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Health & Fitness

Short Sales — The Most Misleading Term in Real Estate (Part 1)

An attempt to uncover some of the mystery behind short sales.

Once the real estate market began to decline, the two most common types of homes for sale on the market were either bank-owned foreclosures or private-owned short sales. From a buyer’s perspective, foreclosures are attractive because of their low price, but the downside is that they are often in bad condition. Whereas the benefit of short sales is that they too are available at an affordable price, plus their quality is that of a private-owned home. The tradeoff is that the short sale process takes a very long time and has no guarantee of working out.

As the market begins to turn (an opinion of mine, one I hope to show with future blog posts), traditional sales are becoming more prevalent. But short sales are still out there, and will most likely stay as a significant part of the real estate market until the housing values recover to pre-2007 levels. Unless you’ve recently bought or sold a home though, you may not be all that familiar with what a short sale is, so I have written this as an attempt to uncover some of the mystery behind short sales. It is an introduction to the process, as there are things I needed to leave out in order to not complicate the issue too much.

So what is a short sale?

When a homeowner needs to sell their home, but they owe more on it than the home is worth, they either have to make up the difference themselves, or they can try to get the bank to forgive the remainder of the debt. For example, if a couple owns a home with a $200,000 mortgage, but the home is now only worth $120,000, they have the option of doing a traditional sale if they have the $80,000 to cover the difference. If they don’t have that $80,000, then they need their bank to release the lien on the home and accept the $120,000 as satisfaction for the entire $200,000 debt.

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It sounds simple enough, except that there are two different analyses involved in a short sale. The first is whether the owners qualify to do a short sale. Banks are not going to let just anyone and everyone get out of their mortgage by selling their home for less than they owe, because the banks will make much more money if people continue to pay their monthly mortgage payments. From the banks’ perspective, it is only “smart” to allow a short sale if the owners are otherwise going to go into foreclosure. If someone can continue paying their mortgage, the bank will expect them to do so, but if the owner can show that they have a hardship of some kind, and convince the bank that if they don’t do the short sale, the bank will get the home back as a foreclosure, then the bank has reason to allow the short sale. Most hardships are financial (such as job loss, decreased salary, increased medical expenses, etc), but they can also be other situations where the owners have no choice but to sell (job relocation, divorce, needing to move closer to a dying relative, etc). If the sellers can convince the bank that they have to sell, then they may qualify to do a short sale.

The second analysis involved in a short sale is determining what the home is worth. The short sale process is different depending on which bank holds the loan, but most of them will not tell the owners ahead of time what to sell the home for. Instead, the listing agent must find an offer to bring to the bank, which they will then evaluate. This is an important thing to note if you are a buyer of a short sale- the majority of the time, the asking price on a short sale listing has not been pre-approved by the bank. So if there is a short sale listing with an asking price of $150,000, you could offer $160,000 and the bank could still counter you after they do their analysis. While most real estate agents will list short sales at an appropriate price to prevent that situation, it’s always a possibility.

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When an offer is made

So once an offer comes in on the home, that is when both analyses begin. Even though the first analysis (showing hardship) does not require having an offer on the home, most banks refuse to do anything until there is a buyer involved. That first analysis could take 30 days, or it can take more than 90 days. Again, and I cannot stress this enough, different banks handle short sales differently, and the most indicative factor as to how the short sale is going to go is which bank holds the lien. After the bank acknowledges the sellers qualify to do a short sale, then the bank begins to determine what they feel the home is worth. They order a Broker Price Opinion (BPO), where a third party real estate agent does a market analysis on the home (basically just another type of appraisal). Once that is done, the bank negotiator determines how high the proceeds from the sale need to be. If the offer on the home meets or exceeds the amount required by the negotiator, the deal will move on to the next phase, if not, the bank will counter and the buyers can accept or counter the counter. That process can also take more than 30 days.

But wait, there’s more! After the bank negotiator accepts the offer, it then moves on to the investor on the lien. The investor then needs to sign off on the deal, which can take another three to four weeks. Or they can decline and send it back to the bank negotiator, extending the process even further.

Timing is everything

All of this adds up to one frustrating process. Buyers who are contemplating writing an offer on a short sale need to be fully committed to waiting at least 90 days, and need to accept the possibility that the deal could fall apart after months of waiting. I have seen some short sale deals go smoothly and get approval within 90 days of the offer being written, but I have also seen deals take over six months and then still not work out in the end. Future blog posts will highlight some of the pitfalls that can cause short sales to fall apart.

With all of that said though, for buyers who are patient, and want a home in good condition at a good price, buying a short sale may be their best option.

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