Several times weekly, I am asked to define what a Short Sale is, how the process works, where to find Short Sale, how to start a Short Sale, and more, so I prepared the following information for your use as Sellers interested in selling a Home as a Short Sale or as Buyers interested in purchasing a home sold as a Short Sale. NOTE: Often Short Sales are also referred to as Pre-Foreclosures.
The following information is NOT comprehensive, but is intended to provide you with basic, important details regarding the process.
What is a Short Sale?
A completed Short Sale occurs when a Lender agrees to accept a Purchase amount for the Home (from a new Buyer) that's less than the Mortgage amount owed by the existing Owner. HOWEVER, please note that just because a Home's value is less than the existing Mortgage amount does not mean that the Homeowner will automatically be approved for a Short Sale. Read below for details.
IMPORTANT POINTS FOR BUYERS
- The List Price shown on a Home offered as a Short Sale DOES NOT EQUAL the amount that you will pay for the Home!!! When you submit an Offer to the Lender, they will determine the current Market Value of the Home (in a process known as a Broker Price Opinion/BPO) and will decide how much of a discount they're going to offer off of the existing Mortgage amount. Factors affecting their decision include the current market value of the Home (based on recent sales of comparable properties), how much home inventory they own, and other factors. Be aware that there are properties inaccurately listed at prices that are lower than an amount that's likely to realistically be accepted by the Bank, based on what similar properties are selling for in the current market (see #3 below related to this).
- In our current local Market, many Short Sale properties are sold for an amount that's equal to or very close to CURRENT MARKET VALUE. In the past, this wasnt the case as often, but as Banks have more carefully structured their system of determining value, many Short Sales aren't selling at prices that are significantly below current Market Value. Many Buyers are confused about this and think that Short Sales are sold at the significantly discounted prices of Bank Owned Foreclosures and that's simply not the case. With a Short Sale, the Bank is simply taking a loss on a Property that was purchased for a higher price during the peak of the Market and looking for a Buyer to purchase at or very close to current Market Value. That being the case, non-distressed Properties that are priced correctly for the current market are just as great of a deal as a Short Sale where the Bank is looking to sell for current market value.
- Until the Bank accepts an Offer for the purchase of a Short Sale property, they require that the property remains actively listed for Sale, so many Short Sale properties that are shown as actively available for sale currently have several Offers that have been submitted to the Bank and are waiting for acceptance or rejection. A Short Sale's property status is only required to be changed to "Pending" when the Bank has approved and accepted an Offer from 1 Buyer. The specific Dollar amount of other Buyers' offers on property is confidential information, so we do not have access to that information. If the property is purchased, then we will see how much it was purchased for after the sale closes.
- Be aware that because you must wait for Lender approval to determine how much will be accepted for the purchase of the Home, you could potentially be in a situation where you find out that you placed an Offer on a Home that you cannot afford. Example: let's say that you have a Pre-Approval Letter from your Lender saying that you're approved to purchase a Home for $800,000. You search for Homes and place an Offer on a Short Sale that has a List price of $755,000. After submitting your Offer and waiting to hear back from the Lender regarding how much they will accept, you find out that the Lender will accept a minimum of $850,000 for the Home. At this point, you've now wasted a significant amount of time (most likely several months) only to find out that you can't buy the House since you're only approved for an $800,000 Mortgage.
- Because of uncertainty regarding the REAL availability of Short Sale listings and because we have no way of knowing how much they can be purchased for until an Offer is submitted and the Bank completes the BPO (see #1 above), I complete Short Sale property searches separately from non-Short Sale property searches for Buyers.
- When Homeowners list their Homes for Sale as a Short Sale and instruct their Agent regarding how much they will allow their House to be listed for, their Agent provides information about the recent purchase prices of comparable/similar Homes in the area and suggests an appropriate List price, however, the final decision about the price that will be accepted for the purchase of the Home is the Lender's decision, NOT the Homeowner's.
- Occasionally, you will notice a Listing indicates that the Short Sale has been pre-approved or approved. This means that there was previously an Offer from a Buyer and the Short Sale was processed to the point of approval and Lender's determination of acceptable price, but the Buyer cancelled the Contract or the deal fell through for other reasons. In such cases, if the Short Sale was approved very recently, it's likely that another Offer that's subsequently placed can be processed quickly. In such cases, you will usually need to place an Offer in the amount of the price that has been approved by the Lender. If a Short Sales previous approval wasn't recent, the process usually has to be started over from the beginning.
- Lenders are requesting "highest and best Offer" from Buyers, so ask me for details about how to structure and place an Offer that's based in reality, an Offer that's more likely to be accepted. I and many other Real Estate Professionals are seeing numerous Buyers' lowball Offers being rejected by Lenders. Just because home inventory is high and because Lenders do not want to own Real Estate DOES NOT MEAN that they are "giving homes away" and that they're accepting every Offer that they receive. If it were so easy and if Lenders were indeed giving homes away, the current inventory of Homes for Sale would be a lot lower.
- The Lender will first have to determine if the Homeowner qualifies for a Short Sale. Not all Homeowners qualify for a Short Sale. The Lender will review the Homeowner's Income, Assets, and nature of their Hardship to determine if the Owner qualifies for a Short Sale. The Short Sale application process begins once the Homeowner has accepted an Offer from a Buyer.
- Other items that can affect the sale of the home and the length of time required to close include delinquent Taxes, delinquent Association fees, various Liens, etc. If you are planning to purchase a Condo or other property that's located within an area governed by a Condo Association or Homeowner's Association, be advised that Homeowners selling their property as a Short Sale within Association communities are typically delinquent in the payment of their Association dues and YOU (the Buyer) will usually be required to pay the full amount of the delinquent Association dues in order to purchase the property.
- As with a normal sale, you (the Buyer) ARE NOT responsible for paying Broker's Commissions for the purchase of the Home. Typically, the Homeowner/Seller pays Broker's Commissions, but in the case of Short Sales, the Homeowner's Lender is responsbile for paying Broker's Commissions.
- When you place an Offer on a home offered as a Short Sale and submit the Offer to the Lender, the Lender will determine if they will ACCEPT or REJECT your Offer. Price negotiations are conducted through the Lender. Although Homes offered as Short Sales are still owned by the Owner (these homes are also known as Pre-Foreclosures), the Homeowner in Pre-Foreclosure DOES NOT determine the amount that will be accepted for the purchase of their home.
- Get Pre-approved through a Lender BEFORE starting your home search in order to determine how much home you can afford. Home inventory is high in many segments of our local market and we have to be able to narrow your home search first based on price and then other search criteria. It's a complete waste of everyone's time and resources to view homes that you cannot afford. If you're planning for your purchase to be a Cash purchase, a Letter from your Financial Institution verifying your available funds to purchase a home will be necessary.
- Banks are typically interested in receiving current Market Value for Short Sale properties. That being the case, you shouldn't expect to purchase a Short Sale for the below market value prices of Bank owned Foreclosures (it is a common misconception that Short Sales are purchased at prices that are drastically below current market value).
- Lenders are swamped with thousands of Short Sales and Foreclosures and, unfortunately, are understaffed to handle the caseload. Because of that, other reasons, and because of the required steps to process Short Sale requests, the Short Sale Offer and purchase process is typically quite lengthy. Although some Short Sales close quickly once an Offer has been received (within 30-45 days), many others are known to have taken more than 6 months before even receiving a response from the Lender as to whether the Offer will be accepted or not. A minimum of 4-5 months is an average timeframe for the length of time from Offer to Closing on a Short Sale. You can typically expect to wait a minimum of 30-45 days before receiving a response from a Lender once your Offer has been submitted. If you aren't willing to wait, then a Short Sale purchase isn't the appropriate choice for you (see #16 below).
- IF YOU ARE NOT PATIENT, if you don't like the idea of not having control over a situation, and if you have anger management issues, DO NOT ENGAGE IN A SHORT SALE!!! Repeat this a few times! Short Sales ARE NOT for Buyers who are not patient or who have a short, specific timeframe for purchasing. I've experienced several Buyers who ignored my advice regarding this who later regretted not listening. Do not engage if you're not ready for the process.
- Other interested Buyers can submit an Offer on the same Home that you placed an Offer on, so it can be a competitive process where the Buyers involved are all hoping that their Offer is the one that's approved by the Lender.
Short Sales are not the only great deals available for Sale. Many Sellers have reduced their prices in response to market conditions, so there are other Homes that are priced competitively that can be purchased through a normal sale process, without the necessity of Short Sale and Lender approval and related issues. - Related to item #16 and #17 above, some interested Buyers readily agree to place an Offer on a Short Sale and tell me they don't mind waiting. Again, it must be kept in mind that you can have all the patience in the world and wait 4+ months for a response after submitting your Offer, only to find out that you waited for nothing. "Waited for nothing" meaning that another Buyer's Offer was accepted, the Owner wasn't approved for the Short Sale, the Short Sale didn't get approved in time and the House became Bank owned Property, or that appropriate terms of the Short Sale weren't otherwise agreed upon in other aspects. So, if you aren't okay with the idea of possibly hearing "No" after waiting for several months, then a Short Sale purchase isn't for you.
- I've outlined information about Short Sales, however, Foreclosures/REO properties (properties that the Bank has repossessed) are also available for sale. Foreclosures typically require a very specific timeframe for closing (unlike the lengthy time for Short Sales), however, item #16 applies here as well (other Buyers can submit Offers). Click here to view detailed information about Bank Owned Foreclosures.
- Review important Home Buying Information!
- Please review the information below regarding Sellers and Short Sales as it will help further your understanding of the process.
IMPORTANT POINTS FOR SELLERS
- DO NOT AVOID CONTACT with your Lender. The Clock is ticking. Do not delay listing your Home for Sale. At this point, your goal is attempting to find a QUALIFIED BUYER who will place an Offer on your Home, have their Offer approved by the Lender, and complete purchase of your Home before the Bank repossesses it. Your Lender will require a Listing Agreement with a Broker as evidence that you’re actively marketing your Home for Sale and seeking a Buyer.
- Unlike a regular Sale where you're responsible for paying Broker Commissions for the marketing of your home, that is typically not the case with Short Sale Listings. Brokers & Agents are paid BY THE LENDER from the proceeds they receive from the Buyer for the purchase of your Home except in cases where the Lender approves you for a Short Sale, but determines that you’re financially of contributing some Funds at the time of Closing, in which case, your contribution could possibly include payment of Commission and/or partial payment of the outstanding Loan Balance, etc.
- The List Price of your Home should not be based on sentimental value or the amount of money that you’ve invested in the property. I will provide information about the recent purchase prices of comparable/similar Homes in the area and suggest an appropriate List price. Although you have to approve the amount that the Property is listed for, the decision about the price that will be accepted for the purchase of the Home will be the Lender's decision, NOT yours.
- The Lender will order a Broker Price Opinion (BPO) which they use to determine the current Market Value of the home. The Lender will use the BPO to determine the purchase price that they will accept from the Buyer.
- If you're interested in negotiating a Short Sale, you must complete a Short Sale application through your Lender WHEN you receive an Offer for the purchase of the Property, not before. The Short Sale Application package includes items such as the Listing Agreement showing that you're actively marketing your Home for Sale through a Broker, Tax Returns, Financial Statements, W2s, Homeowner or Condo Association Lien Status Letters, and a Hardship Letter.
- Every Lender will require that you provide documentation of your Hardship (in other words, the Lender will require that you provide a written explanation of why you're unable to continue making your Mortgage payments) and the Lender will determine whether the Hardship you explained meets their criteria of "Hardship" or not. Simply owning a Home that's worth less than your purchase price is not sufficient hardship. A few examples of Hardship include Payment Adjustments (such as Adjustable Rate Mortages--ARMs), Family Illness, Death, Unemployment, Divorce, Separation, Military Service, etc.
- In reviewing your Income, Assets, and Hardship, the Lender will determine if you qualify financially for a Short Sale.
- Other items that can affect the sale of your home include delinquent Taxes, delinquent Association fees, various Liens, etc.
- The Lender will not allow you to receive any profit from the Short Sale.
- Your Credit Score WILL be decreased by a Short Sale, although your Credit Score decrease for a Short Sale is typically less than the Credit Score decrease experienced in a Foreclosure or Deed in Lieu of a Foreclosure.
- If you receive a qualified Offer for the purchase of your Home, the Offer will be submitted to the Lender along with your Short Sale Application package.
- Carefully evaluate if you absolutely must sell your home. Listing your Home for Sale does not guarantee its' sell, nor are there guarantees that a Buyer will place an Offer, or that the Lender will accept the Buyer's Offer.
- Lenders are swamped with thousands of Short Sales and Foreclosures and, unfortunately, are understaffed to handle the caseload. Because of that and because of the required steps to process Short Sale requests, the Short Sale Offer and purchase process can be lengthy. Although some Short Sales close quickly once an Offer has been received (within 30-45 days), a minimum of 4-5 months is an average timeframe for the closing of a Short Sale.
- The listing of your Home will be competing with other Homes on the market including non-Short Sales that are competitively priced.
- If you have more than one Mortgage on your home and/or Mortgages with more than 1 Lender, the Short Sale process will typically take longer than if you have only one Mortgage.
- I am not an Attorney, nor an Accountant. I strongly advise you to consult your Financial and Legal Advisors regarding the ramifications of a Short Sale or Foreclosure.
Again, the information I provided here IS NOT comprehensive and does not substitute for the advice of Legal and Financial professionals, but is intended to provide you with basic, important details regarding the process. Contact me for additional details. If you are a Seller who wants to list a Short Sale in Fort Lauderdale or elsewhere, contact me for information about my Marketing Plan for your home.