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A SHORT COURSE ON SHORT SALES

  





For a mini-education on Short Sales, please read this Q & A.  (This page is not very short, but then, neither is the short sale process.)


Home Owners, please watch this video if you (or someone you know) has a financial hardship and the property is worth less than the balance due on the mortgage:







The following information is directed to both buyers and distressed homeowners.


First of all, what is a short pay, or short sale?  


Basically, a short pay, or short sale, is where the seller is short of what they will owe the bank on the balance of their mortgage when they sell their home.


How does a property get into a short sale situation?

This usually happens because either the seller bought at the top of the market and the home has since lost value, or perhaps the seller bought low but later re-financed when the market was high and pulled money out.  In either case, the seller may not have enough equity in the property to pay off their loan(s) at sale, and is unable to make up the difference due to hardship.


Who owns the house in a short sale -- the seller, or the bank?

The seller, not the lender, is still the owner of the property.  When an offer comes in on the property, it is presented to the seller.  An accepted offer would be then forwarded to the homeowner's mortgage holder(s) to request approval of sales price and terms.


How could it benefit a seller to sell their home as a short sale? 

A seller who cannot make up the short-fall, and/or doesn't want to see his/her credit destroyed may opt for a short sale rather than a foreclosure.  Although a short sale or a foreclosure will have exactly the same negative effect on a homeowner's FICO score, the benefit is when the homeowner goes to re-establish credit.  After a short sale, it takes 2 years to re-establish credit.  But after a foreclosure, it can take 5 years.

If you're wondering what circumstances may offer a seller the best chance for the successful closing of a short sale, some of them can include: when there is a true hardship situation; when there is only one lienholder involved; and when their listing agent is experienced with the short sale process.


How could it benefit the seller's bank to approve a short-sale, as opposed to doing a foreclosure?

A short sale is a less expensive process than foreclosure for the lender.  But -- in practice, will the lender approve a particular short sale?  Depending on many factors, sometimes they will, and sometimes they won't.

Although 
there are some short sale programs, such as the HAFA program and Bank of America's new cooperative short sale program, that will start working with the seller on the short sale process before an offer has been received...but in most cases, the bank won't begin to address the possibility of a short sale until after they see a purchase contract on the house.  


I'm a buyer and I noticed some short sale homes are listed at prices way below market...what's the catch?

A listing agent who is not experienced with how to do a short sale may make the serious mistake of listing a home ridiculously low.  The agent is hoping to get an offer quickly with this price and sure, a buyer inexperienced with short sales can't resist making an offer.  But the reality is that a very, very low offer would not be approved by the seller's bank.  This is because the bank does an independent evaluation of property value (the evaluation is called a BPO, or Broker Price Opinion), and then the bank will approve a price that will limit (as much as possible) the bank's loss.  When the bank approves a more reasonable price, then the buyer will be asked to raise their offer by a significant amount of money, which often causes the buyer to terminate the transaction.  Thus, an unreasonably low price can be a real waste of the buyer's and seller's time.  Rather, the property should be priced somewhat below market value, which would make the house enough of a bargain to satisfy a buyer, and have a better chance of being approved by the seller's bank.

By the way, here are a few words about property value:  in addition to the seller's lender doing their BPO, the buyer's lender will do an appraisal.  If the buyer's appraisal comes in higher than the seller's bank's BPO, the buyer will certainly be happy.  But if the appraisal comes in lower than the seller's bank's approved price, and the seller's bank refuses to lower their approved price, then either the buyer will need to bring in more money, or the buyer may cancel the transaction.  


Are short sales sold at lower prices than foreclosures?

Sometimes, sometimes not.  More times than not, I've seen a property go from short sale status to a foreclosure for sale, and the listing price on the foreclosure property was lower than was the price when it was a short sale.  It's best to have your Realtor (that's me, right?) check comparable sales for you, so you can see for yourself the market value of a property so you can make an informed decision.



How soon does the seller's lender give their response to a short sale?

On a short sale that has not yet been approved by the bank, I've seen it take from as little as about 30 days to up to many, many months, to get a written response from the lender. It takes a lot of time for the lender to process the file, because this is not the only property file they have on their desk.  Average waiting time with many banks would be 2-3 months, so if you're trying to purchase a property on a deadline, an unapproved short sale is not for you.

Recent changes in short sale rules are shortening the time periods a bit, and we hope this trend continues.


What is the seller's lender doing during the waiting period, and what are some of the roadblocks to a successful short sale?

Once the offer is received by the seller's lender, the lienholder considers the seller's finances, whether the seller is in a hardship situation, the market value of the home, the prospective buyer's financial qualifications, the buyer's offer on the home, as well as other factors, so the lender can make a decision about whether or not to forgive the short-fall, and what price they will accept.

The lender will also want to find out whether the property is the seller's primary residence or if it is their investment property; if it is the latter, often the short sale will not be approved.

Another roadblock could have to do with the seller's original loan when they bought the property -- if the seller did a "stated income" loan, the lender may match the amount of the seller's stated income to their tax return to make sure the two numbers match, so the lender can see if loan fraud was possibly done by the seller at that time.

Generally, the lender wants to make sure that a short sale will be in their (the lender's, not the seller's) best financial interest.

If there is a second lienholder involved, that lender will be doing their own investigations and deciding on their own terms for releasing their lien on the property.  The holder of the first lien would usually offer the second lienholder a sum of money in exchange for releasing their 2nd lien.  If the second lienholder will not release their lien, the short sale will fail, and if the property gets foreclosed on, the second lienholder will get no money at all.

Let's say the holder of the 1st lien offers the holder of the 2nd lien $6,000, but the second bank really wants $9,000 in exchange for releasing their lien.  Due to a recent law, the lender cannot ask the seller to make up the shortfall...but they can ask the buyer to pay it.  If the buyer in this example is willing and able, they would pay the difference of $3,000, which cannot be rolled into the buyer's loan but must be paid at closing. 

In addition, if there are back-owed homeowner association (HOA) dues, these would need to be brought current at close of escrow.  If not, then the HOA will not release their lien on the property.  The seller and their bank are extremely unlikely to pay these dues, and they would then become the buyer's responsibility, if the buyer agrees.  These back-owed HOA dues can get quite high, in the thousands of dollars, due to late fees and penalties, so the buyer will want to make sure they find out the amount owed, before they agree in writing to bring them current.



Will a short sale always close escrow?

Unfortunately, many times, short sales do not go through for many reasons.  Some of these reasons from the seller's and lienholder's side of the transaction may include the ability of the seller to repay the shortfall if required by their bank, issues with the appraised value of the property, the willingness of the holder of a second mortgage to cooperate with the short sale, the seller's pursuit of a loan modification or bankruptcy which would hurt the process, or just running out of time while pursuing all the steps, before the foreclosure clock runs out. 

Even if the bank finally comes back with an approval, the approved sales price is often much higher than the buyer thought they were going to pay for the property.  The approved price will usually be a percentage of what the bank perceives is the current market value of the property, not necessarily the price the buyer offered for the home. And there may be extra costs involved for the buyer and/or the seller.

Many buyers get discouraged by the long process of waiting and waiting, and then in the end, not getting the answer they had hoped for.  I have heard it said that an unapproved short sale can have a pretty good chance of closing, IF all the pieces are in place and the listing agent knows what they are doing.  But more often it has only a 0-20% chance of closing!  But, as you see, many of them do close, and do so at an excellent price.

Click here for an article by Inman News about short sales in California 



What's an "approved" short sale?

It's a good thing!  This means a short sale has been approved in writing by the lienholder(s) and the buyer and seller know up front what to expect.  If all parties are in agreement as to price and terms, the transaction should then be able to proceed in the same time frame as a regular sale...but see the next section for a caveat on extra fees.


On an "approved" short pay, the price is the price, right?

Not necessarily.  A sales price that has been approved in writing by the bank might have extra fees included which often need to be paid for by the buyer.  These should be spelled out in the approval letter.  These costs can include -- but are not limited to -- termite-related repairs, back-payment of homeowner association dues, cost of an environment hazard report, or a payment to satisfy a second lienholder's shortgage, which can be in the thousands of dollars.  Similar to a foreclosure, the home is usually sold "as-is" with no repairs made to the property, so there may property repairs that need to be paid for either before or after close of escrow.  Also a buyer's home warranty -- customarily paid for by a seller -- would not necessarily be included, and the buyer might want to obtain one.

These costs would be over and above the approved sales price.  It would be great to be able to ask the seller to help out, but because the seller is in a hardship situation, it cannot be expected, so the additional costs would ordinarily fall to the buyer.



What about the emotional effects of the long wait on the buyer and the seller?  Is there relief in sight?

Because the process can take a long period of time, it is not uncommon for buyers to get tired of waiting, and they often will back out of the transaction.  Because of this, the seller may want to accept a back-up offer on the house.  Sometimes the seller will insist the buyer put a small deposit into escrow, or pay for a home inspection; these actions will encourage a buyer to wait for the response from the bank(s).

There is good news to report -- legislation has been approved that is streamlining the short sale process, with particular focus on shortening the second lienholder's response time.  Banks are using government money to offer more money to second lienholders, and offer money to distressed sellers to help them in their move.   Hopefully at some point, the process will be improved and those long waiting periods will soon be a thing of the past.



Am I the right kind of seller or buyer for a short sale?


Short pays are for sellers in a hardship situation who want to avoid foreclosure, are willing to do the extra paperwork involved, and have patience.

Short pays are for buyers who have a lot of time, want the opportunity to get a good price, and don't mind uncertainty. 

Short sales are not for the faint of heart. :)  But if you want to do a short sale, I am a certified CDPE - Certified Distressed Property Expert - and am here to help.



But wait, I have more questions...!

Contact me and I'll answer all of them!




(This page originally copyrighted in 2010 with updates c. 2012 by Felicia Grady, and it may not be reproduced in any form without permission)



 
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