SHORT SALES - WHAT ARE THEY
AND SHOULD YOU CONSIDER PURCHASING A SHORT SALE?
When looking for a home nowadays, buyers find many homes listed as a “short sale” That term can indicate several scenarios: The seller is “upside-down” on his or her mortgage, or may be faced with an untenable financial situation whereby making mortgage payments is impossible-- and is attempting to negotiate a with the lender to accept less than full payment of the loan in the hope of avoiding foreclosure.
So, in this type of sale, the bank (lender) agrees to accept less than the amount owed on the mortgage. This benefits the bank by allowing it to avoid repossessing or foreclosing on the home, which is expensive and can take a lot of time and resources, and the short sale benefits the seller by avoiding the negative credit results of foreclosure. Or a bankruptcy which sometimes occur in these situations.
There are some things you need to know if you’re thinking about buying a property listed as a short sale.
How A Short Sale Works
In a foreclosure, the bank owns the property—they’ve repossessed it and are the legal owner. But in a short sale, the bank does not own the property. However, the bank must approve the sale because it is they who will be taking a loss, not the seller. Although it does seem like the buyer in a short sale is purchasing the property from the bank, this is not true. What is many times true, that the difference between buying a foreclosed property and buying a property listed at short sale is that a short sale can be frustrating in that it is time-consuming, there are many layers of processes, and nearly everything is dependent on the seller’s financial position (much of which you may not know).
In some ways, purchasing a short-sale property is very similar to an “arm’s length” or retail purchase. But, there are several key differences nonetheless. The purchase agreement that you and your Realtor draw up will contain verbiage indicating that the sale is “conditional” (dependent) on the lender agreeing. The purchase contract can specify that the property is being sold “as is”, and that’s important. In a short sale, the seller has no money to make repairs; thus he lists the property “as is with all faults”. This does NOT prevent you from inspecting the property to ascertain its faults and repair needs. And there is language in the purchase contract that permits you to withdraw your offer should repair needs be more than you’d like to consider. The bank is also unlikely to make any repairs—although there is always reason to ask the bank to consider repairs, to give them a chance to consider making them.
The “Waiting Game”
Banks have the reputation for taking several months to respond to short sale offers. You might consider giving the bank a deadline to respond, but don’t believe that YOUR deadline will compel the bank to act. You can employ that strategy if you’ve decided how long you feel you can wait for an answer, leaving yourself an out of the deal. If the bank hasn't given the seller approval for the short sale at the time of your offer, declaring a deadline will be useless as it may take several months for the seller to reach a short sale agreement with the lender. But be aware that even if such an agreement is in place, there is no guarantee that the short sale will go through.
Opinions about short sales are numerous, good and bad. On the good side, short sales are priced below market values, and offer buyers the opportunity to get a great deal, or for first-time homebuyers to get into a home they otherwise might not be able to afford.
The other side of the coin is that many believe that, although lenders appear to be open to short sales, they’re actually not. They prefer to foreclose rather than go through the lengthy short sale process. The bank will want to minimize their loss, and a CMA (comparative market analysis) or BPO (broker price opinion) may come in higher than the offered price. Possibly the seller’s agent has listed the property far lower than supportable in hopes of generating a bidding war.
Approaching the Short Sales
Work with an experienced short sale agent, not someone who is unfamiliar with the process. Be sure that your agent is willing to participate in a short sale. There are many agents who shy away from these transactions because of the poor reputation they have for success. Be aware that your agent may have to accept less of a commission for a lot more work. Be prepared to enter into a Buyer Broker Agreement whereby you agree that the agent’s commission will be a certain percentage with you making up the difference. Consider, if available, making use of a 3rd party professional negotiator to whom you will pay a fee for services. Many times having a professional short sale negotiator involved can make the short sale process more smooth and more likely to succeed.
1.Try to find out if the listing agent is experienced with short sales or if he is using a professional negotiator to try to ensure a good outcome. Although the bank has the final say, a listing agent or professional negotiator who knows the process well will be able to better facilitate or expedite the transaction.
2. Keep Looking
Given the length of time it will probably take the bank to respond to your offer, it might be a good idea to keep looking at other houses while you wait; and don’t wait around if you find another property that’s easier for you to purchase. Your agent can write additional terms and conditions in your purchase offer that gives you that latitude.
3. Negotiating the Price
Be prepared to increase your offering price. This increases your odds for success. Within reason. Don’t bend to the a seller who implores you to do this to a price you truly don’t want to pay. The bank may also counter your offer. The bank may also decide to continue to look at other offers even if you’ve opened escrow. The bank may reject your offer outright., especially if you’ve offered a significant low offer. Or, they may not answer at all.
4. Seller in Default
Although sometimes difficult to find out for sure, try to ascertain if the short sale is already lender approved. If the seller isn’t actually in default, many banks may not be interested in a short sale. The bank may also not be interested if it believes there is more money to be gotten.
Short sales are tough with one lender. If there are two lenders, the toughness doubles. You will be dealing with a first loan, and a secondary or junior loan. You may come up against the Mortgage Insurer, also. So while many homes are listed as a short sale there is no guarantee that the transaction will ever be completed. Recent government incentives promise to streamline the process, but it can only be so if the lenders go along “with the program”. Remember too, that the banks are overwhelmed with short sale requests, and thus far, they’ve not been able to handle the deluge.
What may be the new method for banks to handle the huge demand for short sales is that they may move to their own professional negotiators via companies that offer those services to work between them and the parties. Be open to fees for these companies, as it may be the wave of the future.
Short sales will continue to grow, and the demand is waiting for the process to become more straight-forward. Have a good and educated real estate agent on your side, consider a third-party negotiator (where approved by the individual state), and participate with patience. Know that each short sale situation is different as each seller’s situation is different, and that outcomes cannot be accurately predicted.