More Insights About Short Sales

There are thousands of available homes for sale: retail homes, bank forclosures and “short sales” (the lender is willing to accept less than the amount the seller owes).  It seems like short sale properties would be the answer for the many owner-occupant buyers who are looking for a home at a good price.  Instead, these homes can be on the market or under contract for long periods of time.  Why?  Because there are simply no time stipulations for the lenders to approve of prices and terms.

The short sale process is unclear to many.  All owner-occupant buyers I work with want to know when they’ll be able to move into their new home.  With more information about short sales available, buyers can decide if they want to consider these types of listings before they spend valuable time trying to purchase one.

Here are some things I’ve learned from short sale transactions I’ve been involved in.  I hope these points will help to clear up confusion I’ve heard from agents, buyers and sellers.

1. A short sale may be more attractive for a seller as opposed to allowing the home to go into foreclosure because a short sale may hurt the seller’s credit significantly less than a foreclosure would.
2. A lender would prefer that the owner sell as a short sale and take it off their books rather than to end up owning the property as a foreclosure which costs them more time and money.
3. The seller must be behind in their payments and prove hardship and the value must be more than the amount owed in order for a lender to agree to short sale the property.
4. Various lenders handle short sales differently from each other.  Each have their own policies and have employees who are at different levels of experience.  Some may take a shorter time than others to respond.  Each step of a transaction may be routed to a different department and each desk may need to clear earlier files before getting to a new one.
5. Despite what I’ve heard from a few investors, there is no particular percentage of list price or market value that a bank is willing to accept.  Each varies according to the amount owed and the determined value.
6. A contract for a “short sale” property is between the seller (the owner of record) and the buyer; not between the bank and the buyer.
7. The terms of the contract will be “contingent” upon the approval of the third party lender/lien holder.  The contract is like any contract with a contingency (for instance: other contingencies can be on inspection or appraisal).  Once the property is under contract, the property is not available for secondary buyers to bid on unless they wish to be in a “back up” position to the contract.
8. Earnest money will be deposited and held in escrow until closing or until the parties release the contract. Surprisingly, a buyer I had once was surprised that the money was taken from her account.  It was explained to her prior but she had a hard time grasping the process.
9. Although it is a legal and binding contract between the seller and buyer, the lender views it as an offer (to them it is).  Nevertheless, it is still a contract between the buyer and seller that is contingent upon the bank’s approval.  There seems to be some confusion about this which is why I’m repeating it.
10. The seller may or may not be required to pay the difference between the sale price and the amount they owe.  This is between the seller and their lender.  The lender may forgive the balance of the debt if the seller’s hardship is insurmountable.  It’s in the seller’s best interests not to accept a very low offer for this reason and because the lower the offer is, the more apt the lender is to decline it when they finally respond.
11. The seller must normally settle other liens such as taxes and HOA fees before the bank will close (unless the bank agrees, beforehand, to pay for these). Sometimes the buyer will agree to pay these liens if the seller cannot.
12. If there are  mortgage, the bank may work out a settlement with the second lien holder.  Later filed liens may suffer the loss.
13. The lender may require changes other than the price.  They usually do not pay buyer’s closing costs or provide a home warranty.   A buyer can write these into an offer in order to let the seller know what the buyer would like but requests like these will only hold up the process and the seller will be required to remove them in their counter-offer.
14. A bank will only warrant “real” property.  Personal property such as appliances will be removed from the contract.  Since it can take a long time for a response from the lender, make sure that the response is regarding the terms that the lender will work with by asking for terms that the lender will likely not oppose.  The seller may agree to leave items but, contractually, they are not required to.  If you’re writing an offer, a buyer can ask for appliances just so the seller is aware of the desire but the seller will remove them in their counter-offer.  If they don’t, your first response from the lender may be to tell you that.  You may not hear from them for another stretch of time afterwards.
15. The property needs to be approved “AS” a short sale before the lender will accept a short figure.  Most of the time, although the listing may state that the property is approved as a short sale, the price is rarely approved by the lender until sometime after the lender has seen a firm offer from a qualified buyer.
16. The list price may not be agreeable to the lender.  It may be listed low by the seller to lure buyers in hopes of quick or multiple offers, especially if the property has been on the market for a while.
17. Once the lender approves the short sale terms, they may require a quick close.
18. The lender pays the agency fees but is not required to pay the same fee to the listing agency that the seller agreed to pay in their listing agreement.  The lenders set their own percentage for commission and they will not pay any marketing or brokerage fees.

Be prepared to wait for weeks to months for the third party approval.  Once a contract is submitted to the lender, the lender will order an appraisal or hire agents to provide a Broker Price Opinion for value purposes.  They will require a minimum earnest money deposit.  They will require more forms to be signed which can hold the process up longer so act quickly when anything is requested.  There’s no sense in more than one party holding up the process but the lender can and will require time frames from the other parties involved.  It’s important to present the lender with offers that won’t cost the seller unnecessary time off the market or the buyer the property.

Without enlightenment of when or whether purchase price will be approved, although one can get a great value, a short sale purchase may not be the best choice for a buyer who needs a home to live in within a specific time frame.  Until the numbers of available properties dwindle, it will continue to be difficult to sell retail properties and, ultimately, allow for values to increase.  Why isn’t anything being done to speed up the short sale approval process?  Obviously, this would create desirability and ability to qualified buyers.  It suffices to say that we would more quickly get past the abundance of available short sale homes if we could sell them.  In closing, the more you know and prepare before you start the short sale process, the less disappointment and stress you will experience throughout the course of the transaction.