Short Sales: A Buyers Overview

Short Sales: An Overview For Buyers

This article is one in a series on Short Sales and Foreclosures. Eighteen articles are currently planned, but more will be added as needed. A complete list of articles appears at the bottom of this page.

What is a Short Sale?

A “Short Sale” occurs when a property, usually a home, townhome or condominium, is sold for a price that is less than the amount that is owed on the property AND the Owner cannot afford to pay off the balance of the mortgage(s). The “Short” in Short Sale means the Owner/Seller is “short” on the mortgage payoff.

Sometimes it is easier to explain using an example.

Mortgage(s) on the Home: $200,000 The total of all loans on the home.

Market Value of the Home: (150,000) The likely Sales Price.

Loan Balance after Sale: $ 50,000 The “Short” Amount.

That isn’t the entire story, however. There are Closing Costs associated with selling a home, such as Title Fees, Escrow Fees and Sales Commissions. Who pays those fees, which, in the above example, likely total around $11,000?

The Lender typically pays the Closing Costs, which, in addition to the $50,000 short amount, increases the loss by $11,000 or a total of $61,000!

Why would the Lender approve a $61,000 Loss?

The alternative to a Short Sale is Foreclosure. Foreclosure is a process where the Lender “takes” the home from the Owner. Foreclosure takes time, at least 90 days, and there are additional costs involved including legal fees.

If a Lender is given the choice between a Short Sale or Foreclosing on a home, presumably they will accept the Short Sale providing the sales price is at or near “Market Value”. If the sales price is too low, the Lender may decide against approving the Short Sale and either wait for another offer or Foreclosure on the property. “Presumably” is my way of saying we think the Lender will act rationally, but that is not always the case.

Purchasing Short Sale Property

Making an offer on Short Sale Property is no different than any other sale; a Purchase Contract is submitted, the Owner/Seller considers it and may accept it, reject it or counter the offer.

Some additional paperwork is involved; a Short Sale Addendum must be included with the offer and usually an “As Is” Addendum is also required. As a Seller in a Short Sale does not have funds to pay towards closing costs, it stands to reason they will likely not agree to repair any problems found with the property. The As Is Addendum states that the Buyer is aware the Seller will not make any repairs, but the Buyer also has the right to inspect the property and cancel the offer.

How to Get a Short Sale Offer Accepted

It is usually not too difficult to obtain Seller acceptance on a Short Sale offer so long as the price is reasonable. The Seller will not receive any proceeds from the sale so their primary interest is in accepting an offer that is within the range a Lender(s) will accept.

Short Sale offers do not have to be at market value to be acceptable to lenders; they have certain formulas they use to determine what is acceptable, based on the loan type and market value.

The formulas allow for offers below market value, but it is critical that offers fit within the Lender’s range. Short Sales can take months for Lender approval, and it would be a big waste of time if you waited on acceptance of an offer that has no chance.

It is critical, then, that Buyer’s work with agents experienced in the market values of the area; equally or perhaps more important is working with a Realtor that has Short Sale experience. Realtors can take an all day class and three Webinars to attain the “SFR” designation (Short Sale & Foreclosure Resource), which is a good start; however, experience is critical when purchasing a short sale property. It would be best if a Realtor has Short Sale experience as both a Listing and Buyer’s agent, but in any case they should have participated in a minimum of five successful short sales transactions.

My Short Sale Offer is Accepted; Now What?

You wait. How long? Nobody knows. In many transactions you really do not know how long before the Lender(s) will look at the file. Several steps must occur before the Lender will respond to the Offer:

The Seller must submit a completed Short Sale Package: The package typically includes a Hardship Letter, Financial Statement and copies of Tax Returns, W-2’s, Bank Statements, etc. The package must be complete before a Negotiator can be assigned, so it is critical that the Seller take care of this immediately.
A Negotiator is Assigned:Once a Negotiator has been assigned, the Seller’s Agent has a contact they can call to help move the process along.
A BPO (Appraisal) is Ordered:The Lender orders either a BPO (Broker Price Opinion) or an Appraisal of the property to determine actual Market Value. An Appraisal is performed by a Licensed Appraiser but Lenders often use “independent” Real Estate Agents to prepare a BPO, which is very similar to an Appraisal but costs about 1/3 as much.
An Acceptance Letter is Sent:The Negotiator’s response to the offer is in the form of an Acceptance Letter. The Letter will either state that the current offer is accepted or it will indicate an amount that the Lender is willing to accept. If there are two Lenders, two Acceptance Letters are required.
If the price on the Acceptance Letter(s) is the same as the offer that was submitted, the Contract is complete and the Buyer must begin their inspections of the property. Short Sale Contracts usually provide for a 10 day Inspection Period that commences on the date the Acceptance Letter is received. The Buyer must also close the sale within 30 days unless the period has been changed in the contract.
Escrow is Closed:Once Inspections have been completed and the Buyer has received final loan approval, all documents transferring the property are signed and the sale is “closed”. Once the sale has been recorded by Pima County, the Buyer may take possession of the property.

That’s it, in a perfect world. Each Short Sale is unique, and new issues come up frequently. There is also a major, government sponsored Short Sale program called HAMP to be released in April. Participation by Lenders is voluntary, so it will be interesting to see how they respond.

In closing, please know that Short Sales are complex transactions and there are many steps and details involved in each one. Each Lender has different rules, and they often change them as well. If there are two Lenders involved, the difficulty increases substantially as Realtors must negotiate between both Lenders and the Seller.

Short Sales are not for inexperienced Realtors. Do you recall the messages on Reality Shows that state, “Warning: Do not attempt this at home. Professionals only. ”? Realtors should have a minimum of three and preferably five Short Sale closings to have the experience required to be successful in this market.

Disclaimer:The above article is, to the best of our knowledge and belief, an accurate representation of the facts. It is informational and not intended to be a source for financial or legal advice. We are not qualified to provide financial or legal assistance; however, we are licensed and experienced in the sale or purchase of Real Estate, and we will gladly provide guidance and recommendations in this area.

Rob & Catherine Hallberg, CSR, GRI, ABR, SFR, MRE

Associate Brokers, Long Realty

More Articles on Short Sales and Foreclosures

Buying Lender Owned (Foreclosure) Properties

Foreclosures: A Buyer’s Overview

Lender Addendums: Buyer Beware

Getting Your Offer Accepted

Foreclosure Lists: What They Are & Are Not

Inspections: Protecting Your Interests

Reality Show: Short Sale & Foreclosure Lore

Frequently Asked Questions

Next Article: To Be Determined

Buying Short Sales: The Good, The Bad & The Ugly

Short Sales: A Buyers Overview

Getting Your Offer Accepted

Negotiating the Lowest Possible Price

Short Sales: What is Taking So Long?

Will Lenders Pay Your Closing Costs?

Reality Show: Short Sale & Foreclosure Lore

Frequently Asked Questions

Next Article: To Be Determined

Short Sales & Foreclosures: A Homeowner's Perspective

Short Sales: A Seller's Overview

Pricing a Short Sale For Success

Should I Short Sell My Home?

Negotiating With Lenders

Help! I Received a Foreclosure Notice

Future

The Short Sales Package

Reality Show: Short Sale & Foreclosure Lore

Frequently Asked Questions

Next Article: To Be Determined

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