A short sale condition occurs when the owner of a property can no longer afford the monthly payments on their home and they need to sell. Unfortunately, the current value of the owner’s property has dropped BELOW the amount the person OWES on the home. This makes selling the home for the amount of the loan impossible. Here is a simplistic example to illustrate
Joe owes the bank $500,000 on his home, but similar homes are now selling in Joe’s neighborhood for $400,000, Joe cannot sell his home for the $500,000 he owes to the bank. Because Joe cannot afford to KEEP the home, one of Joe’s options is to let the bank foreclose on the home. The bank would then own the home. If Joe stops making payments on his home and the bank takes it back (foreclosure) the bank won’t be able to sell it for the amount Joe owes either ($500,000). Just like Joe, the most the bank can sell the home for is the current market value of the home. In this example that is about $400,000. The bank really does NOT want this home. Therefore, instead of going through the cost and time delays of a foreclosure, the bank agrees to let Joe sell the home for $400,000 and they let Joe off the hook for the $100,000 difference. This is called a “Short Sale”.
Now why would the bank do that? Why would the bank agree to loose $100,000? Well, from the bank’s perspective this is reasonable because (just like Joe) the bank could not sell the home for any more than market value ($400,000) and if they let Joe sell it, the bank doesn’t have to go through the high cost of foreclosure and eventual sale. In the end, they only get $400,000 and they can get it the hard way (foreclosure), or the easy way (short sale).
From a Buyer’s perspective a short sale in Sonoma County may offer a way to purchase a home below market value. This additional savings “on top of” the already low prices for real estate in our current market makes many potential buyers get excited. As shown above, even with a sale below value, the seller and the lender may both get a good deal. The seller can potentially get out from under a home that they cannot afford and the lender can avoid a costly foreclosure.
There is a catch: this “below market value” comes at a cost. The extra cost is the amount of time and frustration required for a short sale, the possibility of lost expenses from inspections, and all the unpredictable events inherent in a short sale. I recently ran a report for every short sale in Sonoma County for the last three years and found that only 12-15 percent of the homes offered through a short sale actually closed escrow as a short sale. Most went through foreclosure, while some sellers (hopefully) worked out a new loan they could afford. 12 percent isn’t a very good number. This means that 88 percent of the short sales were a waste of time and money. I have worked with a number of buyers looking for a short sale and most of them would never do it again.
The short sale process is very different than the normal process for buying a home. The escrow period can easily be three to five months for a short sale while a normal sale can often be done in 30 days. The SELLER has a contingency in the agreement that is absent a normal sale; bank approval. Even if the buyer has complete “offer and acceptance” from the seller and a signed purchase agreement, the house could still be sold to the next buyer that comes along with a better offer. The bank may make last-minute demands from the buyer which is NOT part of the original purchase agreement. The seller of the property may be very indifferent about the sale, sometimes even uncooperative and unresponsive. It is not uncommon for a buyer to wait through a four month escrow only to learn that they are not going to get the home and any money they spent on inspections was wasted. I’ll talk about each of these differences as I walk you through a typical short sale.
The best way to start your search for a short sale is to select a lender and get pre-approved for a loan. Most banks will not even consider an offer from a buyer that is NOT preapproved or cannot supply an adequate proof of funds. Remember what got the bank in this situation in the first place: A borrower that cannot afford the home. No mater how bad any real estate market is, there is an inherent underlying fact about real estate: The best deals ALWAYS go first. Shopping without a loan approval is practically a waste of time.
The second item on your list is to find a great Realtor© who works in the area you want to buy, and has experience with short sales. This is a big deal. short sales can be challenging even for an experienced agent. I’ve seen more curve balls thrown in short sales than even the World Series. Having a Realtor© help you through the short sale requirements will make your offer more attractive to the lender and improve the quality of the home you buy. You can read this article for Tips on how to find a great Realtor.
When you write an offer to purchase, remember to write the offer so it has the best chance for approval. This includes offering a good earnest deposit, short escrow time, and as few conditions as possible. Do NOT assume the lender is desperate, they are not desperate. They are a business enterprise with a short-term problem and will deal with it in a cost-effective a manner. Writing a ridiculous low offer, or making unreasonable conditions is an easy way to get a “No” answer from the bank, or in many cases, no answer at all. This may be fine in a normal market where you get your answer in a few days, but not in short sales where you will wait months before you know if the offer is going to be accepted by the bank.
It is critically important that your Realtor© write a purchase agreement structured for a short sale scenario. This is entirely different than a regular sale. Because the escrow period on a short sale is so long (three to five months is common) it is a good idea to perform any no-cost or low-cost inspections right away (perhaps even before you make an offer) in case you find a deal-breaker. You don’t want to perform any high-cost inspections until such time as you know the deal is going to go through. Have your inspectors signed-up and ready to roll the second the bank accepts the offer, so you can include a short escrow in your offer. Your inspection contingencies in the purchase agreement need to support this plan. Most buyers (and quite a few agents) think the purchase agreement is between the buyer and the bank. This is not true on a short sale. Your legal contract to purchase the home is with the owner, not the bank. All disclosures will come from the owner, not the bank. Spend the money on a great home inspector and be respectfully suspicious of the disclosures and condition of the home.
Just because the seller accepted your offer, don’t get over excited until the offer is accepted by the bank. Remember that the seller will continue to offer the home for sale AFTER you have a signed agreement. There really is no contract language you can create that will stop this from happening. This is an inherent element of a short sale. Most sellers will (and should) submit a higher offer to their lender if another buyer makes one before the lender makes their decision. The seller may notify you of this new offer and allow you to make a counter offer. They may not. I have seen all kinds of weird stuff out there. The seller has no obligation for allowing you to make a counter offer, so it is possible that another buyer could scoop the home out from under you. Remember too, the bank and the seller may share information about your offer to other interested parties to try and get upward bidding action, don’t be shocked or get mad, simply decide if you want to play the game or not. A good Realtor© will have created several contract addendums that can help in this situation, but none that can completely stop it.
If you think you are getting deal that is too good to be true, you are probably right. Regardless of what the seller agreed to, the bank will only accept an offer that is “reasonably below” the current market value on the home. Without bank acceptance, you have no deal. I always caution buyers that if the house is a good investment and solves their housing needs, they should steer away from low-ball offers that will ultimately go to someone else (and STILL be a GREAT bargain to the other person).
Short sales are a new concept to many real estate agents and many listing agents don’t really understand short sales or the perspective of the lender. As a buyer, you can really hedge your bet by finding a buyers-agent that understands the short sale and can help the listing agent through the process thereby improving your chance for a successful purchase. I always talk to the listing agent BEFORE we submit an offer and get a feeling for how this agent works short sales. It can make a difference on how I write the offer.
I have heard that the lower the loss to the lender, the faster the file moves through the company. If this is true, it makes sense that the larger the loss, the slower the lender will be. This will be the difference between the amount the seller owes the bank and the current market value of the home. As a buyer, you should take this into consideration when choosing a property to submit an offer. Have your Realtor© look-up the current loan information on the property and include this in your decision to make an offer.
Short sales will take time. Sometimes, a very long time. It is not uncommon for lenders in Sonoma County to take anywhere from 3-months to 5-months, simply to accept or reject a purchase offer in a short sale scenario. A short sale will require more paperwork and patience than a regular sale. This means you need to be prepared to wait for an answer on your offer. If properly written, your purchase agreement will allow you to cancel the agreement if the lender has not responded within a certain amount of time. It is also entirely possible that the lender could file a “Notice of Default” (NOD) against the property while you are waiting for a response, or the owner may receive a “Notice of Trustee Sale”. The NOD used to be the death of a short sale, but not so much lately. Many lenders file this just to protect their investment, but are still willing to finish the short sale and AVOID foreclosure. So don’t freak-out if this happens. Your agent should be in contact with the listing agent who can relay the lenders plans. A Notice of Trustee Sale is a bad thing. Usually when this happens, the deal is dead.
Most short sale properties in Sonoma County are sold in “as is” condition. This means that the lender may not pay for any repairs to the property as noted in the pest inspection, or other discovery. Most lenders will not pay for a buyers warranty plan, inspection fees, survey costs, etc. These will have to be paid for by the Buyer or (sometimes) from the sellers own pocket, they typically will not be paid with the proceeds of the sale.
You and your Realtor© should document the condition of the home with photos and notes before you release your contingencies in case the owner stops taking care of the property. Do not expect a spotless home when you take possession, the seller may be feeling like they have been “screwed by the System” and act accordingly. You should have photos to show if something major has changed if you need to prove it, and a purchase agreement written to protect you.
Short sales are not the kind of real estate transaction every buyer is willing to pursue, however, if you decide a short sale is right for you, learn as much as possible about the process and get a very good real estate agent to represent you. You might want to consider calling me!! Click here to contact David Harts