Understanding Short Sales
Q. My neighbor bought a short sale. It seemed to take forever, but they got a great deal and now I think I want to buy one too. What exactly is a short sale?
A. A short sale is when the seller owes more on the mortgage than the property is worth in today's market. So when they receive a market price offer, they are asking their lender to accept a discounted payoff to release the existing mortgage or even mortgages. The lender may or may not approve this.
Q. What's the short sale process from the buyer's perspective?
A. When you decide to purchase a property that's listed as a short sale, your offer will initially be submitted to the seller for their acceptance or a counteroffer. This does not differ from a regular sale at this juncture. Once an agreement has been reached between the purchaser and seller, your offer then becomes contingent upon the bank's approval of the price and terms. With your offer, you should be prepared to submit Proof of Cash Funds or a Preapproval Letter from a local bank.
Next, the bank begins to gather information on the seller's loan, this adds another step to the approval process. In addition, the seller may have a second mortgage on the property. The bank will also gather the financial information from the seller to determine if they qualify for the short sale.
The next consideration is determing a value for the property. The bank will order an official appraisal or BPO (Broker Price Opinion) to determine the market value. You may find that properties are listed considerably under market value (what other comparable properties have recently sold for) to encourage offers, however the bank want as close to today'[s market value as possible.
Q. How long does the process take?
A. All lenders are different. In you're in a hurry, or you have a particular time frame in mind, a short sale is probably not for you. In general, a short sale can take 4-6 months to close. The faster one I have experienced is a 45 day close, but that was not the norm. The longest was 9 months. A lot can happen in 9 months. There may be long periods of time without any communication from the lender as they work through the negotiations with the seller.
The bottom line is that you can get a great buy with patience, but it requires you to wait until the bank decides what will happen to the property. The bank is in total control and you have to be willing to live with their time line. It doesn't matter who you know, it doesn't matter if you have cash and can close tomorrow. The lenders all follow guidelines and procedures to make their final decision.
Q. So do many people survive this process?A. Only 33% of all short sales ever make it successfully to the closing table. Unfortunatley, the seller walks away from the table because of bank demands put of them that they cannot fulfill.
Kelly Klein, Lifeguard Real Estate, Inc.
Broker / Owner