Searched the MLS for a house? Then you've likely seen the phrase... "Short Sale Approved". The implication is that the seller's mortgage holder has approved the sale of the home at the asking price. While some listing agents may lead you to believe this, the truth is that short sale deals are complex and are only "approved" under certain conditions. Practically speaking, there are really no short cuts when it comes to purchasing a short sale home. However, having a basic understanding of the short sale transaction process can certainly expedite the transaction and keep you from being involved in a questionable deal.
In a short sale transaction, the Agreement and Offer to Purchase is with the owner of the home. To start the short sale process the executed Purchase Agreement, along with substantial documentation from the seller is then submitted to the seller's mortgage holder. This officially, is the beginning of the negotiation process. The bank, because they are taking a loss, will determine what they are willing to accept. (We have found that how much that may be often depends on the loss mitigation rep from the bank, but that's a subject for another article.) Once an agreed price has been negotiated, the bank will then issue an Approval Letter outlining the price, the time to close escrow, and any additional terms. THEN, and ONLY THEN is the deal technically "APPROVED."
So you may be thinking, but if a sale is only "APPROVED" AFTER an offer has been submitted by a buyer and approved by the bank, how can a property be advertised as "Short Sale Approved" if it just came on the market?
Well, it seems that the de facto standard is to market the property as "Short Sale Approved" if there was once an offer that the bank accepted and approved with a prior buyer, that didn't work out. So, the underlying assumption is that since the bank was willing to take the prior offer, that another offer of the approved amount will be easily be "approved" or accepted by the bank.
The TRUTH about the short sale process is that each new offer is mutually exclusive from any prior offer submitted. While the prior "approved" price may serve as a guide for future offers, the bank will often consider offers that are less than one before. One example is a deal we recently acquired, where the agent had previously gotten approval from the lender at $900,000 in March. Unfortunately that deal did not close. But 3 months later, when we picked it up as the new buyer, after a new round of negotiations the bank accepted $845,000. We never assume that just because an old price was accepted that this must be the only price the bank is willing to accept. In this case, our lack of assumptions saved $55,000.
Short sales can be a lengthy and arduous process. Unfortunately, in this market there are agents, who likely out of frustration have turned to tactics that breach both ethics and standards. One that we run into quite frequently is the concept of submitting deals with a "straw buyer." This is where the listing agent or the seller may work with a "friend" who is willing to put an offer into the bank, not with the real intention of purchasing it, but for the purpose of determining how much the bank will really accept for the property. The fact is that this process is form of fraud. But, unfortunately, it is not at all uncommon.
Another scam we discovered came when we recently submitted an offer. Apparently, the listing broker took our offer and submitted it to the bank without even presenting it to the seller. When we held a conference call to clarify our offer, the broker explained to us that they went to the bank first, to "make sure we don't waste anyone's time." Again, this process is also a form of fraud and likely a breach of contract. (Obviously, we immediately withdrew our offer.) It's not hard to see how an uneducated person may easily think that these "short cuts" may be saving them time. But, unknowingly they could be walking into a deal that could leave them legally exposed.
As a short sale investor, we see the phrase "Short Sale Approved" as marketing hype. Experience has taught us that there are no real short cuts when it comes to short sale transactions. We can only bring to the table our commitment and cash and hope that the bank will work with us to get the deal "Approved."
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