bank’s involvement, no short sale may occur without their approval. While all the paperwork is being reviewed, keep looking for other properties in Greater Vancouver. You don’t want to miss out on other opportunities waiting for a deal that might never go through.
The Short-Sale Price
As mentioned, the price of a short sale is what attracts buyers. You should still be ready to raise your offer price if you want to win the home. That is because the seller has no real authority to approve the selling price and the bank will want as much money as possible. It is not uncommon for them to counteroffer. As well, when you low ball your offer, you risk the bank rejecting your offer outright.
Often, sellers list the house lower in the hopes of generating a bidding war. Although they are motivated, they still want the best price to please the bank and balance their losses.
Pros and Cons of a Short Sale
There are pros and cons to shorts sales.
- Short-sale transactions are very time-consuming.
- The waiting period is very stressful.
- Your offer might be rejected by the lender after a long wait while other potential opportunities are missed.
- You are purchasing a home “as is.”
- You will be buying at a price below market value.
- You can purchase in a highly desirable area you might not otherwise have afforded.
- They can make an excellent option for investors who are not concerned about moving into the home themselves.
To avoid additional issues, always make sure the short sale is already lender approved.
As you can see, a short sale is quite complex. It is always best to work with an experienced agent who knows how to short Vancouver real estate and is up to date with prices in the Canadian housing market.