First Time Homebuyer Series – Part 5B: Short Sales

In Part 5A of our First Time Home Buyer Series, we talked about bank owned properties, which are commonly called Foreclosures. In this installment, we will look at another type of “distressed property” – Short Sales.

A short sale is when the seller is trying to sell the property for less than his mortgage balance. Therefore, he is “short” on his mortgage and is asking the bank to take a loss in order to sell the property. As home values declined over the past few years, this has become a much bigger part of the market. When home prices were going up, sellers were usually in a position to sell their homes for more than their mortgage even though they could no longer make their mortgage payments. That’s the beauty of rising prices! However, with declining prices, a short sale is often a seller’s last resort before foreclosure. It benefits the seller because he does not get a foreclosure on his credit report, and even though the bank takes a loss, it benefits them versus actually foreclosing and taking ownership of the property. If you know someone how is “upside down” on their house, this may be an option for them. Jarrod Thomas, on our team, is a Certified Distressed Property Expert, and can help them navigate their options.

How does the short sale process work?

The process is a little backwards in my opinion, but here are the absolute basics.

1. The property is listed by an agent at a price at which the agent thinks will generate an offer. At this point, the bank has not set a price at which they will sell the property. Therefore, the buyer and seller do not know if this asking price will be accepted.

2. The offer is received and accepted by the seller pending acceptance by the bank who has a mortgage on the property.

3. The listing agent submits the offer and other short sale paperwork (the seller has to apply for a short sale, but we won’t go into that here) to the bank.

4. The bank has the property appraised to determine the current market value. Often the bank’s other alternative is to foreclose. In that case, they have to hire an attorney, take the property back, clean it out, list it with an agent, etc. Therefore, they want to evaluate if it makes more sense to sell it now with the current offer.

5. The bank accepts, rejects, or counters the current offer.

6. If accepted, the buyer can move forward with their inspections and loan in order to purchase the property.

7. If the bank counters with a higher price that is not acceptable to the buyer or if the buyer walks away, the agent will re list the property at the price accepted by the bank. They can now market it as an “Approved Short Sale”. In this case, a new buyer can come in a purchase the property at this price.

The reason I said it was a backwards process is because you do not know the price the bank will accept until you make an offer. So you can offer full price and still not get the property! That doesn’t seem right!

For the buyer, short sales can be one of this market’s best opportunities and one of its biggest frustrations! How could it be both? I’ll outline the advantages and disadvantages below.

Advantages of a Short Sale for a buyer

1. Buy the property at a discount.

You can often get a great deal on a short sale. The seller is not going to receive or pay any money at closing, so they are only concerned with getting the property sold. On the other hand, the bank is concerned about the sales price since they are taking a loss on the mortgage. However, they are going to take a loss whether they approve the short sale or whether they foreclosure. There are quite a few other costs associated with foreclosing, so the bank is actually incented to sell the property for a little less as a short sale.

2. You are not locked into the property.

At least you are not locked in at first. The contract will be written so that you can terminate the contract prior to bank approval. Therefore, we can keep looking for other properties while we wait for the bank to decide. Your due diligence period and other contingencies begin once the bank approves the sale.

3. Better condition than a foreclosure.

This is obviously a generalization. I’ve seen foreclosures that are immaculate and short sales that are dumps. However, in general short sales are usually better maintained than foreclosures because the owners often still live in the home or they just moved out. Foreclosures have often been vacant for a while, and homes age quickly when they are vacant. You can also find out information about the property from the owner (such as maintenance history, repairs, etc.). This info is never available from the bank on a foreclosure.

Disadvantages of a Short Sale for a buyer

1. Uncertain pricing

Until the bank approves the short sale, you don’t know if you can buy the property for the asking price! This can obviously be frustrating. I’ve seen buyers wait months only to find out the bank will not accept their offer. This is heartbreaking!

2. Uncertain timing

Short sales are not for you if you have a very tight and precise timeline. A few years ago, banks would take forever to respond to short sale offers. In the last year, many of the banks have significantly improved their process. However, it is still a longer process than buying from a regular seller. We also don’t know exactly how long this process will take. Therefore, if you have to move into a place one month from now, I can’t promise you that the short sale will be approved in that amount of time. I can’t even promise it will be approved in two months.

3. Uncertain sellers

The seller also has to be committed to getting the property sold. They have to fill out a lot of paperwork and submit a lot of documents to the bank. If they do not get approved, the sale could fall apart. Also, if they feel like it is too much effort or they would rather just let it foreclose, the deal won’t get done. Unfortunately, I’ve seen both happen.

To wrap it up, short sales provide a great opportunity to get a stellar deal in this market. However, you do have to navigate the uncertainty of the process. They are best for buyers who have the flexibility to wait and see what will happen.

We’ve worked with many clients on both sides of short sale transactions, so if you need some help, give us a call!

Justin Landis
Keller Williams
404-803-0471
justin.landis@kw.com

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