The Is Nothing "Short" About Short Sale
Be prepared to wait if you want to buy a short sale.
From reality shows about flipping homes to infomercials that claim you'll get rich quick, the message is that purchasing a short sale home is a sure way to financial security. However, considering all the hype surrounding "short sales," it's important to separate the facts from the fairy tales.
What exactly is a short sale?
It's when the bank agrees to accept a discounted payoff when a property sells for less than what is owed on it. Here's how a home usually ends up in this category:- When a homeowner stops making the mortgage payment, he eventually receives a notice of default from the bank that threatens foreclosure proceedings if the debt is not cured.
- In an effort to avoid foreclosure and any more damage to the homeowner's credit, they try to sell the home to pay off the loan.
- Most of the time, what the homeowner owes on the home is more than the value of the home. This is due to the dramatic drop in home values over the last five years. The amount owed will be even greater if the homeowner took out a second loan based upon the equity that used to be in the property when values were high.
- The bank agrees to accept the amount and consider the loan paid in full, even though it is less than what is owed.
Based upon what you read or hear, you may believe that banks are willing to take fifty cents on the dollar just to unload these distressed properties, making the houses real bargains just waiting to be purchased. Unfortunately, the reality is quite a different story. In fact, in Santa Maria and Orcutt, California, where a large number of listings are properties in some stage of foreclosure, you can't be in a hurry if you are thinking about buying a short sale home. You may find that you'll pay less if you wait until the bank has taken ownership of the property.
What does buying a short sale home take so long?
The homeowner who is facing foreclosure decides what the selling price should be for the home without knowing what the lender and loan servicer will accept. As a result, what might sound like a great price could end up being rejected by the parties who provided the loan.
When a buyer makes an offer on a home being sold as a short sale, most of the time the bank is not the one that holds the note. The offer has to be presented to the investor who bought the mortgage-backed security for approval. According to one manager from a large, national loan servicer, the lender needs to present the loan investor with a short sale package that includes:
- A Broker Price Opinion: the lender hires a real estate agent to provide them with a detailed market analysis to determine the current market value of the home.
- Current Appraisal: provided by a licensed appaiser.
- Proof that the property is listed on Multiple Listing Service.
- Documents that prove hardship for the seller such as current bank statements, pay stubs and copies of tax return.
All of this takes time to accumulate and verify. Sometimes the seller slows down the selling process because the paperwork is not turned in on time. It is an emotional time for them and they may be distracted due to the situation.
In most of these cases, the lender does not make the decision - it's up to the loan investor, who is going to lose money and wants to know why. Decisions are made based upon the facts presented. In addition, the lender needs to verify facts about the homeowner and provide that to the loan servicer. They need to see documents that support the current financial situation and the seller must prove hardship. A buyer who has made an offer on a short sale home may wait for several weeks (or months) before getting a response (often a counter-offer) from the lender because of the steps described above. During this waiting period, it is not unusual for buyers to change their mind when another comparable home that is not a short sale comes on the market.
What is really noteworthy is that it is not unusual for the lender to reject an offer for a short sale, only to list the property at a lower price, months down the road, once it has gone through foreclosure.
How To Buy Short Sales Successfully
With all this said, it is still possible to find a great deal in a short sale. If you want to explore this avenue, the best thing you can do for yourself is to work with a real estate agent who has a lot of experience selling short sales. They can help you avoid a great deal of frustration and wasted time. If you would like help finding an agent who can guide you through this process and who knows the neighborhoods where you want to live, consider using our Concierge Service - we'll give you names of professional real estate agents who can help you out.