A short sale occurs when a homeowner owes more to the bank than they can sell the home for (thereby being “short”). The owner is typically behind on mortgage payments, and usually headed for foreclosure. The lender may agree to accept the short sale proceeds and forgive the rest of what is owed on the mortgage. Or they may decide it’s better financially to foreclose on the house.
Normally, the bank has not yet approved selling the home short when it is first put on the market. They won’t begin the review process to approve or disapprove until they receive the first offer. The listing price set by the seller has practically no bearing on what the bank might accept as a sale price. It may be set unreasonably low to attract offers which are needed to get the bank involved.
If the seller meets the bank’s conditions for a short sale, the bank will then get their own appraisal of the property to see if the offer is reasonable. As a buyer, you should review comparable sales, particularly other bank sales in the area to determine your offer.
The best situation for a buyer is to find a short sale that has already gone through a bank review with a previously unaccepted offer. This should shorten the time for a bank response, and may give you an indication of what the bank might accept.
You should avoid short sales with more than one mortgage lienholder. This adds another level of interaction and time delay, and a greater chance that the short sale will be rejected.
Buyers need to have great patience when going after a short sale purchase. Even if the seller accepts the purchase, as noted above, the lender must approve the purchase before it can move into escrow, which can take months. The bank’s response may be to approve, decline, or counter with higher price. I advise buyers to expect at least 30-60 days before we get any response from the lender, which may just be an acknowledgment of the offer with more review to follow. If prior offers have been reviewed by the bank, then it may be possible to get a faster response.
Typically a short sale contingency addendum is included in the purchase contract such as this one provided by the Arizona Association of Realtors. Likewise, the lender will usually have their contract addendums for the buyer, such as accepting the property in “as is” condition (no repairs will be made).
Also keep in mind that homes in a short sale situation, or in foreclosure are typically not in the best of condition. You may have to invest a significant amount to bring the home up to your standards. These repair costs should be factored into the purchase price you offer. As with any home purchase, a professional inspection during the contract inspection phase is strongly recommended. This will give you good feedback on the work needed and cost involved.
Other Short Sale blog takes:
Examining Myths: Crummy Markets Mean a Short Sale Extravaganza!, by Eric Bramlett
Short Sales are “Fake Listings.” Only 5% Close, by Frank Borges
Also check this article at the WSJ: Why Lenders are Leery of Short Sales
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Its crazy how many short sales are on the market out there in arizona! I’m sure working Arizona short sales is the only way you are surviving out there! I just saw where almost half the homes on the market in Phoenix are short Sales right now! Thats nuts! Working short sales in Florida are the only way we can make a living down here in these trying times! Just wish the lenders were quicker to approve them!
Great Article!
Mike Linkenauger
First Coast Realty Associates
Jacksonville Condominiums for Sale