Often us real estate types tend to forget that the real estate vernacular (I’ve always wanted to use ”˜vernacular’ in a blog post) we are so accustomed to might be unfamiliar to many who don’t deal with real estate on a daily basis.
I know I am guilty.
We throw around words and terms like REO, Option ARM, fixture, encumbrance, and short sale like everyone knows what those terms mean.
However, not everyone does. This isn’t said to slight anyone’s intelligence ”“ far from it. It is simply a function of if you don’t use these terms regularly, why would you know (or care) what they mean?
Enter “short sale”. . .
I’ve gotten no less than three emails this week from folks asking me exactly what is a short sale.
The short answer, no pun intended, is that a short sale is the sale of real estate where the owner owes more to the bank than the property is worth.
In the Phoenix real estate market, this is not an uncommon scenario.
Let’s say Joe Homeowner bought a home in 2005 for $300,000. He put 20% down, which amounts to $60,000, and he got a mortgage for the other $240,000. So Joe owes the bank $240,000. (Yes, he’s paid down some of that $240K principal in the five years he’s owned the home, but not much. For the sake of simplicity, let’s just say he owes $240K).
Now Joe wants to sell his home. So he calls his trusty real estate professional who tells Joe that his home will probably sell for $200,000.
But wait, Joe owes the bank $240,000. How can he sell his home for $200,000?
Well, he could sell the home for $200K, and write the bank a check for the other $40K. This probably won’t sit well with Joe, but it is an option (assuming he has 40 grand lying around).
Or, he could sell his home short ”“ sell it for less than he owes to the lender.
The lender however, won’t like this.
Selling a Home Short
Joe Homeowner can’t just up and decide that he’ll sell his home for less than he owes on it. Lenders, and investors in mortgages, don’t take kindly to getting stiffed for tens of thousands of dollars.
Joe is going to have to prove to the lender that he can no longer make the payments. Yep, he is going to have to submit financial statements that demonstrate he can not pay the mortgage. Not that he doesn’t like making payments on a house that isn’t worth what he paid for it ”“ but that he can’t make the payments.
Let’s say for the sake of argument that Joe has a legitimate hardship ”“ lost job, medical expenses out of control, something along those lines. Depending on his lender (or lenders), he may or may not have to actually get an offer on his home before the lender will take a serious look at approving him for a short sale. Unfortunately, there is no standardized short sale approval process ”“ it varies from lender to lender and sometimes even within the same lending institution. Consult a real estate professional for help in listing your home for a short sale. And make it an agent experienced in short sales. It is also not a bad idea to consult a tax professional, and quite possibly an attorney. Trust me, you don’t even want to attempt to go “For Sale By Owner” on a short sale. There’s no point in that, given that you won’t pocket a nickel on a short sale.
Let’s say your lender has indicated they may be receptive to a short sale. Yes, it really is up to them. They are the ones after all that will be taking the loss. They will have to approve any short sale offer that comes across the table. So now you’ve got your home listed for sale. . .
Buying a Short Sale
Buying a short sale is like buying any other piece of real estate.
Here are some things to note if you are considering buying a short sale property:
1) Expect a long wait. In a “traditional” sale (not a foreclosure or short sale), you make an offer, and the seller reviews it. Maybe you go back and forth on the price a couple of times, but an agreement to sell the home typically happens in a couple of days. Not-so-much in a short sale. You make an offer just as in a traditional sale, the owner of the home agrees to sell it, and now the offer gets sent to the bank. Remember, it’s the lender/bank that has to approve the sale price. And that can take WEEKS. Sometimes MONTHS. If you aren’t in a position to wait for months on an answer as to whether or not the bank will accept your offer, then you really shouldn’t play in the short sale sand box.
2) Don’t expect the seller to make any repairs to the home. In a traditional sale, repairs are negotiated between the buyer and seller. In a short sale, the owner will not make any money on the sale. Hence, they are going to be completely reluctant to spend money on repairs. Plus, the owners are typically in financial distress and simply have no money for repairs.
3) The banks don’t give a damn about your personal situation. Selling a home is a very emotional experience ”“ for real people. Banks are not real people. They have zero emotional investment in a home. All they care about is their bottom line. It means nothing to them that you’re a Veteran, that you are having a baby, that you’ve found your dream home. Nothing. They don’t care. You may make an offer, wait weeks for a response, only to find out someone submitted an offer after you for a thousand more and *poof*, you are out of the picture.
Yes indeed, someone can submit an offer after you, and have it accepted over yours. From the Arizona Association of Realtors Short Sale Addendum, lines 13 ”“ 15:
Nothing shall limit a seller from accepting subsequent offers from subsequent buyer(s) and submitting the back-up contract(s) to the seller’s creditor(s) for consideration. All parties understand and agree that seller’s creditor(s) may elect to allow the seller to sell the premises only to the holder of the contract with terms and conditions most acceptable to the creditor(s).
Generally speaking, the banks play by their own rules. They are in almost complete control of the short sale process. Scary isn’t it?
4) Unrealistic listing prices. There are agents out there that list short sales at ridiculously low prices. Some of this may be due to ignorance, some may be agents trying to generate an offer and/or bidding war. Any list price on a short sale needs to be taken with a grain of salt. If it sounds too good to be true, it is. While banks often pull bone headed moves, they aren’t completely stupid and they aren’t going to approve a short sale significantly under market value. Many people think they can “steal” a short sale. Banks don’t take kindly to being stolen from.
In Short (if you call 1,325 words short). . .
If you can’t make your mortgage payments, a short sale may be an option. If you’re considering buying a short sale, bring the patience of Job and be prepared for significant frustration.
Anecdotally, we are seeing some banks respond in somewhat timely fashion to both short sellers and buyers. Loss mitigation officers, the poor slobs assigned to handle short sales for lenders, are overwhelmed with work. A good short sale listing agent can make a huge difference in pushing through a sale, but in the end, the ball is in the bank’s court.
More on short sales from this very blog, should you be so inclined:
- The Short Sale from Hell
- I want to short sell my home! The banks not being fair!
- Short Sales and Stupid Lenders
- Do It Yourself Short Sale
Looking for more information on short sales? Below is a link to all articles written on this site about short sales:
Phoenix Short Sales
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