The Long and Short of Short Sales

The Long and Short of Short Sales

A client of mine said, “I don’t know why they call them short sales; they should be called long sales. They take so long to let you know.”

What is a short sale?
A short sale is a sale in which the seller is trying to sell the house “short” of what is owed. For example, if the house is currently worth $100k, has a mortgage of $150k, and the seller can’t afford to make up the $50k shortfall, he/she may choose to list the house as a short sale.

Why would a seller make this choice?
Forever and always you will be asked on some applications if you have ever had a foreclosure. If a house is sold as a short sale, the answer is NO. By short selling your home, you will not take the same loss in credit score as a foreclosure. The transaction will instead show up on your credit report as a “short pay.” Credit scores will not be hit as hard with a short sale. Lenders do look at short pays all the same way. Be of good cheer, lenders will be happy to take a look at borrowers that have sold short or foreclosed on their homes again in 2-3 years. Sellers be aware, talk to a tax person this may have tax consequences.

Buyers, what does this mean for you?
Short sale homes are generally in decent condition. They’re not generally trashed. Fortunately for the buyer, there are numerous required disclosures that provide more information than in a typical real estate sale. These disclosures spell out when the roof was repaired, when the new water heater was installed, etc. Some of the house’s mysteries will be revealed in the paperwork. (NOTE: That same paperwork is not filled by the sellers if it is a foreclosed home. The asset manager never lived in the house and can not fill out paperwork about the house’s condition.)

So what happens after the buyer makes an offer on a short sale home.
In a nutshell, WAIT. Meanwhile…

• The homeowner gets the offer from the agent
• If agreeable, the homeowner signs the offer agreement just as in a normal sales transaction.
• In a short sale, signing the offer does not mean a deal has been made. Signing the offer is just one step in the short sale process.
• Next the listing or sellers’ agent presents the offer to the mortgage holding bank or its asset manager. The seller provides a stack of information that makes a typical loan submission look like a short stack.

So how long does everyone have to wait?
It depends. There is no good answer to this question. It takes as long as it takes. In my experience, the time has ranged from 1 to 6 months. At the point the bank makes a decision, escrow can begin.

Other key things to understand about pricing in short sales:
If every house around the short sale is selling for 20% more than the asking price of the short sale house, is the buyer getting a good deal at the asking price?
Again, it depends. The bank will get with several reliable, independent real estate agents to get outside opinions on the house’s value. The process can take so long that the value of the outlying properties has dropped to the asking price range. It is likely the bank will come back and ask for more money, or in other words, counter the buyers’ offer. Can they do this? Sure. The bank did not approve the price; the agent made that determination. The bank doesn’t have to make the deal.

Here are the arguments for the bank to accept a lower price than the going rate in the area.

We listed the house higher and kept dropping the price until we got an offer. So therefore that is what the market will bare.

A few final notes:
• This information is based on this agents experience in a So. California market. Other markets may not follow the same pattern.
• The seller is not in the position to negotiate price. Be respectful to the sellers’. They are letting you in their home.
• Write your best offer. The bank knows what the market is. You can tell yourself over and over again that it’s a buyers’ market, but the bank frankly doesn’t care. In our market we have not seen banks take “half price offers.”
• If you are looking for something drastically under market, try the auctions. (You may want to read my blog about the auctions before you venture into that avenue.)

Happy House Hunting,

Karen @ Hamilton Landon in Apple Valley, CA