We have been finding ourselves showing more and more short sales to our buyer candidates lately so a small refresher on the process is likely a good thing. I wrote this summary for our website and thought to post it as a stand alone BLOG as well.
The short sale is a HUGE misnomer! There is really nothing short about it! If you’re a buyer in today’s real estate market, one choice you have is the short sale. A short sale is when a seller, wanting or needing to sell their home, needs the approval of THEIR lender because they owe more than the home is worth. They need permission essentially to sell it SHORT of what they owe.
The process begins with an agent listing the home as an unapproved short. Unapproved as the seller’s lender hasn’t approved the transaction. The lender needs an offer, to establish their loss and accept/deny or make a counter to the buyer.
Buyers today, with interest rates so low want to close quickly so they don’t lose such a low rate qualification. However if you choose to make an offer on a short sale listing here is what will be happening. The seller, along with your offer and appropriate addenda submits 2 years worth of tax returns, 2 months of bank statements and pay stubs, a hardship letter explaining the reasons behind the request (Note: I just don’t like my house or I owe more than it’s worth and I’m pissed simply doesn’t work-There has to be a real hardship. Loss of income/job, job transfer, etc) and whatever else their lender may require the offer “package” to contain and all this sits with the sellers lender until a negotiator gets to it. That waiting process alone can take 2-5 months!
In the time spent waiting for a negotiator the buyer may have had 1 or 2 opt out’s available to them. As a buyer you need to be prepared to stay with the offer at least 60 days form effective date or the seller may not even want to work with you. The seller has no way to know how long it may take his lender and they can’t afford to waste time with a buyer who is unwilling to wait…IF, as a buyer…While under contract with a short seller that PERFECT house comes available, you cannot buy it! You have a fully executed contract and unless you can afford 2 houses, you already have one! Shorts are very risky! Your rate lock may expire; the seller’s lender may flat-out not accept your offer, the seller may not accept their lenders terms for release which will kill the deal right there. Reminder, to get here in the process has likely taken 2-3 months! What you hope for is an acceptance with agreeable seller terms or a counter offer of some sort to work with.
The seller’s lender, before accepting, denying or countering you will order a BPO (Broker Price Opinion) from a local agent. That agent will, like appraisers, use recent sale comps. What’s that mean to you, the short sale buyer? It means you will pay MARKET VALUE for the home you waited months to close on!! You will NOT get a “deal”! The seller’s lender is taking a loss and they won’t just cave to your low or even seemingly reasonable offer. “But I offered full price” you may think…OK, but full price may not have been the right price! The seller’s agent may have intentionally UNDER priced the home to tease buyers into contracts so they could get in line with the bank. That process is common. Have your agent do a complete CMA, or review of the neighborhood comps before making the offer and understand you may need to offer OVER asking price to appease the seller’s lender.
The buyer will in 96% of cases finance the purchase so…The house MUST appraise for the purchase price. Here is where you may get a little better price, If your offer is for more than the BPO dictates the home may be worth. The sellers lender isn’t about to state that your offer is higher than they anticipate it selling for and will accept an over value offer simply to see if…It will appraise for you! In some cases, it just might! If however it doesn’t the seller’s lender will likely drop to your lender’s appraised value.
Think you’re done now? Nope, not close! The approval from the seller’s lender will have stipulations for the SELLER that they must agree to. Promissory notes, Cash at closing, they may not issue a full release of liability…And if the seller can’t or won’t accept those terms, the deal dies. You just waited months for nothing while watching better homes and other buyers close.
Bottom line, only write offers on short sales when you LOVE the home! Be willing to wait months and ready to lose out if the seller or seller’s lender is unreasonable. Most of the time short sales close…But you have to be patient.