I am frequently asked to define what a Short Sale is, how the process works, where to find Short Sales, how to start a Short Sale, and more, so I prepared the following information for your use if you're a Buyer who's considering a Short Sale purchase or if you're a Seller who would like to list property as a Short Sale. NOTE: Often Short Sales are also referred to as Pre-Foreclosures, even though there are technical differences between the two.
What is a Short Sale?
A completed Short Sale occurs when a Lender/Bank 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. "Short" refers to the Lender accepting a purchase price that's short of the existing Mortgage amount. In our current Market, such properties are typically those that were purchased several years ago when purchase prices were higher.
Example: A Home was purchased for $800,000 in 2005 and now has a Market Value of $600,000, so the purchase price for a Buyer in today's Market would most likely be an amount that's fairly close to current Market value IF the Bank approves their purchase.
Bank Owned Foreclosures, on the other hand, typically offer much more significant discounts.
IMPORTANT POINTS FOR BUYERS
The List Price shown on the listing of a Short Sale property DOES NOT EQUAL the amount that you can purchase the property for!!!! The List price is a price that has been set by the Owner of the Property, typically based on the recent purchase prices of similar properties (see item #4). The Bank, not the Property Owner, will determine how much you can purchase the Property for.
Be aware that there are Property Owners who have listed their Short Sale properties at prices that are unrealistically low in attempts to generate increased interest and Offers. "Unrealistically low" means prices that aren't likely to be accepted by the Bank because they're too far below current Market value. In order to start negotiation with the Bank for a Short Sale, it's necessary to first submit an Offer, so this artificial pricing strategy is one that some Owners will use. It's a "bait and switch" tactic that I despise, that's very deceptive and confusing to interested Buyers.
Short Sale listings are not Bank Owned. Offers for Short Sales are submitted to the Property Owner's Listing Agent, who presents the Offer to the Property Owner for review. If the Property Owner accepts your Offer (determines that it is a reasonable offer to submit to the Bank), the Offer is then submitted to the Bank for review.
After receiving an Offer for the purchase of property, the Bank will then determine how much the Property can be purchased for by ordering a BPO. A BPO (Broker Price Opinion) is an analysis of the Property's value that's based on recent purchase prices of similar, comparable properties. Note: because the Bank doesn't determine the List price of a Short Sale property, it's possible that the Bank might set a purchase price that's higher than the list price and it might or might not be a price that you're willing to pay.
Lenders are requesting "highest and best Offer" from Buyers and lowball Offers are often rejected. A realistic, serious Offer is one that's equal to or very close to the recent purchase prices of similar properties.
When submitting an Offer to purchase property, Proof of Funds must accompany your Offer. For Cash purchases, Proof of Funds should be in the form of a Bank Statement verifying available funds to purchase the property. For Financed purchases, Proof of Funds should be a Loan Pre-Approval Letter, in addition to a Bank Statement verifying Funds to cover your Down payment and Closing Costs. If Financing the purchase, it is typical for the Bank that owns the Short Sale listing to require that you complete Loan Pre-approval through them (even though you already have completed the Loan Pre-approval process elsewhere). They DO NOT REQUIRE that you Finance the purchase through them, however, they like to make sure that your Pre-Approval is solid by processing it on their end as well. There are many Financing Contingencies/Lending criteria that can derail a purchase, regardless of how well-qualified you might be.
The Short Sale review and approval process typically takes several months. 3-4 months is the average, MINIMUM time that's required and there are times when Short Sales have taken 6 months or more to process. Additionally, it's typical to expect to wait at least 1 month before receiving the Bank's initial response to your Offer. NOTE: Being a Cash Buyer doesn't increase the speed of the Short Sale process with the Bank.
Note that if a Property is located within a Community that's governed by an Association, such as a Condo Association or Homeowner's Association, it will typically take even longer to process because delinquent Maintenance Fees are usually involved and are required to be negotiated and because the Association has often filed an additional Foreclosure action against the Property Owner (related to the Issue, see Item #16 below).
If you are not patient, if you have Anger Management issues, and if you can't tolerate situations in which you don't have control, do not engage in attempting to purchase Property in a Short Sale Transaction!
If you have a short, specific timeframe for purchase, a Short Sale transaction IS NOT your best choice. 2 significant examples: needing to relocate by a specific date or needing to purchase property that's located within a specific School District in order for a Child to start School on a certain date.
Working through the process for several months doesn't mean the answer is going to be "Yes" when the process is finished, so patience does not guarantee a successful outcome in a Short Sale transaction. Some Buyers say to me, "Oh, I don't mind waiting," but if you're involved in attempting to purchase property listed as a Short Sale, you need to accept the possibility that you might wait for several months only to receive an answer of "No". Some Short Sale property listings simply have too many encumbrances and are not truly "sellable", in which case, they will typically, eventually end up as Bank Owned Foreclosures.
The Bank will not communicate with you directly. Other than having Funds in place to purchase the property and promptly providing the Bank with requested items when they request them, there's nothing more that you can do to expedite the process. Questioning why is futile. The process is what it is, regardless of the fact that portions of it defy logic.
The Property Owner's Real Estate Agent will communicate with the Bank regarding Negotiation of the Short Sale purchase or they will engage the services of an Attorney, Title Company, or similar entity to facilitate the transaction and to communicate with the Bank.
Part of the review and approval process includes the Bank determining whether the Homeowner qualifies for a Short Sale or not. They will review the Homeowner's Income, Assets, and nature of their hardship to determine qualification. Just because a Property's current Value is less than the existing Mortgage doesn't mean that the Property Owner will automatically be approved for a Short Sale.
The Bank might determine that the Seller/Homeowner will need to contribute Money in order for the Transaction to close. If the Seller refuses, if the Bank refuses to change their terms, and if the Buyer doesn't agree to pay the required difference, the transaction won't be successful.
Other factors that can affect the sale of the property include delinquent Property Taxes, delinquent Association Fees, various Liens, etc. Example: a Bank will typically request that you, the Buyer, pay for a significant portion of delinquent Association Fees, Property Taxes, etc. that the current Owner has not paid and will not pay. If you refuse to pay and the Bank and the Association refuse to pay, then the purchase transaction is canceled since agreeable terms were not met.
A Property might have more than 1 Mortgage, in which case approval has to be obtained from the 2nd Mortgage Holder as well. If the 2nd Mortgage Holder doesn't agree to acceptable Payoff terms, this can terminate the attempt to purchase. Short Sale property listings that have 2 Mortgages instead of 1 typically take even longer than usual to close.
The actual Owner of the Mortgage, also known as the Investor, also has to approve the purchase. What this means is that if it's indicated that the Property Owner has a Mortgage with Wachovia, for example, Wachovia is very likely not the actual Owner of the Mortgage.
An Offer for the purchase of a Short Sale listing doesn't stop the Foreclosure process. This means that a property can become Bank Owned during the Short Sale negotiation process. If a property becomes Bank Owned during a Short Sale transaction, Buyers who placed Short Sale Offers for the property DO NOT receive priority to purchase the property. The Bank will complete the Foreclosure process first, resolve Liens, etc., and then make the property available for sale, at which point you can place another Offer if interested. Yes, I understand that this doesn't seem logical, but that's just the way it is.
Sometimes, Property Listings will indicate that the Short Sale is approved. An Approved Short Sale listing occurs when another interested Buyer previously placed an Offer for purchase of the property and the purchase reached the point of Bank approval, but the Buyer who was attempting to purchase the property canceled their purchase of the property, at which point the property is listed as available for purchase as an Approved Short Sale. In the case of Approved Short Sales, the Bank has already obtained the BPO, so we will know upfront how much the property can be purchased for IF the Approval was recent. If the Short Sale approval was recent (within approximately the last 30 days), the Property purchase can typically be processed much faster than usual.
Be aware that Short Sale Listings are required to be actively marketed for sale until the Bank has accepted an Offer for purchase of the property. An ACCEPTED OFFER DOES NOT refer to an Offer that was simply SUBMITTED to the Bank for review. An accepted Offer is one in which the review and approval process has been completed and the Buyer, Property Owner, and Bank have agreed to all terms of purchase and signed a Contract indicating such. This means that, unfortunately, there are many Short Sale property listings that appear to be fully available when viewed in property searches online, but Offers have already been submitted to the Bank for their purchase. In such cases, Property Owners will typically allow properties to be viewed by other interested Buyers and will indicate that Back-up Offers will be accepted by the Owner in case the other Offer(s) fall through.
IMPORTANT SHORT SALE 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 final 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. 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. To expedite the process, you should complete the Short Sale Application Package when you list your Property for Sale so that the package is complete and ready for submission when you receive an Offer for the purchase of your property.
- 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 or reduced Salary, 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. Maybe a Loan Modification or Deed in Lieu of Foreclosure could be possible alternatives for you to pursue.
- 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.
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.
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