Short Sale

Understanding Short Sale:

1. Short Sales Defined.  The term “Short Sale” is used in the real estate business to describe a situation where there is more debt owing against a property than the property is worth. In other words, the owner can’t sell the property unless the creditors (Third Parties) agree to accept a payment that is less (or short) of the amounts actually owed to those third parties. The third parties are usually mortgage lenders, mortgage insurers, bankruptcy trustees, and Federal, State and Local Taxing Authorities (such as the IRS or State tax Commission).
2. No Binding Contracts without Third Party Approval.  A Short Sale requires the written approval of the Third Parties. Consequently, the owner of the property, and any interested buyer, are advised that even if they reach an agreement between themselves for the purchase and sale of the property, the agreement will not be binding until the third parties approve the terms of the Short Sale. This can at times take 6-8 weeks to find out if the contract has been approved.
3. Third Party Rejection or Changes to Proposed Short Sale.  Based upon the obvious financial loss, third parties will often reject a proposed Short Sale. If however, the third parties do not reject the proposed Short Sale, they will usually send to the owner a list of requested changes to the proposed purchase contract. Some of those changes will affect the owner; and others may affect the interested buyer.  For example, the third parties will most likely require that the property is sold in “As-Is” condition.  Also, the Third Parties will normally not permit the owner to pay for any of the buyers closing costs, repairs, etc. The owner and the interested buyers are not obligated to accept any of the changes requested by the third parties – in which case, there will be no Short Sale. If, however, the owners, the interested buyers, and the third parties reach a written agreement with each other, then, at that point, the Short Sale transaction may proceed to closing. However, the third party may at any time prior to closing, including at the closing table, decide not to complete the Short Sale and walk away from the transaction.
4. Buyer Assumption of Liens.  Per the contract- third parties and seller shall have a curative period in which to satisfy the responsibility of providing clear title. If third parties and seller can not or will not agree to clear certain aspects of title, the buyer may be responsible for either clearing such conditions or accepting such conditions AS IS. Examples may include leftover utilities or code violations.
5. Time Periods.  The Effective Date shall be the date Seller delivers written notice to Buyer that the contract has been approved by the third parties. All contingencies will begin from this date although it is strongly encouraged that the buyer obtains their inspections before making an offer.

Waiting for an answer on a short sale can be frustrating. A short sale happens when a seller’s lender agrees to accept less than its unpaid mortgage balance to facilitate a sale between the seller and buyer, and banks take a long time to decide.

Some short sale buyers wait six months or more for a response. More than half the time, the answer is “No, and don’t let the door hit you on the way out.”

Short Sale List Prices are Not Real
Buyers gravitate toward short sales for two reasons. The list price is attractive and they believe the seller is desperate. However, neither of those beliefs is necessarily true.

Since not every short sale home is in foreclosure, not every seller is desperate. Moreover, sellers often set the listed price unrealistically, hoping that buyers will flock to that listing like moths to a flame.

Preapproved Short Sales
The way a listing agent finds out how low the bank will go is if an offer has already been accepted and the buyer walks away. Only then is the agent free to market the listing as an accepted short sale because banks rarely disclose a bottom-line price up front.

With a pre-approved short sale, the new buyers’ wait is dramatically shortened. Typically, about the time the first buyers walk away, the sellers’ documents have already been submitted to the lender, and the lender may have been close to issuing the short sale approval letter. The missing documents at this point are the new buyers’ offer and loan qualifications.

Before making an offer on a “short sale,” please keep the following in mind:
• Any offer must be approved by seller’s lender.
• Because of the required approval process by the lender, closings on a short sale are often delayed by several weeks, if not months.
• A lender may not agree to, and thus change, the terms of the agreement made between the seller and the buyer.

Short Sale Negotiations:
The sellers can agree to any type of purchase offer put before them for signature, but it’s not binding unless the sellers’ bank approves the offer. It doesn’t matter what stipulations are in the offer if the bank won’t accept them. Your true negotiation does not lie with the seller; it lies with the bank’s negotiator.

Banks rely on desktop appraisals and third-party BPOs (broker price opinions) to determine value. Although banks don’t want to follow through on a foreclosure, they also want fair market value. It is up to the listing agent to provide comparable sales and to substantiate the price submitted by the buyer.

Is the Price Lower After a Foreclosure?
Whether a buyer should wait for the property to go through foreclosure and be deeded to the bank depends on whether the home has multiple offers. If more than one buyer has submitted an offer, the highest and most qualified offer will most likely win.

If the buyer is the sole offerer and the bank is responding negatively, or worse, not at all, it might be in the buyer’s best interest to wait out the foreclosure. There is also no guarantee that a bank won’t reject multiple offers, too, particularly if none is high enough.

Sometimes banks aren’t reasonable and end up shooting themselves in the foot. I’ve had several listings where banks refused to accept short sale offers only to get title to the home through foreclosure, which then ultimately sold for tens of thousands less.

Don’t get discouraged if the bank rejects your short sale offer. Be smart. Laugh all the way to your bank.

If no one else submits a higher offer — and if you didn’t, why would anybody else? — eventually the bank will put the home up for sale as an REO. Watch for it to reappear on the market as a bank-owned home. If the price is reasonable at that point, buy it from the bank. At least buyers of bank-owned homes are relatively assured their transactions will close within 30 days or so, and most likely at a much lower price.

A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.

In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.

A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economical way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack of), by determining the probable selling price from a Broker Price Opinion BPO (also known as a Broker Opinion of Value (BOV)) or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.