"Beware Of Buying Short Sales"

If you are in the market to purchase a home, you will discover that many properties on the market these days are "short sales". This means the owners are upside-down. They owe more on the property than they will net if they sell the property.

Whenever an owner who is upside-down accepts a purchase offer, it will always be a contingent acceptance that is conditional upon the approval of the lender(s). This is because the banks must agree to accept less money than is owed to them.

The upside-down seller is often willing to accept any offer. After all, they will get no money out of the short sale. Their objective is to protect their credit to the extent possible.

In reality, the bank is the actual seller as they are the only ones that can make a final decision on a purchase offer.

You would think that a bank would be motivated to get a property sold, even if it means they get less than is owed to them, so they don't have to foreclose and take over the property.

However, most of the people in the "Work Out" department of banks are just bureaucrats who have no real motivation to make a deal happen. In fact, they lean toward driving a hard bargain to show the bank's investors that they are trying to get the most money possible for the bank.

In the event the owner has multiple loans on the property, the lenders who hold the second or third trust deeds may get no money at all from the sale. So you can see why they might balk at approving the sale.

Once a seller accepts a short sale offer, they forward it to the bank. Often, the bank will come back saying the offer must be higher. Or, in some cases, the bank will not even respond to the offer for several months.

Even if a bank agrees to the short sale and provides a letter to document that decision, they will still demand that the listing agent continue to market the property for sale. And, even you are just a few days from close of escrow, the bank may come to you and say they have a higher offer and, if you want the house, you will have to up your price to equal the other offer or else they will refuse to close.

Technically, you could sue a bank that does this for breach of contract but the truth is they have more money than you and they have attorneys on staff to fight lawsuits.

A short sale can be a good deal for the buyer. However, for the reasons above, I always warn my buyer clients that attempting to purchase a short sale property is filled with challenges. It often takes extra time and can be a frustrating experience.