Short Sale Basics — A Primer
Short sales are becoming more and more common these days. Every week I seem to have another client who has become involved in a short sale, whether on the sale side or the purchase side, and is completely bewildered by the process. So what is a short sale? How does it work?
A short sale comes into play when you have someone who is trying to sell real estate, but cannot get an offer that is sufficient to cover the mortgage owed on the property. For example, Seller A might own a property with an outstanding mortgage of $175,000, but Seller A is unable to sell the property for at least that amount. Not only that, Seller A can no longer afford the mortgage, taxes and other costs associated with keeping the property. Seller A is not making loan payments and knows that he is on the road to foreclosure. Instead of going that route, Seller A can call up his bank and ask them to consider a short sale. If the bank agrees, the bank may eventually accept a reasonable offer that is less than the outstanding loan balance.
Banks are overwhelmed by short sale applications these days. In order for a bank to consider a property for short sale, they require a great deal of financial documentation from the seller, as well as a bona fide offer to purchase the property. Even after submitting all of the required paperwork, banks typically take from 1-6 months to make a decision on the file. During that time, the responsible party needs to constantly follow up with the bank and make sure the process is on track. Banks these days are notorious for losing their client’s short sales’ files.
Some banks will eventually respond with a counter-offer; other banks prefer to see your best offer up front and don’t negotiate much. If a buyer is in a hurry to move, short sales are not the way to go. There is no guarantee that a bank will ever agree to the price, even if the seller has. And often times, after months of going back and forth, the bank will turn down the buyer’s best offer. In fact, if the seller has two loans from two different banks, the secondary bank with the junior lien is often unwilling to negotiate, despite the fact that if the property is foreclosed, the junior lienholder will not receive anything. This is becoming a greater problem these days, and is an additional factor in the increasing foreclosure rate.
Short sales are often an attractive deal for buyers regardless of the time it takes to close. Buyers have an opportunity to obtain property that they could not afford otherwise, often at just 75-85% of the original price. Banks are not in the business of managing property, and they are often willing to sell the property at a loss in order to avoid the hassles of property ownership. Savvy buyers are on the lookout for short sales in the neighborhoods they are considering. So if you’re a buyer and you’re interested, meet with a real estate agent who can help you find a short sale bargain!