The Truth About Short Sales
There are many stories going on especially with buyers who call me, about a "friend" who was able to buy a million dollar property for $100,000 or some other ridiculous fable and short sale myths. Conversely, I get stories about a "friend" who short saled their house and now they're on a cruise and own another home in less than a year. You Can't Do That - legally unless they pay cash from a recent lottery winning.
To short sale your home, you have to do a few things first, some of which follow and as the buyer, you should know the whole scenario:
- Prove a real hardship. A hardship is not a divorce, it's death of a spouse. Another hardship can be a medical problem or job loss when the only employed spouse's income barely covers food and utilities and taxes. This may get very painful. You will have to write a hardship letter explaining why you own a boat, a rental property in another state, free and clear cars, but you just can't make your mortgage payment living your lifestyle. You are going to have to forward a serious hardship letter, your last two years bank statements, last two years income tax files, stubs from your present job or a letter stating you were let go and when and no chance of a re-hire.
- Real comparables. Banks prefer short sales in that someone will still be living in the house and taking care of it so foreclosing on the home or auctioning it off is too costly. When you list a short sale, you're supposed to have spoken with someone at the bank first in the loss mitigation department to let them know you've listed and they're going to want real comparables. Every day I get a call from someone who wants to pay $50,000, ask for closing costs among other requests, on a house advertised at $140,000. Meanwhile, this property should have been listed at $300,000. The agent who listed the house has done two things: pulled a number out of their hat convincing the seller that they'll get 20 offers, all for more than $140K until the seller won't owe the bank a dime. Second lie, they didn't work hand-in-hand with someone at the bank, tendered a broker's price opinion with copious photos and prepare a preliminary HUD so the bank would have an idea regarding circumstances and come to a listing price that will sell the property. Third - the agent probably didn't explain how the bank can still 1099 the seller - that is, if the seller owes $250,000 and the sale garners $100,000, the seller will most likely get a 1099 at tax time for the $150,000 difference.
- AS IS Condition. Short sales (foreclosures) are sold in AS IS condition. The seller can't afford repairs and the banks won't pay for repairs. If you're a buyer, you should still do an inspection so you'll understand the work needed in the property, have your agent show the bank the lowest comparables available in the neighborhood and make a realistic offer. If the bank has indeed agreed to list the house at $250,000 and you offer $125,000, it's going nowhere fast. The bank wants to show the least losses on the property possible.
- Clean offer. People ask me all the time, what is a clean offer. A clean offer is when you offer a realistic price for a property, have a relatively quick closing date, and knowing it's in as is condition, you don't ask for a new $89 disposal and closing costs. A clean offer is just that - realistic price, reasonable earnest money, no request for closing costs, preliminary HUD, 30-45 day close, no special stipulations asking for home warranties, fences for your dog, garage door openers, etc. If you don't accompany your offer with supporting comparables and your financial statement and/or loan approval or if one "i" is not dotted, you are going on the bottom of the pile or the whole offer will be sent back whenever the bank gets around to it.
- Short sale addendum. When you are the buyer in a short sale offer, you must have an amendment that states something like: if the bank doesn't answer me in 30 days, i.e., January 31, 2012, all earnest monies shall be refunded and this contract is null and void - so you can bail and go onto the next property and you're not waiting for an answer for months only to be turned down by finding out the bank has foreclosed or there's another, more acceptable offer.