Short sales have been a key player on the real estate playing field for a few years now, but buyers just now entering the market still find them very confusing. There’s good reason: of all the potential types of transactions, short sales lead the pack with misunderstandings, myths and misconceptions. This makes them the granddaddies of real estate urban legend generators for producing the highest number of misconstrued opinions and factoids.

In our local market, short sales have taken over the lead from REOs and now dominate the distressed property pack. As an example, in Hayward, California, short sale listings have soared to 46% of active listings, while REOs (bank owned foreclosures) have dropped significantly to less than one quarter of local inventory (23.44%).*

With short sales representing such a high percentage of currently active properties, it’s important to understand them.

Here are the eight myths you need to know and understand:

Myth #1: Short sales are short.

Nothing could be further from the truth. In a short sale, the word “short” refers to the fact that a homeowner is selling their home for less than they owe on their mortgage(s): they’re “short” of the funds required to pay off their obligations. In all other ways, these sales are actually long: long on aggravation, long in potential pitfalls … and they typically take a very LONG time to close (in spite of all the recent lender hype to the contrary).

While the average transaction is approximately 6 months from offer to close (we know that some, especially Wachovia loans, can actually close in a very short period of time), we’ve seen them go 18 months. And that’s IF they close. The odds of a successful close on a short sale, while greater than they used to be, are still … long.

Myth #2: Short sales are bargains.

You’d think so: they’re typically the lowest priced properties on the market. Why? Because buyers, aware of the potential difficulties, usually put these at the bottom of their list. Listing agents, knowing this, try to make homes selling short as attractive as possible. Instead of focusing on property condition, they usually lower asking prices far enough below market averages to entice a buyer. Problem is, before a short sale is approved, an appraisal is performed by the bank.
 

Many buyers don’t understand how this can be (see Myth #3): they don’t understand that the ultimate selling price doesn’t typically matter to a seller (since they are losing everything anyway), so an upside down homeowner will frequently agree to almost any price just to get an offer. Unfortunately, in a short sale, the homeowner does not have the authority to set the final price. Don’t like it? You can try negotiating, but good luck with that. In many cases, once the price goes back up to normal, bargain-hunting buyers bail. In other cases, the price is readjusted higher than the buyers can afford, causing the deal to implode and forcing the home back on the market – this time, with an “approved” price.

Myth #3: Short sale homeowners set prices.

Au contraire, mon ami. This is the most confusing aspect of short sales. Buyers cannot understand why the price of their accepted offer can change once they get into escrow. They assume that they can negotiate with the seller, come to an agreement and then wait for their keys. Many get a rude shock when the bank comes back with a higher price. Buyers often cry, “FOUL!” because no one explained to them who really sets the price: it’s not the seller … and it’s not the bank, either. In reality, it’s the investor behind the loan. In most cases, the bank is only servicing the loan for an investor and it’s this “hidden entity” that gives final approval. Or not. Frequently, the investor is operating by a set of guidelines that seem to make absolutely no sense at all.

Myth #4: Short sale sellers are motivated to sell.

Put yourself in their shoes: their credit is getting trashed, they’re losing their home, they’re being publically humiliated, they’re going to have a hard time finding accommodations that will accept their bad credit (and in MANY cases, their pets) … and then factor in the fact that many of them have not been making mortgage payments of any kind for months …

Why would they be in a hurry to move?

In many cases, they’re not. Which can add to the further confusion and frustration of a short sale. And brings up the next myth.
 

Myth #5: Short sales are easy to access.

We all have pet peeves. Mine include people calling and not leaving a message, folks walking behind my car while I’m already backing up, Caltrans sweeping during the day, cell phones ringing during events (church, movies, etc.)… and so on. Buyers have pet peeves as well, and their No. 1 complaint is…

Short sale listings with no lockboxes and viewing by appointment only.

It’s a VERY real problem. Realtors can get into foreclosures and most normal sales with ease: they all normally have lockboxes. You go direct with REOs and normal sales usually have showing instructions like, “Call, leave a message, go, leave a card.”

An increasing number of short sales, however, state “Appointment only — no lockbox.” No homeowner phone number is give and, in MANY cases, the listing agents don’t answer their phones, return calls or respond to texts or emails.

This is VERY real, it happens every day and totally frustrates legitimate buyers who want to see short sale homes.

Call me old-fashioned, but I’ve always thought that the reason for listing your home was to get it sold. To sell, you need offers. For that, you usually need to let people in — when they’re available — not when or if it’s convenient for the seller, but when it works… for the buyer. And since short sales are the most difficult homes to sell, you’d assume sellers selling short would go overboard to ensure their properties were accessible.

It seems the exact opposite is true.

I frequently ask listing agents why their short sales are “appointment only.” They usually say: “The seller doesn’t want to be inconvenienced.” What? They’re losing their home, will have their credit trashed, will be forced to move — and they don’t want to be inconvenienced? In reality, I place the blame squarely on the shoulders of the listing agents. I believe many agents do a disservice to their sellers by (1) not  explaining things adequately, (2) providing incorrect information to their sellers as to how the process works and (3) by allowing sellers to dictate how showings should happen.

The only exception should be short sales with renters who make it extremely difficult to show the home.

Which brings up another question: if, as a seller, you are selling your home short, then why would you allow a renter to remain? What can you possibly hope to gain by allowing the renter to stay? Again, there is an exception – Section 8 renters who have a government contract. However, that should be the ONLY exception. (Did I mention this was a pet peeve?)

Cooperative short sellers who remain in their homes have a lockbox with a key in it and their phone number(s) listed for buyer agents to call for access. Homes that are easy to access are the ones most agents choose to show AND the ones that get offers.

Done right, a short sale can be priced right, attract offers and be off the market in a relatively short period of time. And then there is a long wait while the bank processes the short sale during which the sellers can do whatever they want to do — without being “inconvenienced.”

And without TOTALLY frustrating buyers.

Myth #6: Short sales are sold “AS-IS”.

On the surface, this is true. “AS-IS” means don’t expect the seller or the bank to contribute ANYTHING towards the property condition. No repairs, no cleaning, nothing. Zip. Nada. Rien. Niente. Zilcho. And this frequently includes delinquent HOA fees.

Problem is, the buyer is usually selling because they can no longer afford to live in the home. Forget the fact that they haven’t been making payments and could possible be squirreling money away somewhere out of sight to the bank and others – you will never see any such funds - should they actually “exist.” And don’t forget that since they haven’t been making payments on anything, they’ve also stopped maintaining their digs. And will continue to do so AFTER you get your offer accepted and submitted to the bank.

Here is where it gets a bit dicey: it’s not really sold “AS-IS” because, in many cases, property condition can be substantially WORSE than when you saw it and agreed to buy it.

And, as a parting shot, the sellers may take “stuff” with them when they leave. Like appliances that were specified in the contract. Or light fixtures. Or … whatever. Think you can get them to bring those items back? Guess again. You’ll more than likely have to take them to small claims court – good luck with that. And, supposing they “dent” a wall moving out … who fixes it? Or who cleans the property after they leave? It won’t be them, that’s for sure. They have absolutely NO incentive to do so. I can count the number of clean short sales I’ve seen after the sellers moved out at close of escrow … on one thumb. And we’ve closed a bunch.

Buyers can understand that a property might not be clean when they get the keys, but they often want other assurances when buying a short sale. Which brings up the next myth.

Myth #7: Buyers are protected when buying a short sale.

Truth is, and even though I stated it in the previous myth:

THERE ARE NO GUARANTEES.

No guarantees that:

· That they will receive the property and its contents in the same condition as when they originally viewed it and got their offer accepted.

· That all the appliances will be there.

· That there will be no damage.

· That there will not be any additional costs required to close the deal.

· Etc.

Buying real estate is fraught with inherent risks – and short sales are the all-time risk leaders – you accept those risks when you chose to enter a short sale transaction. Buyers ARE NOT protected when buying a short sale – and their only recourse may be small claims court. If at all.

Myth #8: Buyers can recoup costs if a short sale collapses.

It’s a sad fact that while some approved short sales may make it into escrow, they don’t successfully exit the other end. Any number of things can and do go wrong. In reality, this is true of any transaction, but is even more probable for a short sale. And here is the caveat:

Money expended by the buyer during a short sale escrow WILL NOT BE reimbursed to the buyer should the deal collapse.

This can include money paid for:

· Inspection Reports

· Appraisals

· HOA docs

· Any money they may have invested to get the property up to par so it would qualify for an FHA loan

· Etc.

There is no one to pay. The title company is usually not the party at fault. Neither of the Realtors made any money on the failed transaction, the bank will not pony up a penny and … the seller doesn’t typically have any money either.

As stated in myth #7, there is RISK involved in buying any form of real estate.

So if you are the timid sort who holds things close to your chest and are not willing to lose any funds, then, quite frankly, short sales are probably not for you.

And here’s the final irony: some short sales do actually close in a very short period of time. And some end up being actually incredible bargains. And there are those who buy lottery tickets who actually WIN! Just don’t get your hopes too high …

Those are the exception rather than the rule.

*Data for April, 2010 - TrendGraphix.com