Short-sales

Short Sales continued…

This is easiest to explain with an example.

Let’s say you purchased your home in 2006 for $550,000.

You paid 10% down in cash ($50,000) and took a Mortgage of $500,000. The home is now worth $400,000.

If the home sells at $400,000, then the lender (bank) needs to agree to let this happen. The bank will lose $100,000 plus selling expenses. The Owner will lose the $50,000 he paid and all the money he put into the property. If the bank agrees to the sale, they can still hold the owner responsible for paying off the lost $100,000. It is up to you to ensure that this term is not agreed and part of the contract. There may also be tax consequences to you, as the seller. A REALTOR® may help highlight these issues, but all sellers of Short Sales should take professional legal or tax advice before proceeding. Your agent cannot advise you on these matters, by law.

So, to buy the home for anything less than $500,000 (the amount the bank wants to be paid off) you will need to make an offer and WAIT. How long? This depends on the lender. Some can respond and close quickly but generally it takes 2-6 months to close a short sale. (Agents call them LONG Sales in frustration!) The lender has to be confident that this is the best that they will do, that an appraisal confirms the value of the home and that the owner is not de-frauding them by failing to pay the loan off. 

Why would an owner sell in a Short Sale rather than wait for a foreclosure? The main reason for this is to provide some protection to their credit rating. A foreclosure will stay on your credit report for 7 years. This will make it difficult to buy another house, but will also mean you pay more in interest charges on cars, appliances, credit cards and all other items you buy on finance.

A short sale may also stay on your credit report for 7 years but in some cases, the damage to your credit score will diminish substantially in 2 or so years and you may be able to buy another house then. Some lenders report that a foreclosure may hit your credit score by as much as 200 points more than a short sale, but this has not been confirmed.

Short Sale Strategy: Agents who list homes as short sales can put any price at all on the listing. In other words, a million dollar home could be listed for $100,000. Would the bank agree to sell it for that? Almost certainly not! So when you’re shopping for short sales, don’t be deceived by the list prices. These may have no bearing whatsoever on the true market value of the property, or represent a price that the lender will accept. Many times the homes are purposefully listed at prices which are well below market. This is an attempt to stimulate buyer interest, generate offers and hopefully drive the property into an overbid situation, which the lender might accept.

How do you know how to structure an offer on a short sale? As with any property purchase, your agent (that would be me) can explain your options and offer suggestions. The price you offer will always be your own decision, however.  Short sales are often in better condition than REOs but the escrows are much less likely to close. This is because the banks do not always agree to the offers, and they can take months and months to give you a decision. Therefore, short sales are really not very appropriate for people who have to move within a certain time period.

Be prepared for a frustrating ride if you go for one of these. It takes patience and a persistent agent to have a chance of closing a short sale. Statistics show that only about 1 in 3 do close successfully, so don’t set your heart on the house, if you’ve offered. That’s the price you pay for a bargain.

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