Most buyer clients in today’s real estate market are looking for a “deal”. Due to this fact, their home search usually begins by looking at homes that fall into the distressed seller category. When I represent a potential buyer I want to be sure they have all the facts and understand the process involved with these types of listings. In today’s post, Distressed Seller Series, Part 1: Short Sales, I will define what a Short Sale is, outline the short sale process, and highlight additional factors to consider when looking at short sale homes. There will be a separate post, Distressed Seller Series, Part 2: Bank Owned/Lender Owned/REO’s, where I will define, explain and address the REO process.
Short Sale Definition: The home is worth less than what the homeowner owes the lender. In order for the homeowner to sell, the lender will have to agree to accept less or “short” of what is owned.
Events that lead to a Short Sale Listing: In Arizona, we do not have mortgages we have Deeds of Trust. They are similar to a mortgage but the major difference is that this is a 3 party relationship between the borrower/homeowner, the lender/bank and a trustee; the 3rd party that holds the Deed. At some point a homeowner knows they are not going to be able to make their current monthly payment or they may have stopped paying already. Once they fall behind on their monthly payments a Notice of Trustee Sale is sent to the delinquent homeowner. The notice states that the homeowner has 90 days to catch up on and get current on their payments, or their home will be auctioned off at a Trustee Sale. The homeowner is aware that their home is worth less than what they currently owe to their lender. It most cases they have already received a Notice of Trustee Sale. In an attempt to avoid the black mark of a foreclosure on their credit record they will list their home for sale in the hope of “beating the bank” before the trustee sale takes place.
The Short Sale Process: Generally how the short sale process works is the homeowner/seller comes up with a list price. At this point they have no idea what amount the bank will accept. In most cases, they set the list price WAY below current market value to generate interest and receive an offer quickly. A buyer sees the home, likes it and makes an offer to purchase the home. The seller must accept the offer first, then the offer is submit to the seller’s lender for review along with a short sale package including documentation of their hardship and why they can not pay the difference between what is owned and the amount the offer is for. The lender orders a Blanket Price Opinion (BPO) to determine the value. The BPO is typically done by a real estate agent, but not the listing agent. The lender decides, based on the BPO and the financial hardship documentation provided by the seller, whether they will accept the buyer’s offer. They lender MAY come back and ask for highest and best offer, they MAY accept the offer, or they MAY reject the offer. Here is where it gets tricky. There may be more than one lender involved. If this is the case, ALL of the parties that have a financial interest in the property must agree and accept the terms outlined in the buyer’s offer in order for a sale to take place. Sometimes the 1st lender will offer the 2nd lender something, sometimes not. If the 1st lender offers the 2nd nothing, the 2nd may reject the offer altogether or they may ask the buyer to offer more. To add to the equation, sometimes the seller will instruct their listing agent to submit ALL offers to the lender to be reviewed. In this case, the lender may accept an offer outright, they may counter some or all offers or reject some or all offers. Each seller’s situation is different, therefore the scenario can and will change based on the particular home of interest and that seller’s situation.
Additional Short Sale Factors/Conditions to consider:
- The current real estate market is inundated with Short Sale listings. Lenders are overwhelmed attempting to process the short sale paperwork.
- The process is LONG. It can and usually will take anywhere from 2-4 MONTHS after the offer is submitted to final acceptance and closing.
- If the home owner does not submit a complete short sale package to their lender with the offer, expect addition time to be added on to the already long process.
- While you are waiting for the lender to process your offer and respond, similar homes (comps) may close for an amount that is lower than the offer you submitted a few months ago and the lender may reject your offer.
- Other homes that you may have been interested in can and usually do successfully close before you will receive a response from the lender.
- Most short sale listings are sold AS-IS. This means a buyer still has the right to perform inspections but they are expected to take the house in the current state and condition. The seller can not and will not make any repairs or corrections since they do not have the means to do so. Do not expect their lender to step in and make the repairs either.
- The seller can not and will not be able to contribute towards buyer’s closing costs.
- Finally, only a small percentage of short sale listings actually close.
Still confused or have additional questions? Contact me and I will be happy to share my thoughts, knowledge and expertise on short sales with you.
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People use to get in doubt to invest in short sale. Some say that there’s too much bureaucracy. Others say that it’s a nice way to get a house in great price and condition, since it’s directly linked to the owner
I about pulled all of my hair out waiting for a property I purchased through a short sale to close. I practically had to cut gums to get any repairs made.
I promised I would never invest this way again. Instead I’ve been taking out 80/20 LTV hard money loans and buying at trustee sales in phoenix.