Buying A Short Sale
A short sale is a sale of real estate in which the proceeds won't pay back the money owed on the property. In a short sale, the bank or mortgage lender agrees to take less money because it might be cheaper than foreclosing on the home. The seller might be able to lessen damage to their credit history, and purchase their next home sooner.
Many buyers find out the hard way that Short Sales are full of headaches, may need extensive repairs, and require great patience over an extended period. The 'Short' in short sale does not describe a short time, it describes that the payoff is short of the amount it needs to be. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 3 to 6 or 8 months to get the deal closed. It's like being in a slow-moving line at Disneyland, and there is no Fastpass. No amount of calling, pleading, prodding or nudging can hurry the process. On 5/15/2011, an agent in my office closed a short sale after listing it over 3.5 years earlier.
Be aware that short sale deals have a high failure rate. I've had buyers wait 6 to 10 months in escrow, only to find out that the home will be foreclosed on instead. Even though one department of the bank is negotiating a short sale, there may be another bank department proceeding with a foreclosure at the same time. Recently, there was a home that was foreclosed on just one day before the short sale was supposed to close escrow. The buyers had wired in their funds, and were preparing to move in. Imagine how I had to break the news to the buyers.
Many agents tend to put ridiculously low prices on these homes in order to quickly get a bunch of offers. They can't start the short sale process without an offer. However, if the offer is not at market value, then, ultimately, the bank will counter offer at a higher price, sometimes $50,000 higher than what the buyer and seller agreed upon. Remember, the price listed by the agent is not a price approved by the short sale lender. If it seems too good to be true, it is!
One of the hardest things to understand about a short sale is that the buyer and seller agree to a price, but the bank is the one calling the shots. Banks won’t take lowball offers. The banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because a home is on the market and listed as a short sale doesn’t mean they’re going to sell it for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes. Usually there is no great bargain in purchasing a short sale. These homes are also sold in 'as is' condition. So if repairs need to be made, they will be the buyer's responsibility. You can waste a lot of time, spin a lot of wheels, and lose out on a lot of properties making offers on distressed homes.
From a buyer's standpoint, trying to purchase one of these homes can be a long process that leads nowhere. It may take over 120 days to get a response from the bank to approve or disapprove of the offer accepted by the seller. Why does it take so long? Many banks are overwhelmed and not properly organized to deal with the current environment. They can't review the homeowners' situation for weeks or months because of massive backlogs. The seller's lender will not approve of a short sale if they determine that the owner can make the payments, owns other real estate with lots of equity, or lied on the loan application. A short sale is not an easy way out of an over-mortgaged home. The seller has to have a true hardship -- loss of job, medical bills, etc.
The delays these actions cause can be incredibly frustrating for brokers, servicers, homebuyers and others involved in the transaction. And even if the primary lender agrees to a price, there might be a secondary lender that has to agree to the payoff they are offered -- all lien-holders must release their claims for a short sale to be completed. Many homebuyers don't wait, and end up walking away from the deal. For that reason, real estate agents may keep these homes listed as "Active" on the MLS, even though there may be 10 offers submitted --over asking price.
Many times the homes are unavailable to be seen, possibly because there are tenants, and sometimes because the sellers just don't care -- after all, the sellers do not get any proceeds from the sale. Many showing instructions for these homes say "Make offer subject to inspection". What does that mean? You can't see the home, but go ahead and make an offer. If your offer ever gets approved for the short sale, then you can look inside. Buyers, of course, have the right to cancel these agreements.
The short sale process can get complicated, as there might be multiple loans on a property, with each lender needing to approve of the sale. The first lender usually offers the second lender part of their proceeds in order for the second lender to let the deal close escrow. The second lender might get 5 - 10% of what they are owed. If there is a third loan or other liens on the property, then negotiations get more complicated. The seller may have to negotiate and pay these liens off. If the seller refuses to cooperate, or can't cooperate, the sale will get refused.
I just sold a home in which the homeowner had three loans on the home. The bank negotiator of the first loan would not consider any payoff to the second lender until the third lien was taken off of the property. So, the seller borrowed money from friends and family to pay off the third mortgage. The second lender then agreed to accept a small payoff from the first lender. Funny thing is, all three loans were with the same bank. Sound a bit insane?
Recently, I represented some homeowners that had first tried to do a loan modification. The lender told them that they did not make enough net income to qualify for the loan modification. The lender suggested that they try to do a short sale. We presented an all-cash, market-price offer for the home. After 7 months, the lender determined that the sellers made too much gross income to qualify for the short sale. Try to figure that one out. The buyer had waited 7 months for this home. The bank foreclosed on the property, and sold it a year and a half later at the same priced as the offer I had submitted. Don't try to make any sense of it.
If the bank finally does approve of an offer, they may want the purchase completed within a couple of weeks. So, the buyer has to wait, and wait, and wait, and then hurry and jump through hoops. It might be best for the buyer to have inspections and appraisal done, and financing ready. However, those are up-front costs, and there are no guarantees that the sale will occur. Getting a loan in even 30 days is getting to be tough.
Currently, many short sales do not get approved and the homes end up getting foreclosed upon. They are purchased by investors via cash at the courthouse steps, who then fix and sell the properties. Or, ownership reverts to the bank, which will list the home with a Realtor and put back on the market as an REO.