Let's Talk Short Sales!

Raise your hand if you know what a short sale is. Hand still down? That's ok, there really isn't a reason you should be familiar with them unless you've tried to buy or sell a home as a short sale. About 95% of people I talk to don't know what a short sale is, or are at least completely unfamiliar with the process. Probably a third of those people tell me they know how they work, but they don't. And that's cool. Let's talk about what a short sale is, and what the buying and selling process is really like. Spoiler: It sucks.

We'll start on the buying side. So you've seen a home online that looks like a great deal, you call your agent and find out it's a short sale. Youi ask, "What does that mean?" A short sale is when someone is selling their home and netting less than what they owe on their mortgage. The problem here is that, unless the seller brings the balance of the mortgage to closing, the bank will need to approve the sale of the home and hopefully clear the remaining debt for the seller in order to allow the transfer of the property. You cannot sell a home without clearing all liens against the property.

Knowing that it's a short sale, you go see the property, and you love it. You want to write an offer. It's time to get your expectations in line, before you go rushing back to the office with your agent. When you submit an offer to a normal seller, you should have a response within a day or so. The same is true for short sales. The home owners will usually sign off quickly on an offer, however, now that contract needs to go up to the bank for approval. Here's where things stall out on the buyer side, big time. This process can take 90 days to 9 months! I tell my clients, if they're not ready to wait 6 months for a response from the bank, then it's not worth the bother. If the bank approves the sale, they'll want you to close 30 days later. So what do we do, as buyers, while we wait for the bank? Nothing. Absolutely nothing. We just wait. As the buyer's agent, there's nothing I can do to get the bank to go faster. There's no one I can talk to. Going to a local branch won't help. The bank does not care about your timeline. They'll process this short sale in order they received it, along with thousands of others. We have to rely on the listing agent, the sellers, and in most cases their attorney, to get the bank the information they request in a timely manner. There will be gaps of weeks and months where the bank does absolutely nothing to process the sale. Unless I call you to tell you I have an update, I don't have an update. 

Because of the uncertainty of bank approval, you have to be very flexible with your living situation. You either need to be on a month to month rental agreement, in a situation where you can move out at any time (like living with parents), or be able to cover two payments if your short sale gets approved and you have to close while you wait for your rental agreement to run out. I never recommend short sales to anyone who has to hit a specific closing date. Banks will not accept a home sale contingency with a short sale offer either, so selling your current house, can't be a requirement of closing on your short sale purchase. Short sales are also, often sold "as is". 

So you submitted a full price offer on the short sale, so there's no reason the bank shouldn't accept that, right? Wrong. The list price, in most short sales, is set by the listing agent, not the bank. So the bank could get your offer, spend 6 months processing it, only to counter at a higher price. You'd think the list price would be set in advance by the bank, but the banks are run by the same morons who caused the housing crash in the first place, so it's not. There's no guarantee your short sale offer will be approved. Their counter could even come in well above list price. If that happens, you can negotiate with the bank, or back out of the deal. That's the gist of the process for a buy. It's a lot of waiting and uncertainty. 

Now that we have an idea of what it's like for the buyer, let's talk about selling your home as a short sale. First step is contacting your bank, who usually has a short sale department, to confirm that your loan type is eligible for a short sale. Some loan types can't be sold short no matter what. In this case, if you have to move, you'll either own a rental property or have to decide if you're willing to walk away from it and be foreclosed on. I recommend the former. From there, your agent will want to get the home on the market and begin advertising the property. This is where that great price comes in. I'll often list my short sales 10-15% below market value with a goal of getting an offer fast, and starting the process with the bank as soon as possible. This lower price is often necessary to get a quick offer since most buyers would prefer to avoid short sales. Once we have a ratified offer on the house we'll send that up to the bank and begin what will be for you, a fairly miserable process. At this point, I enlist the services of an experienced short sale attorney to work on your behalf with the bank to keep things moving.

Along with the buyers, you'll also be playing the waiting game for weeks or months at a time. The difference being that when the bank does finally do something, they'll make requests of you and give you very little time to provide the information they want. Failure to meet their deadline could cause your short sale to be completely rejected. During this process they're going to dig into every aspect of your finances. They'll want bank statements from all your accounts, a full rundown of your debts, your monthly expenses, and your income. It's very intrusive, which is the biggest complaint that I hear, but you're asking them to forgive thousands, or even tens of thousands of dollars in debt. From their perspective they need 100% assurance that you cannot repay the loan they've given you. I've found that the bank will request something like 2 months of bank statements, then fail to process them for two months, and end up requesting bank statements again. It's infuriating. Be prepared. They'll also send out an appraiser to determine the value of the home. This plays a big factor in whether or not they'll accept the offer you've received. 

With most short sales, the goal is to be completely forgiven your remaining debt, but sometimes that doesn't happen. The bank may come back and ask you to take on the balance or a portion of the balance on a separate short term loan. Your agent and attorney can help negotiate with the bank on this. If you can't come to agreeable terms with the bank, you do not need to sell your house. If the bank counters the first offer your receive, and the buyers back out, you do have the option of putting the house back on the market with a "bank approved price". The second time through is often much faster. Prospective buyers will just have to understand that the price is the price, and accepting anything below the bank approved price will most likely lead to another rejected sale.

Now that you have a basic understanding of short sales, I hope you'll have a better idea if buying or selling as a short sale is a good fit for you. Just remember, they often take a long time, with a lot of uncertainty. Be prepared to be frustrated, and to never have a full understanding of what the bank is doing (because they often know what they're doing either!). As always, patience is a virtue. If all works out, short sales are a great opportunity to buy a house below market value or to get out from under a property you no longer can afford, Any other questions please contact me directly, or leave them on the comments below, and I'd be happy to help answer them.