Feb 09
10
Some time back, I wrote the Truth About REO. It’s still one of the most popular posts on the site. Today, I will add a post on a common but misunderstood kind of listing, the short sale.
1. In real estate, a “short sale” is when the mortgage holder is going to be “short” money at the end. This is either because the mortgage owed is higher than market value, or because the homeowner is behind on payments. Often, both.
2. It’s not the same thing as a “short sale” in stocks or commodities. That kind of short sale is when the seller actually sells something he doesn’t own, hoping to “buy to cover” at a lower price later. There’s a nice example of this at the end of the movie, “Trading Places”. You might recall last year’s temporary moratorium on short sales of certain banking stocks.
3. Real estate short sales must have the approval of the mortgage holder, and that takes time. Although the homeowner is the person who accepts the buyer’s offer, the mortgage people are the ones who will be losing money on the deal. It’s only fair for them to be involved in the process. I have personally seen approval come in as little as 2 weeks, but I have also seen it take 5 months. A general rule of thumb is to count on it taking 30-60 days. Some properties are “approved short sale.” That means that the mortgage holder has already approved a sale for a certain price — usually a previous offer has fallen through — and another offer at that price can be quickly approved within a week or two.
4. Both buyers and sellers need to have a lot of patience to make a short sale work. Not only should you count on 30-60 days before there is an answer from the mortgage holder at all, be prepared for the idea that they might say no! If they decide that market value is above the offered price, they may well come back with a price they would like to see instead.
5. Buyers need to be aware that they cannot count on the seller to make any repairs or concessions. The seller probably does not have the money for repairs, and the bank will not allow concessions such as a contribution to closing costs. The buyer may even be required to purchase their own HOA documents. However, unlike an REO property, the buyer has every right to expect the disclosures of property condition they would receive from an “ordinary” buyer.
6. Like REO properties, some are bargains and some are not. Remember, if the price is “too good,” the bank won’t approve it and the buyer will be back to square one in 30-60 days.
7. Although they are often in better condition than bank-owned properties, many of them still need work. You will find that a lot of these homes are still occupied by the owner (or a tenant). Sure, that means they are in livable condition. However, when somebody can’t afford their house anymore, maintenance can and usually does suffer.
8. Having a really good Realtor on both sides of the transaction makes it more likely to happen at all. This time last year, conventional wisdom was that only 1 out of every 3 contingent short sale offers ever got approval. That number has changed a little bit as banks don’t really want to own more property. Nevertheless, you need a strong buyer’s agent and an absolutely tenacious seller’s agent to make everything come to pass. Choose someone with experience and enough time to do the job right.
9. The seller needs to count on handing over a lot of information. The seller is asking the bank to write off many thousands of dollars. Anybody who has ever had to argue with a bank knows how hard that it can be to resolve a dispute involving far less money. The seller needs to be prepared to help prepare a “short sale package”, explaining to the bank why they should go with this plan. The package will probably include financial statements, bank statements, tax returns, a letter of hardship, and a full market analysis by the selling agent. In many cases, a negotiator is involved to help make the final deal with the bank. Even so, the mortgage company will still do its own research on the seller’s finances, an independent appraisal, and one or more Broker’s Price Opinions (BPO). It is important for the seller to understand that if they don’t provide this information, there will be no short sale approval.
10. The seller also needs to know that a short sale will effect their financial future. It will effect your credit score, making it drop by at least 100 points (some sources say more like 200 points). That in turn will effect your ability to buy real estate in the future, and the interest rates you pay on other debt. Until 2007, the debt that the mortgage company wrote off could be considered taxable income. In any event, you should consult a tax and accounting professional for more detailed information.
I hope this post has been helpful to you.
I have a better than average approval rate on short sales, both as a buyer’s agent and as a seller’s agent. If you have a question for me, or you would like to talk about hiring me as your Realtor, please use the “Contact Me!” link in the sidebar, or call the number at the top of the page today.
