Friday, October 22, 2010

Short Sale?

Just like seller's concessions, I find myself explaining short sales a lot too so I figured I'd post a blog entry about them as well.

In a nutshell, a short sale is when a person sells their home for less than what they actually owe on their mortgage.  The short sale must undergo an approval process by the bank(s) that hold the loan(s) on the property. First, the owner needs to be approved for the short sale, they must prove to the bank that they are facing a real economic hardship (loss of job/spouse/income/etc).  This is achieved by providing pay stubs, tax returns, bank account statements and filling out a financial statement where all monthly expenses are documented.  Once the owner is approved for a short sale, then the offer that is presented must be also approved.  Once a bank begins to review an offer to purchase, they will either order an appraisal or BPO(broker's price opinion), or both to gauge the value of the home.  The bank wants to make sure that the value of the property, compared to the offer amount makes sense.  It is also very important to be aware that most of the time properties are marketed as short sales without notice or approval of the bank, therefore the initial listing price may not be approved by the bank, it may be a figure that the homeowner and listing agent devised (sometimes an outrageously low number).  Because of this, the bank can and may counter any offers over the asking price.

Example: If the offer is for 100,000 but the property is worth 300,000 based on recent sales, most likely the bank will not accept because they would make out better if they just foreclosed.  I have heard that banks are willing to accept 28% under the appraised value of a home, but don't hold me to that.

Keep in mind also that the bank will not only be taking a loss on the home's value, but they will most likely be picking up other expenses related to the sale such as real estate commissions, back taxes, attorney fees, etc.

Sounds easy, doesn't it?

While I have had a short sale approval in 24 hours, I have also had one that took 5 months, and then another that took months before finding out that the bank actually wasn't even considering the offer my clients presented and they foreclosed and the house was auctioned off.  Those clients ended up losing a lot of time, but ended up finding a wonderful house in the end

Short sales have become a large part of today's market, so as a buyer, one would need to decide if they want to entertain looking at short sales or stray away from them completely.  A short sale can be a great deal, but you need patience and need to be prepared for the fact that it could take a long time to get a decision from the bank and that in the end you may or may not end up with that house you fell in love with.

That's the long story, short :)


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