So you want to buy a short sale!
So you want to buy a short sale!
I completely understand the allure of the short sale when you are a buyer. The prices are attractive and there are a lot of them. They have ultimately become a necessary evil of the real estate market. While I understand why a buyer would be attracted to a short sale, buyers need to be aware that there is a lot more to them than low prices and a large inventory.
If you really want to pursue a short sale, be forewarned. Know what you are getting into, understand the risks, the pitfalls, and what is required to make them happen from a buyer perspective. They may, or may not, be worth it.
What is a Short Sale?
The seller’s obligations in a sale (loans, encumbrances, and closing costs), exceed the value of the property. The seller must prove a hardship (job loss, wage reduction, divorce, health crisis, lack of assets) to qualify for a short sale.
A Few Realities
- There are no Standard Operating Procedures for the banking industry to handle short sales. Every bank has different guidelines and manages them differently; even negotiators within the same bank manage them differently.
- This is important: Nearly across the board, a banking institution will not consider a seller’s hardship application until they submit an offer with a short sale. What does this mean to a buyer? Your offer is used to see if they qualify in the first place. You may sit in escrow for weeks while the bank considers not your offer, but the seller’s circumstances.
- There are no Standard Operating Procedures for how banks handle their short sale transactions. Frankly, I think there is a lot of irresponsibility in this area. Each agent is different in how they handle their short sale listings and frankly some may not know how to correctly manage them.
- Many agents leave their listings ACTIVE in the MLS even though they have an offer submitted to the bank. Once an agent has a good offer with a solid buyer and a second offer comes in, it will go into back-up position. The bank will only look at ONE offer, and that offer will usually be the highest and most acceptable offer.
- An ‘Approved Short Sale‘ does not necessarily mean that the process will go any faster.
- A short sale process will take as little as 60 days (which is unfortunately very rare) or as much as 4 to 6 months, or even longer.
- Banks Do Not have to respond to your offer ever if they choose not to! They may counter or even reject your offer, but not tell you if there is a price they would accept.
- The list price is not a reflection of what the bank will, or will not, take. The listing price is positioned to generate offers. Remember, the bank hasn’t even looked at the seller’s situation yet, let alone evaluate the market value of the home.
- There may be past due HOA fees, property taxes, or other expenses that the bank will ask a buyer to cover the expense of.
- If the seller declares bankruptcy during the process, your deposit may become a frozen asset and you will likely wait a fair amount of time to recover, if in fact you do.
- Many short sales ultimately foreclose. Why? If you find out please tell me. It may be that the private mortgage insurer will pay off the bank if they foreclose. It may be that the negotiator was too overloaded to respond to your offer before the foreclosure. There is often NO LOGIC in the way banks (and investors) approve, or disapprove these.
- Listing agents rarely receive any updates from the bank, so you as the buyer will rarely be updated.
More banks are trying to do loan modifications for sellers rather than approve short sales and in some instances, they are incentivized by the government to do so.
Real Life Examples
The following are scenarios that have been experienced by me, my agents, colleagues, and my buyers.
- A listing last May: I had 8 offers in 3 days. The highest was $580,000 home condition and it took 4 months to get an approval from Countrywide. By the time it was approved, the market value had fallen precipitously and the buyer was no longer interested. When I asked Countrywide if the process would go more quickly with a new buyer given the hardship had been approved, their response was that the each buyer was a new file and they couldn’t provide better than a 4 to 6 month time frame. The home sold for $490,000 4 1/2 months later.
- An agent had a short sale in escrow with a solid buyer for 90 days. The bank asked the insolvent seller to come to the table with $3,500 on the $165,000 sale. When the seller was unable to, the bank refused the short sale. The home is currently vacant and doesn’t show well, and worth about $145,000 6 months later. Currently, it’s not in foreclosure and the seller hasn’t made a payment in about a year.
- One recent short sale listing was in escrow 60 days with a qualified, ready-to-go buyer. In that time, the bank reviewed the seller’s hardship, denied it, and offered a very poor loan modification. Buyers lost 60 days and their offer was never considered.
- On a more positive note, there are those rare occasions where a short sale won’t be as hectic and long-lived. I recently had a listing that was a short sale and dealt with a local bank I have a business relationship with and we had an answer on an offer within three hours! The bank told us exactly what they were looking for in order to finalize the sale. It goes to show that having positive rapport with people can go a long way in certain circumstances!
All of this is simply the tip of a massive iceberg. So if you want to buy a short sale, you certainly have my blessing. Just be aware and armed with patience, don’t become emotionally attached to any property, and be prepared to potentially go through the short sale process more than once.
If you have questions, or you think I’ve gotten any of this wrong please email me or give me a call. I’d be more than happy to talk with you. If you would like to create a strategy to buy in Albuquerque or surrounding areas – whether it’s a short sale, bank owned, or an equity seller, just let me know and I would be more than happy to help.
Happy House Hunting!
Cheryl Marlow & Associates
Prudential Sandia Real Estate
My team and I have helped over 3,300 families since 1986.
We can help you move too!