Home Buying in 94043>Question Details

CA Mom, Other/Just Looking in Mountain View, CA

How does "Short Sale" affect the buying process?

Asked by CA Mom, Mountain View, CA Thu Apr 8, 2010

I think that a short sale is when the owner must sell because he can't make his loan payments anymore, right. How does that affect the potential buyer?

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Hello CA Mom,

A lot of agents have clarified that it's not necessary for the seller to have missed payments in order to have a short sale, but you are correct in that this often is the case.

The "short" in short sale means a "short payoff" to the bank. The bank "is shorted" what's owed.

I have written a lot of blog posts on the topic of short sales and will put a link to that category of topics below in the links section. Your main question, though, is "how does it affect the buying process". The main problem for buyers with short sales is this: they don't always close!

It used to be that only a tiny fraction of short sales would actually close - something like 10-20%. Since banks do better with ss than foreclosure, that ratio is now improving. Banks only get about 40 cents on the dollar for a bank owned home, but more like 65 cents on the dollar for a short sale. The math is easy enough to figure out - they're better off with a SS if the seller really MUST sell.

The thing is, there's a lot of smoke & mirrors involved, both by the home owners at times and by the banks (and sometimes their "servicing departments"). Sellers sometimes don't have to sell at all - but they want to because it's better for them economically. When the banks sniff that out, they usually say something like, "OK, but only if you agree to a promissory note to pay us back X amount over Y number of years...."

As a home buyer, you may not know if the home you want to buy is a seriously distressed seller or one who just wants to see if he or she can get a short sale. Some sellers will get a demand from the bank to pay to get out of the loan or to sign a promissory note, they won't agree and then refuse to sell. By that time, you may have been waiting several months, and possibly even paid for inspections (some listing agents are not waiting for approval before insisting that the buyer put money in escrow, pay for the appraisal etc.).

In short, you have loads of uncertainty with a short sale. In a regular sale, the seller usually cannot cancel. In a short sale, the seller can. There's also a contingency on the seller's side for the bank's approval of the deal. It may or may not happen. Another offer may come in higher than yours and you can "get bumped". More uncertainty!

Short sales are working more and more, but they are just as often unproductive and frustrating. If you buy a short sale, realize it's not like any other transaction - it can be a bumpy ride that in the end may or may not be successful.
1 vote Thank Flag Link Mon Apr 12, 2010
Right now, it stops it dead, IF your Buyer is looking to get a Tax Credit. Unless the contract is binding by April 30, 2010, the Tax Credit is gone. So, any buyer in hot pursuit of Uncle Sam's money needs to look for a regular sale. The new HAFA procedures are starting to bring order out of the cahotic Short sale mess, but it will still take some time.

Doc
0 votes Thank Flag Link Mon Apr 12, 2010
With any sale requires the lender approval there are long delays for response. Asset mgr assigned that property can have 1000's of homes they have to process .

At times there is drama.

We instruct our buyers "you may have submitted a sales offer" till there is an executed sales agreement best keep looking.

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
972-699-9111
Web Reference: http://www.lynn911.com
0 votes Thank Flag Link Mon Apr 12, 2010
Shortsales have nothing to do with the seller being able to make payments. Basincally if they owe more than the home is worth and need to move for work or other reasons then they would need to request a shortsale from the bank. Often times it is those that can no longer afford their home who are asking for bank assistance and maybe that is why you related it to the affordability.

Shortsales are very damaging to a consumers credit. Practically just as bad as a foreclosure in most cases.
0 votes Thank Flag Link Mon Apr 12, 2010
It does not have to mean the current owner can't make the payments. What it means is: The home itself is worth less than what is owed. I have a client right now who bought in late 2005 for $720,000. Currently the home is worth $550,000. To break even they would need to sell for $760,000 (What is owed plus commission and taxes) So basically they are $210,000 short.

They are current on their payments, but don't have $210,000 to bring to closing. So the Bank would need to accept a "SHORT" or offer less than what is owed. Thei process will typically take 90 to 180 days to complete.
0 votes Thank Flag Link Mon Apr 12, 2010
A "Short Sale" is when the Seller would like to accept an offer that "Nets Out" to less than he owes the bank on the Mortgage. The Seller is then asking the Bank to accept less than the Seller owes to release the lien on the property. As a buyer you now have two parties who need to agree with you on the terms of the transaction.
0 votes Thank Flag Link Mon Apr 12, 2010
I just read a few posts and would like to comment on them.

SS are a lengthy process but if agents know what they are doing, the buyer has patience and wants to find a good deal on a house in good condition, and then short sales might be right for you.

Banks don’t arbitrarily draw out the process. They have millions of dollars at stake and have to protect their assets because that’s what banks do. Wouldn’t you want your own bank to protect your assets (avoid fraud)? There is a huge issue with fraud which is why the banks are taking so much time to orchestrate short sales. After the short sale package with offer has been submitted with all of the related documents (financial background, hardships, etc.), then they have to scrutinize the numbers on the HUD, order a BPO (broker price opinion – like an appraisal) to determine the market value, and then work with an investigator to ensure that what is submitted isn’t fraudulent. Most agents’ don’t have a clue or maybe have heard from others and are happy to share stories. Equator formerly known as REO Trans is who Bank of America and a few others use that makes the process more mechanical, minimizing human error and providing a forum for communication with the bank’s asset manager and negotiator.

I list short sales because I genuinely want to help people. They can avoid unnecessary damage to their credit score and repair their lives sooner. Sure, they could walk away but what does that say about their integrity? The average person’s credit is reduced 50 points on a short sale verses 200 on a foreclosure. Also, they can purchase a home when they correct their financial situation as opposed to a foreclosure period of 7 years.

The benefit to the buyer is an opportunity to buy a quality house at a reduced rate and know they are helping the economy by not allowing another foreclosure to occur. There are a lot out there so it’s hard to avoid and if you eliminate these in your search you could be missing a fabulous house. If you’ve seen the results of a foreclosure you’d know that the short sale is a better option if that’s an option.

Cathy Bureau, MBA, REALTOR, Green, SFR
Broker-Owner
GREEN Home Realty
(210) 378-2489
Cbureau@greenhomerealtyco.com
0 votes Thank Flag Link Mon Apr 12, 2010
I just read a few posts and would like to comment on them.

SS are a lengthy process but if agents know what they are doing, the buyer has patience and wants to find a good deal on a house in good condition, and then short sales might be right for you.

Banks don’t arbitrarily draw out the process. They have millions of dollars at stake and have to protect their assets because that’s what banks do. Wouldn’t you want your own bank to protect your assets (avoid fraud)? There is a huge issue with fraud which is why the banks are taking so much time to orchestrate short sales. After the short sale package with offer has been submitted with all of the related documents (financial background, hardships, etc.), then they have to scrutinize the numbers on the HUD, order a BPO (broker price opinion – like an appraisal) to determine the market value, and then work with an investigator to ensure that what is submitted isn’t fraudulent. Most agents’ don’t have a clue or maybe have heard from others and are happy to share stories. Equator formerly known as REO Trans is who Bank of America and a few others use that makes the process more mechanical, minimizing human error and providing a forum for communication with the bank’s asset manager and negotiator.

I list short sales because I genuinely want to help people. They can avoid unnecessary damage to their credit score and repair their lives sooner. Sure, they could walk away but what does that say about their integrity? The average person’s credit is reduced 50 points on a short sale verses 200 on a foreclosure. Also, they can purchase a home when they correct their financial situation as opposed to a foreclosure period of 7 years.

The benefit to the buyer is an opportunity to buy a quality house at a reduced rate and know they are helping the economy by not allowing another foreclosure to occur. There are a lot out there so it’s hard to avoid and if you eliminate these in your search you could be missing a fabulous house. If you’ve seen the results of a foreclosure you’d know that the short sale is a better option if that’s an option.

Cathy Bureau, MBA, REALTOR, Green, SFR
Broker-Owner
GREEN Home Realty
(210) 378-2489
Cbureau@greenhomerealtyco.com
0 votes Thank Flag Link Mon Apr 12, 2010
If a short sale is listed correctly, the listing agent has already contacted the short sale department and maybe an asset manager to apply for a short sale with the appropriate lender(s), has priced the home at 88% of market value, and has procured all the necessary financial documents from the seller, then there may be a chance you can get through the obstacles. If they have ‘t done these things and can’t answer a few simple questions such as who is the negotiator, how many liens are there, and is there a pre-approved short sale from the lender(s) then the buyer is at high risk. Either the listing agent isn’t prepared to handle the issues related to a short sale and/or the seller isn’t cooperating, both resulting in a disaster.

Find a SFR or CPDE expert in your area or let me help you find one from my network. They are certified short sales and foreclosure people that can identify and smooth out the bumpy road.

Cathy Bureau, MBA, REALTOR, Green, SFR
Broker-Owner
GREEN Home Realty
(210) 378-2489
Cbureau@greenhomerealtyco.com
0 votes Thank Flag Link Mon Apr 12, 2010
The answer from Grace Morioka is accurate and well explained. We hope that everything will go as expected with the changes by the HAFA Program. I have seen short sales becoming quicker lately. However your original question wasn't addressed.

How does "Short Sale" affect the buying process?

The term short sale refers to the fact that the owner will be selling the home for less than they owe, thereby "shorting" the bank.

How this affect's the potential buyer is that the transaction takes longer than other sales. There may be multiple loans on the home and each has the right to say no. If the bank has required that they have the right to accept muliple offers then another buyer could offer more for the home and get the home. This can be disheartening to the buyer who is not prepaired for this or offered thier highest and best offer. I'm sure you've heard of buyer nightmare deals but an experienced buyers agent in short sales will write the purchase and sale contract to provide you with the most protection and avoiding possible road blocks. Be sure your real estate agent has the experience to make the processes as seemless as possible.

If the buyer is patient and the HAFA Program works as promised we may not see the long delays we've seen in the past. If we have enough of these homes purchased then we may even see the price of homes level out because short sales won't be driving down the market as they have been. However this is an optimistive view but possible.

I hope our responses here have helped answer your question.

Best Regards,
Teresa Lamb
Summa Real Estate Group
360-713-4082
TeresaL@Summa-Vancouver.com
http://www.ClarkCoHomesAll.com
0 votes Thank Flag Link Mon Apr 12, 2010
All the ans posted are good. It could slow the time it takes.

Not sure how successful is locally. It was 16% successful before. Data on successful rate of closing is getting better and faster. But it is not a sure thing and the buyer needs to be patient.

Often the banks may not wish to accept the offer as they are in the business to minimize losses. About 25-33% homes with an accepted offer ended up at sheriff auction block selling for more.

Buying a rental on short sale it can be problematic, I know two ss the tenants moved all the appliances not their own causing confusion. The inspection etc are not as comprehensive as regular sales.

Here is a video on sellers perspective:
http://www.youtube.com/watch?v=yJym4VEDBhU

Sam Shueh
Keller Williams
0 votes Thank Flag Link Sun Apr 11, 2010
CA Mom, tonight I met with a young couple looking to buy their first home. The first time I met with them was back in June, 2009, when they went to contract on a short sale. First they had to pay for the appraisal, because it was an FHA 203k loan and can't be underwritten without it. Then their attorney, for what reason I am not sure, decided that they had to get a survey on the house. Of course she never paid attention to the fact that there were 2 loans on the house, which we didn't find out until November. I spent a lot of time keeping everything updated, but luckily didn't let them pay for an updated appraisal. Finally, when the bank for the second agreed to take a small sum, the seller's disappeared, and the bank holding the first mortgage decided to foreclose.
So, to make a long story short, with help from their parents, they found a lovely home that they are buying, that is not a short sale.
0 votes Thank Flag Link Thu Apr 8, 2010
Hello CA Mom and thanks for your question.

The truth is that the long delays and waiting for bank approval are soon to be the way of how things "were" done in selling short sale homes. Under the newly installed HAFA (Home Affordable Foreclosure Alternatives) Program that started on Monday, April 5, individuals who cannot receive help through HAMP (Home Affordable Mortgage Program) may short sell their homes under HAFA. Once the home is approved to be sold through HAFA, there will no longer be 6 month delays in obtaining bank approvals--in fact, the time period for an approved price from the bank shortens to 14 days. Short sales homes will be listed with already approved sales prices from the bank, and this will make the entire process much easier for all concerned.

HAFA will also truly address problems that have plagued short sales for years, by: 1) Prohibiting the lender from obtaining a deficiency judgment against the seller for any unpaid mortgage amounts after the home is sold; 2) provides the seller with a small relocation fee of up to $3000, 3) requires the lenders to cover the seller's closing costs and 4) prevents "fire sale" pricing of short sales, which will help support housing prices within the immediate area.

The only unfortunate thing about HAFA is that it is NOT retroactive, and applies only to short sale listings from April 5 forward. However, for those who have not found relief under HAMP (and have tried), HAFA will keep help move people from distressed properties with dignity and help.

Sincerely,
Grace Morioka, SRES
Area Pro Realty
Email: GraceAreaProRealty@att.net
0 votes Thank Flag Link Thu Apr 8, 2010
CA Mom,
Many of us Realtors have asked the same questions.
It just doesn't seem to make any sense, does it?
0 votes Thank Flag Link Thu Apr 8, 2010
Oh good heavens! Why would anyone try to buy a short sale house? Why do the banks stall? If a owner can't pay anymore and is ready to walk away, what possible benefit is there for the bank to drag it out another 6 months? Doesn't such a house go into foreclosure eventually? Isn't that bad for the bank too?
0 votes Thank Flag Link Thu Apr 8, 2010
Hi Ca Mom,
You are somewhat correct in that the owner has to prove a hardship in order for the bank to approve a short sale ie: loss of job, moving because of job,etc. The owner owes more money to the bank than the property is now worth on today's market so the bank is taking a loss hence you need their approval for how much loss they are willing to take.
After you put in an offer for a short sale you may have to wait 1 to 3 months for an answer as to whether or not your offer was accepted or declined.
Because the property is being sold by the owner you may get full disclosure on the condition of the property (if the owner is still living there). But realize you are dealing with someone who is in financial difficulty. If you remember that you will realize that there is no money on the seller's side to buy you any inspections or to make any repairs. I will give you another warning here. After you make your offer and it is accepted, you will be paying for inspections. If, after studying those inspections you decide not to get the home you will still be responsible for paying for those inspections!
The owner or renters will often still be occupying the property and they may or may not be taking care of it. (or it can be vacant). Because short sales often have renters in them they can be more difficult (but not impossible) to get in to see.
In a short sale you can expect to use the standard real estated contracts.
Recently in this market I have seen that some short sale agents are putting properties on the market at a price far below what they know the bank will accept. Here is the reason for that. There is a fairly lengthy process between the owner and his bank to create and accept the short sale. This process is NOT begun until the bank receives at least one offer on the home. So in order to get this process started the agent for the seller is anxious to get an offer, whether it is a good offer or not. However it is very depressing for the buyer when he thinks he put in a good offer on a short sale and it is tens of thousands of dollars below what the bank will even consider as the bank does it's own appraisal called a BPO and they want what the current market shows the home is worth.
I hope this helps, feel free to contact me with any questions.
Regards,
Allyson
DRE# 01397256
0 votes Thank Flag Link Thu Apr 8, 2010
There is an element of truth in your thinking - a bank typically won't accept a short sale unless the owner has hardships that either currently or in the future could affect their ability to pay their mortgage. Loss of job/income, injury that keeps the borrower from working, illness in the family, mandatory job transfer, significant financial loss due to some other issue, etc.
The simplest way to look at it is that the seller must get his lender's approval to sell below the mortgage balance just as you must get approval from your lender for your new mortgage.
The biggest difference between you getting a mortgage and the seller getting his lender's permission for a short sale is the timeframe for processing. A mortgage lender typically approves a fully-documented loan within a week or two, approval for a short sale has no standard time frame and can take many, many months. Additionally, most banks require that the seller continue to market the property and submit multiple offers while they are considering the short sale application. In other words, the seller can accept several offers and there is a chance that an offer submitted after yours could win the property that you thought you had locked up.
0 votes Thank Flag Link Thu Apr 8, 2010
Hi there.

A Short Sale, by definition, is the sale of a home by the owner where the dollar amount of the loan(s) on the property are higher than the market value. The owner is not required to sell his home if the amount of the loan(s) is higher than the market value or if he cannot make his payments; however, the lender (the entity that issues the loan) or the servicer (the entity that owns the loan should the original lender have sold it to them) has the right to foreclose on the property.

This process affects the buyer in many ways. First, because the loan will not be fully paid off by the sale, the owner and the lender/servicer have the right to approve or reject the sale. Therefore, the owner may approve the sale but the lender can still reject the offer and elect to foreclose on the home.

This can get even more complicated if there are two or more loans on the property. At this point, all people with an interest (ownership) in the property have to agree to sell the home short. If there are two different lenders/servicers who own two different loans on the property then they both have to agree to sell along with the owner who occupies the home.

When a home is sold or foreclosed, the entity that issues the first loan has the right to be the first one paid. Whatever money there is leftover goes to pay the entity that issued the second loan and so forth if a third of fourth loan exist, although not likely.

The problem is that the entity that issued the second loan usually will not get any proceeds from a short sale, yet they still have the power to reject any offer they want. So they can be stubborn and hold the home hostage, in a sense, until they get paid some money. They can also decide to foreclose on the home, even though they probably won't get any money in a foreclosure either.

The nice thing is that if you do get a short sale approved, the lenders have to agree to release it from any liens, so you receive clean title to the home.

So if you are okay with all that possible turmoil, get ready for round two. The other issue is that they usually take months to negotiate. For those buyers that really need to have a particular home, this isn't as bad. From a financial standpoint, however, you are essentially locking in a purchase price for 2, 4, 6, 10 months while the sale is being negotiated or while the bank stalls.

As the market fluctuates you could run the risk of paying over fair market value, which usually happens. renegotiating the price will usually lead to another few months of further negotiation where the bank contemplates their financial position of selling it now versus foreclosing and selling later.

Short Sales are fraught with risks - to tread lightly.
Web Reference: http://www.atlistings.com
0 votes Thank Flag Link Thu Apr 8, 2010
The buyer in a short sale must be patient and flexible. Once an offer is submitted, the lender must contact all of the investors that now have the loan for that property, and see what amount they will settle for. This can be a lengthly process taking a few months, although the banks are trying to shorten this time. In parallel, the bank will be ordering an appraisal, so the listing price, and whatever price the buyer has offered, may not be what the bank and investors will settle for. They are not going to give away the property. Often, they will come back with a counter offer of a higher price.

If there is a second mortgage on the home, there is a concurrent negotiation with them, because they are typically settling for little to nothing.

A 3 - 4 month escrow period is not uncommon fro a short sale.

Also, because the seller typically has no money, there are no inspections and you will need to buy the house AS-IS. As a minimum, plan on ordering your own Termite and Property Inspections as part of your due diligence. If you decide not to move forward with the purchase, you are out the ~ $550 for the inspections.
0 votes Thank Flag Link Thu Apr 8, 2010
A Short Sale has nothing to do with the owner not being able to make their payments. However, many people who are unable to make their payments often attempt a Short Sale.

A Short sale is when the owner of a property owes more than the current value of a property and subsequently a sale will come up "Short" of what is owed.

This means that the Seller must not only find a qualified Buyer to purchase the property, but must also convince the creditors to "forgive" the remaining debt.

This affects the Buyer because even if the Buyer can make a deal with the Seller they still must wait for the Seller to negotiate the debt forgiveness side of the deal. Depending on the Sellers financial situation this could happen quickly or very slowly. New rules adopted this month are making it easier for Sellers to negotiate these sales, but there still is little the buyer can do to speed up the process. As a Buyer the best you can do is find a property that is better qualified to complete the Short Sale (some are just not good candidates). Ask a lot of questions, do a lot of research and have a lot of patience.
0 votes Thank Flag Link Thu Apr 8, 2010
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