One question many Buyers ask me is, “What exactly is a short sale?”.
Most folks understand that a foreclosure means the bank is now the owner of a home, but when we get to Short Sales it can become confusing (and with good reason).
- What is a Short Sale?
- Why would Sellers do them?
- What are the pitfalls of a Short Sale for the Buyer?
Short Sale Terminology
“A Short Sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.”
In simple terms- the Seller(s)s owe more to their Lender(s) than the current market value of the home and they are asking the bank if they can sell it for the market value (at a loss).
A short sale or foreclosure home is typically referred to as a Distressed Property.
The difference/balance between the amount owed on a property to the Lender and the proposed purchase price is called a Deficiency.
Why Would Seller(s) do a Short Sale?
At the time of this writing, about 20 percent of the market in my service area is a distressed property. Some of the reasons a home owner may find themselves in need of requesting a Short Sale from their Lender(s) are because the market value has significantly dropped and they must sell their home. Those reasons for selling could be divorce, health issues, loss of income, death in the family etc. One can see how these homes became known as “distressed”.
There are different methods that Lender(s) use to determine if they will approve a Short Sale. This can make the buying process for a Short Sale much riskier (and longer) for the Buyer.
Common Pitfalls When Buying a Short Sale Property
In our market, it is reported that only 70 percent of those homes being sold as a Short Sale are actually closing. There are a number of reasons why the purchase will not actually make it to the closing table. Below is a partial list of why that might happen:
- The Buyer’s offered sales price is too low for the Lender to release the mortgage, and the Lender decides that the process of foreclosure will yield them a higher net.
- The Seller simply does not qualify for a Short Sale.
- The Lender will not approve Short Sales.
- The foreclosure process is too far along for the Lender to have time to process the Short Sale. Even with a binding contract from a Buyer, that will not stop the existing Foreclosure process.
- On rare occasions the Listing Agent hired to assist the Seller is not properly trained or capable to complete the process.
- There is more than one loan on the home and not all Lenders agree to the Buyer’s offer price.
- Lender/Seller will not make/allow repairs and Buyer will not/can not afford them and is denied their financing. Although many banks will allow Home Inspections, few will make any repairs (including those as serious as treating for Wood Destroying Insects).
Other Common Buyer Misconceptions about Short Sale Houses
- Low ball offers are a good strategy to get the bank to come down on price!
Remember the Seller is asking the Lender(s) to approve “deficiency amounts” (amount(s) owed on a loan(s) minus the actual sales price), and the Lender(s) are only going to forgive a certain percentage of debt. The price on a Short Sale is not a “deal” like one you might get in buying an already foreclosed on home. Typically the asking prices, or very close to it, are the lowest the Lender(s) will accept.
- Short Sale homes are a better value for the money.
Anytime you are purchasing a distressed property expect that the home is most likely to be in poor condition. When you look at cost of repairs, deferred maintenance etc. it may not always be such a great value.
- It takes the same amount of time to purchase as a “regular” home.
The Short Sale process can take from three to six months (sometimes longer) to be approved by the Lender(s). A typical sale, from binding agreement date to closing, is 30-45 days.
- How I finance the house is unimportant as long as I am pre-approved for a loan.
Typically lenders are most likely to reject offers that are made using a FHA/VA loan. One of the reasons is because the condition of the property may not meet FHA/VA criteria. Since the bank typically asks the Buyer’s to agree to an “As Is” sale on a short sale property, the Buyer’s financing may fall through if any repairs are required as a result of the FHA/VA appraisal process. The strongest offer in a short sale situation is cash, followed by a conventional loan.
So who should consider a Short Sale House?
Buyers without a short time frame are ideal for a Short Sale transaction. Also, it helps if you are not highly attached to the outcome, as these transactions have a higher rate of falling through. If you are a Buyer who has readily available cash to purchase the home outright, or you are using a conventional loan with a large down payment, you have a greater possibility of having your offer accepted by the bank.
If you decide to pursue a Short Sale make sure you have a Real Estate Professional who understands the “in’s and outs” of these types of transactions and does their best to protect your interests as the home Buyer.
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Post by Shannon Foster-Boline