A short sale happens when the lender is shorted on a mortgage payoff, meaning the lender accepts less than the total amount that is owed. Buyers pursue short sales hoping to get a good deal. So when you see a price listed for a home that you think is too low for the neighborhood, ask your agent to clarify if the home is a short sale. A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage because the current market value is less than the amount needed to pay off the lien in full. Just because a property is listed below market with short sale terms, it does not mean the seller’s lender will accept the offer. There are many factors that the bank must take into consideration before determining if the short sale offer will help minimize their loss. The seller’s acceptance will be subject to their lender’s approval of the Short Sale terms. <?xml:namespace prefix = o />
Short Sale purchases are not as simple as many buyers and sellers believe, and very few can close in the normal 30-45 day escrow period. Most Short Sales take 90+ days to get an acceptance from the lender on an offer. Then if the seller and lender both accept the offer, the escrow process begins. The escrow period typically takes another 30 days. The success ratio for Short Sale closings is very low… less than 20% of them actually make it to the closing table.
Before a bank will even consider a Short Sale offer, the Seller must provide the bank with a full financial package, including W-2s, tax returns, financial statement, current pay stubs, and a hardship letter. The hardship letter is a very important part of the package. The lender wants to know why the mortgage payment can no longer be met. Borrowers that have been faced with true hardship due to a job loss, a sudden health crisis, death in the family or divorce are the most likely cases to be considered. Another hardship factor may be payment increases in an adjustable mortgage that are no longer affordable to the borrower, however, lenders are more likely to try to work out a loan modification with the owner, rather than agreeing to a Short Sale. Often, a seller thinks their lender will absorb a large discount on the loan payoff, just because the value is now less than what is owed, however, unless they can prove hardship, the Short Sale is usually denied. If the seller has cash in a savings account, owns other real estate, stocks, or bonds, the lender will most likely determine that the seller is capable of paying back, at least a portion of the lender’s loss. Typically, a seller will not agree to sign a promissory note for a portion of the loss, even though the lender may offer the repayment at 0-1% interest and forgive more than 50% of the short payoff amount. Most sellers are simply not willing to agree to this, even though in some cases, a lender may be able to pursue a deficiency judgment for the full loss. So what does this all mean to a buyer? It simply means that they are entering into an offer to purchase without knowing if the seller will ever be able to actually sell the property.
Another common factor for an unsuccessful Short Sale negotiation, is because the seller lists the property considerably below current comps in the neighborhood. The seller’s lender will obtain an appraisal and a couple Broker Price Opinions with supporting comparable sales that closed within the last 90 days. They will look at other closed “distress sales” and current inventory to determine a “quick sale value" on the property. If the seller has listed the property too low, the lender will usually counter “above” list price or decline the Short Sale offer. This is very discouraging to a buyer that may have been waiting for an extended period of time for a response. Many home buyers have waited 4 to 6 months to close on a short sale, and sometimes even longer.
There is also the possibility that a property will get foreclosed on by the bank before completing the Short Sale process with the seller and buyer. This is often the case if the seller’s lender believes that the seller is just walking away from the property, simply because there is no equity remaining. If the property gets foreclosed on during the Short Sale process, the asset gets transferred from the bank’s “Loss Mitigation Dept” to the “REO Department”. Now the REO (real estate owned) department has certain steps and procedures that must be followed before the property is listed for sale or before any offers will even be considered. Therefore, the waiting game starts all over again for the buyer. This process can be very discouraging for a Buyer who has the need or desire to obtain a new home in a reasonable period of time.
FAQs . . .
Can a Short Sale purchase ever close in 45 days or less? Yes, but rarely . . . these are the ones that have highly skilled Realtors assisting the Seller through the whole process and all paperwork was submitted to the lender long before the buyer wrote an offer. A buyer should be prepared for extensive time delays with a Short Sale offer in most cases (usually 2 - 4 months).
Why does it take a lender so long to respond to a Short Sale offer? The banks simply do not have enough trained staff to handle the exorbitant volume of Short Sale offers in a timely fashion. There are also time delays while the lender is obtaining an appraisal, Broker Price Opinions and Seller’s financial data. With so many sellers owing more than their property is worth, they are faced with a staggering number of Short Sale files.
Do I need to provide an "earnest money deposit" check if the Seller accepts my offer before their lender approves my Short Sale offer? A prudent agent should write your offer stating that a deposit check will be provided only AFTER the lender has given "written" acceptance of the Short Sale terms. Normally a deposit check is provided to the escrow company as soon as a seller accepts your offer but in a Short Sale transaction, this is highly discouraged!
While I've been waiting for the seller's lender to approve my Short Sale offer, another property came on the market that I would like to buy.... can I withdraw my Short Sale offer to proceed with the purchase on another property? If your agent has the knowledge and experience in Short Sale transactions, he/she will be sure to write the offer with a clause that will allow you to cancel at any time prior to the Seller's lender accepting your Short Sale offer. If this clause is properly incorporated into your offer, and no earnest money deposit check was given prior to the lender approving your offer, then cancellation is a SIMPLE process.
Can a Seller get a Short Sale approved by his lenders if he has two loans on the property? This is the most difficult Short Sale to get approved for a number of reasons, and now you will be negotiating with 2 lenders instead of just one. In some cases, the 1st and 2nd loans are with the same lender, which gives a greater chance of successfully completing the Short Sale. If you are going to get involved with a Short Sale transaction requiring two different lender approvals, be prepared to experience disappointment and frustration.
Can I find a home that is NOT a Short Sale or a bank owned property at a good price? Yes, there are many sellers who still have equity in their homes. They may have bought their home 5 or 10 years ago and did not take equity out of their homes. Therefore they are able to list their homes competitively to compete against Short Sale and bank owned listings. Keep in mind that many bank owned and Short Sale listings are in need of quite a bit of work and can cost thousands to refurbish. This is not typically the case, when buying a traditional listing, therefore, even paying a little higher price may result in an overall lower cost.
If you have more questions or would like to discuss the Short Sale and Foreclosure market in depth, please feel free to call me