Short sales. Before I entered the real estate industry, selling short meant selling a security that you didn't own and repurchasing it later at a lower price. But the phrase as it is most commonly used now refers to what happens when the lender discounts the payoff it is owed on a home. In other words, the home is sold for less than is owed, and the lender is willing to accept less than the payoff.
According to Metropolitan Regional Information Systems, Inc., only 1 in 8 "short sale" listings that gets a contract actually goes to settlement. Why is this? Because its just not that easy.
Who attempts a short sale? Homeowners who are struggling to make their payments may attempt a short sale before the payments become completely unmanageable and start missing payments.
Who buys a home being sold short? In my opinion, unless there is something so unique about a home that you just have to have, there is no good reason to consider short sale properties. A recent article in the Washington Post detailed a couple who waited five months to hear anything from the bank on a offer they made on a short sale. In this situation, the owners were obviously still making payments, otherwise, the home would have gone into foreclosure - the time from Notice of Default to sale is usually 4 months in Virginia. Second, this couple had special accessability needs and this home met those needs. Lastly, the couple was in no hurry to move. In the end they got a "deal" on the home in that they owe less than what they might be able to sell it for- after they make 10s of thousands of dollars in repairs of course. But with all the frustration and hassle, you wonder whether or not it is worth it. As a buyer agent, I tell my clients that there is so much inventory out there now to choose from, its better to go with a traditional sale- you can almost always find all the features you want with what is already available with less hassle.
Three things I read in the Post article made me think this couple either had no buyer agent or a buyer agent that wasn't that experienced and/or prepared. 1) They made an offer thinking that it would only be a matter of weeks before they received a response, 2) they said the seller and the seller's agent always seemed to not know that their offer was about to expire, and 3) they increased their offer after four months thinking it would "nudge" the deal along.
When attempting to buy a "short" property, buyers should know that the whole process can take months. This is not something you should do if you have a specific timeline in which to move. Second, a buyer must realize that they cannot personally speak to the bank or the seller or the seller's agent. They must be patient. Their buyer agent is supposed to be making these contacts. The buyer's agent and the seller's agent should be in contact at least weekly. But the buyer must also understand that everyone is at the bank's mercy. Is is a common misconception that the banks will respond with any amount of urgency because they don't want to foreclose. In many cases, short sale owners are not in arrears on their payments, so the bank has no reason to respond with any amount of urgency.
What kinds of things can complicate a short sale? The most common issue surfaces when there is a second mortgage on the property and the holder of the second lien will not cooperate. A non-cooperating second can kill the deal straight away. Other times, the first lien holder will want to do an appraisal before involving the second. Another issue that seems to be the trend, according to fellow real estate agents is that the mititgation departments have a lot of turnover. I have been hearing about deals where the buyer's agent has had to deal with 2 or 3 different negotiators, who drop in and out in the middle of the process.
A short sale is different than a foreclosure in that a) the sellers aren't necessarily in arrears in their payments, b) because of reason a), the bank may not be interested in making a deal, and c), it takes much, much longer to negotiate this type of deal, d) many more foreclosure homes go to settlement than short sales, and e) you may not be getting as much of a "deal" as you think.
The bottom line, whether you are a seller or a buyer, there are a few things to remember:
1. You need lots of patience.
2. You need to know that you may never get to settlement.
3. You need an agent who is an expert on short sales and knows what they are doing.
4. There are many, many more homes out there to choose from.