The Truth About Short Sales

Thinking of buying a short sale? Good luck! Here are some things you need to know ahead of time:

Most people understand the basic principle of the short sale – it’s when the current market value of a house is less than what the seller owes on their mortgage. (We often refer to this as being “underwater” on a house.) So in order to sell the house, the bank has to agree to take a “short” on the loan.

However, people often don’t realize that the sale itself (not just the price) has to be approved by the bank – and that is where things get tricky. Ideally, the listing agent has sent what is called a “hardship package” to the bank ahead of the home being put on the market, and has bank approval to sell the home at a loss. The sequence of events then goes like this: a buyer puts in an offer, which is first accepted by the homeowner. Once the offer has been accepted, the buyers are under contract with that owner. The owner then sends the offer to the bank and both parties wait to hear whether the bank will allow the sale. During that time, the buyer is committed to buying the house and is typically not allowed to bid on other properties for the amount of time specified in the “short sale addendum” that accompanies the contract.

Sometimes, the bank will agree to allow the sale, but will counter at a higher price or include additional terms for the buyer to accept. This can be due to the fact that some short sale agents will list the house far below market value in order to entice buyers to put in an offer. I have seen short sales sell $200K above the original list price – partly because of the intense competition between prospective buyers and partly because the bank did not accept the original list price.

In short, these sales are frustrating for buyers on many levels. They often take far longer than a standard sale to close, and can last six months or more. They tend to get buyers’ hopes up by being listed at ridiculously low prices, only to be sold for much more. They can be extremely difficult to view – my experience with many short sale listing agents is that they have very poor communication with buyers’ agents, and don’t make it easy for buyers to access the property. These sales are almost always “as-is” sales, meaning that the seller will not agree to any repairs – and they usually will not pay for any customary seller paid expenses (like termite work).

If you are still convinced that the short sale process is for you, make sure you ask the following questions before diving in on a listed house:

How many different banks hold loans on the house? The process is generally slower when there is more than one lien holder.
Has the listing agent ever worked on a short sale before and are they working with a short sale negotiator? The professionalism of the listing agent can go a long way towards making the process easier on you.
Has the house been in escrow previously and if so, does it have a bank-approved price?
Has a notice of default been filed? If so, the house may be in danger of being foreclosed before the short sale is approved.

It takes a certain kind of buyer to survive the stress of a short sale. If you are willing to commit to the process and wait it out, you could end up with a great deal. But make sure that you talk everything through with your Realtor before moving forward, or you may be in for some big surprises!

If you have any questions about short sales or the market in general, feel free to contact me!