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!
I expressed interest in short sales to an agent here in California, but she highly discourages them. she says that banks are often ambiguous about the final price and throw in last minute costs like back owed HOA fees, for example. please advise.
She is correct in stating that banks are ambiguous, but the goal of the short sale procedure is to clear those ambiguities up. In a typical short sale transaction, the seller will enter into a contract with the proposed buyer and then submit it to the bank; the contract will be subject to bank approval. The bank may take months to respond, and may either agree to the price if it’s reasonable, or ask for more money. But whatever they want, they will let you know at that point. You will not be going to closing with open-ended issues.
Banks may or may not agree to pay homeowner’s association fees in a short sale. On the other hand, in a foreclosure, Illinois law requires the bank to pay condominium association fees after they receive the deed to the property. However, the person who buys the property from the bank is responsible for association fees for the six months prior to the bank getting the deed. I am not familiar with California law on this issue.
A lot of real estate agents don’t like short sales. First of all, banks are unwilling to pay the full commission; often banks don’t even pay half. Additionally, even after months of negotiation, there is no guarantee that you will get the short sale property you have placed an offer on. If you do place an offer on a short sale, it might not hurt to keep your eyes open for other properties in the meantime.
Thanks. I have a better understanding of why agents don’t like short sales. Having seen the market here, I doubt that a bank will want to or even need to approve short sales (I mean a truly good deal) in the Irvine area.
Sounds like the market in Irvine is doing pretty well!