If you are thinking of buying a short sale (or if you're an agent looking for an outlet for your short sale frustrations), PLEASE read. Understanding this information is a must.
I completely understand the allure of the short sales when you are a buyer. The prices are attractive and there are SO many of them. They have become a necessary evil of the Orange County real estate market. I get it.
If you really want to pursue a short sale, be forewarned. Know what you are getting into, understand the risks, the pitfalls, and what is required to make them happen from a buyer perspective. They may, or may not, be worth it.
What is a Short Sale?
The seller's obligations in a sale (loans, encumbrances, and closing costs), exceed the value of the property. The seller must prove a hardship (job loss, wage reduction, divorce, health crisis, lack of assets) to qualify for a short sale.
A Few Realities
- There is no Standard Operating Procedures for the banking industry to handle short sales. Every bank has different guidelines and manages them differently; even negotiators within the same bank manage them differently.
- This is important: Nearly across the board, a banking institution will not consider a seller's hardship application until they submit an offer with a short sale. What does this mean to a buyer? Your offer is used to see if they qualify in the first place. You may sit in escrow for weeks while the bank considers not your offer, but the seller's circumstances.
- There is no Standard Operating Procedures for how agents handle their short sale listings. Frankly, I think there is a lot of irresponsibility in this area.
- Many agents leave their listings ACTIVE in the MLS even though they have an offer submitted to the bank. Once an agent has a good offer with a solid buyer, it should go in Backup position. The bank will only look at ONE offer - highest and best - anyway. Why waste an agent's time, a buyer's time and emotion, showing a property that is not really available?
- Even Banks will ask the listing to remain Active after an offer is submitted. Note the conversation with this agent on Twitter.
- The SoCalMLS has a Special Condition field where agents are required to specify that the short sale has an offer submitted to the bank. Unfortunately, most agents don't use it.
- An 'Approved Short Sale' does not necessarily mean that the process will go any faster. See Countrywide's response on my short sale last year.
- A short sale process will take as little as 60 days (very rare) or as much as 4 to 6 months (common).
- The list price is not a reflection of what the bank will, or will not, take. The listing price is positioned to generate offers. Remember, the bank hasn't even looked at these seller's situation yet, let alone evaluate the the market value of the home.
- There may be past due HOA fees, property taxes, or other expenses, that the bank will ask for a buyer to cover.
- If the seller declares bankruptcy during the process, your deposit becomes a frozen asset that you likely wait a fair amount of time to recover - if you do.
- Many short sales ultimately foreclose. Why? If you find out please tell me. There is often NO LOGIC in the way banks (and investors) approve, or disapprove these.
- More banks are trying to do loan modifications for sellers rather than approve short sales and in some instances, they are incentivized by the government to do so.
Real Life Examples
The following are scenarios that have been experienced by me, my agents, colleagues, and my buyers.
- My Listing last May: I had 8 offers in 3 days. The highest was $580,000 and it took 4 months to get an approval from Countrywide. By the time it was approved, the market value had fallen precipitously and the buyer was no longer interested. When I asked Countrywide if the process would go more quickly with a new buyer given the hardship had been approved, their response was that the each buyer was a new file and they couldn't provide better than a 4 to 6 month time frame. The home sold for $490,000 4 1/2 months later.
- An agent within my company, had a short sale in escrow with a solid buyer for 90 days. The bank asked the insolvent seller to come to the table with $3,500 on the $165,000 sale. When the seller was unable to, the bank refused the short sale. The home is currently vacant and worth about $145,000 6 months later. Currently, it's not in foreclosure and the seller hasn't made a payment in about a year.
- This week alone, I've shown 2 different short sales, marketed on the MLS as Active, that already had offers submitted to the bank without notation in the listing. When I called expressing my buyer's interest in one of the properties, the agent subsequently told me, 'the deal is done'. When asked, "Then why is it active?", his response was, "Don't tell me how to run my business, sweetheart." BTW - Don't call me sweetheart unless you're loving me or you're my husband. :)
- One of my recent short sale listings was in escrow 60 days with a qualified, ready-to-go buyer. In that time, the bank reviewed the seller's hardship, denied it, and offered a very poor loan modification. Buyers lost 60 days and their offer was never considered.
- I currently have an investor buyer in escrow on an 'approved short sale'. We've been in escrow 90 days on a property that had an Notice of Default filed in March 2007! Not only has there been no news, the listing agent has told me essentially - don't call us, we'll call you if there is an update. Not very reassuring to my buyer.
This is the tip of a massive iceberg. So if you want to buy a short sale, you certainly have my blessings. Just be armed with patience, don't become emotionally attached to the property, and be prepared to potentially go through the process more than once.
If you have questions, if you think I've gotten any of this wrong, or if I've just scared the hell out of you - leave a comment or give me a call. Happy to chat with you. If you want to create a strategy to buy in Orange County - whether it's a short sale, bank owned, or an equity seller, just let me know and I'm happy to help.
Happy House Hunting!
Originally posted on OC Real Estate Voice.