NOTE: This is a copy of an email that I’ve sent to dozens of buyers and I felt it made a good blog post. The good news is that banks are more acceptable to working out a short sale today, than when I originally wrote this about 3 years ago.
Short sales defined. Short means that the lender holding the mortgage on the home will have to accept a short pay off in order for the home to be sold. While this in itself isn’t necessarily the end of the world, nor completely impossible it does add significant complications as you can imagine.
The biggest problem with the short sale is that the bank has not agreed to the list price. In most cases the bank isn’t even aware that a short sale is being attempted until a buyer writes a contract on the home. Everyone seems to think that it just takes longer to get done and whereas “I’m in no hurry I’ll wait” for the bank to get around to approving the sale. Not necessarily an accurate assumption.
The list price on a short sale has been determined by the Realtor and the seller (who in effect can’t sell because he can’t pay off his mortgage). The list price is only a starting point for negotiations with the bank. The list agent needs a buyer to write a contract so that they can begin to deal with the bank. The bank won’t discuss selling short unless they have a contracted buyer on the home. In other words, even though you see what looks like a great price, no one truly knows what the home will sell for until well after you write a contract on it. In addition to that, the first thing that the bank does is review the sellers financial situation; income, assets, original loan application etc, etc. Then if they have deemed that the seller truly has a hardship situation, and didn’t commit fraud on their application they may consider letting the home sell and accept a short pay off. If they decide to do so, their next step is to send an appraiser to the home to determine its value. They may let it sell for a little less than true market value though they will not let it sell for substantially less than market value as most short sale home buyers think. As much as I have little respect for the banks intellectual prowess, they are not totally stupid.
People in general have always thought that the list price on a home indicates market value. In a normal situation it is merely the amount that a seller wishes to get. If it doesn’t sell, it is because the seller didn’t want to sell their home at current market value. They listed to high and never priced where the buyers were willing to pay, which is who establishes market value. Sellers establish list price, buyers establish market value, either by buying or not.
In the case of a short sale the buyer still establishes market value by buying or not, it’s just a little different. Say you offer full list price on a short sale. The bank who must approve the sale and accept their short pay off does their due diligence (their due diligence takes 2-6 months) and decides to let the deal happen. If the list price for instance was $150k and you offered $150k, but the bank appraiser felt the home was worth $190k the bank will likely counter with $175k to $180k. There’s your deal, somewhat off of market value but not the steal you originally thought it was. You see, the bank is in the driver’s seat because at that point they will be within several weeks of foreclosing anyways and are certainly not held over a barrel by anyone.
Helpful statistic: 100% of foreclosure homes sell to a buyer at unprecedented values. 25-30% of short sale homes sell, the majority go into foreclosure, many with an offer form a buyer sitting somewhere at the bank.
I’m not saying its impossible, and or cannot be done, it just isn’t what the general population thinks it is. The list agent on the short sale property has to really know how to work through the banks maze too. Homes that have 2 mortgages on them are 10 times less likely to close short. I’m not even going to go into that.
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