How Short Sales Really Work
By Lee Davies
Yes, there are fabulous opportunities in the market today and many buyers have landed some incredible homes by buying a distressed property through the short sale process. A “Short Sale” occurs when the mortgage owed to the bank is larger than the actual value of the home. In these events, sellers are telling the bank that the only way they can get out from underneath the burden of the home is by selling it for less than the existing mortgage. Thus they would like the bank to “forgive” that shortfall in order to make the sale happen.
Several items typically need to happen for a short sale to occur. First, the homeowner, most likely, is or will need to be in default on their mortgage payments for the bank to treat the property as a distressed situation. Once an owner is in default, they are likely eliminating their possibility of getting a new mortgage on a future home for many years to come. At this time, the bank will typically want verification of the owner’s income and assets to determine if they are truly financially distressed. Once confirmed, the bank will entertain the possibility of accommodating a short sale.
Now while all this is going on, most homeowners have already listed the property for sale as a short sale. Buyers will usually race to the property which may receive several offers. All of the offers will be “contingent” upon the bank approving the sale. This essentially means that the seller may accept all of the offers, in hopes the bank will accept one. It is at this time that everything seems to come to a standing halt and nothing seems to happen for, in many cases, 3-9 months.
There are five things that typically slow the process down at this time.
- The bank is getting an appraisal and trying to determine what the real shortfall should be.
- The bank is determining if the homeowner, Realtor, and buyer are all legitimate.
- The bank is hoping there will be a better offer as the bank is often “open” for more offers.
- The work load is overwhelming and processing file after file is a “loss” for the bank.
- The work on the 2nd Mortgage cannot begin until the 1st Mortgage is settled. At that time the process starts again with the new lender.
Once an offer is accepted by the bank, then the sale enters the typical transaction cycle where the home is contingent upon a home inspection, appraisal, and financing. So the process is still far from over. In many cases, the seller and/or their Realtor prefer to submit only one offer to the bank for approval. It is for this reason that it is critical that the seller select a buyer who is not only excited about the great financial opportunity of the purchase, but is also truly passionate about owning the home. The chances are then much better that the buyer will stick with the short sale process and ultimately close the deal.
Due to the time involved and the lack of communication, many buyers tire and choose to terminate and move on to another property. This is why many homes today are selling as the buyers get excited about a “great deal” with a short sale, only to get burnt out and eventually just buy a nice home to move forward at today’s historically low rates.