The Challenge with Short Sales
I get a lot of questions about short sales and why short sales frequently seem to be great buys. I will address this and other short sale issues in this article.
First, a definition: "A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured against the property upon receipt of less money than is actually owed." For example, if the unpaid balance of mortgage is $100,000 and a property sells for $90,000 the lender accepts $90,000 as full payment for the debt. Note that the seller may still be responsible for the difference between the sale price and the amount owed.
Short Sale Considerations
- Banks will only agree to a short sale if they are convinced that not doing so will result in a default. Foreclosure is far more costly to a bank than a short sale.
- Short sales take a long time to process. The quickest of the 30+ short sales that we have completed took about 6 months and the longest about 3 years
- By law, the seller of a short sale gets nothing from the sale; the seller doesn't care how much the house sells for.
- Banks basically ignore the price and terms on the purchase contract. Yes, you read it right. You can have a executed purchase contract for $150,000 and the bank could counter back 1 year later at $200,000 (this actually happened to one of my clients).
- Banks do not have to agree to a short sale and frequently they do not. So, you could have an accepted offer, wait 18 months only to learn that they denied the short sale.
- Banks do not want to lose any more money than they have to so they will not agree to a discounted sale price; banks will only accept the current market value or the contract price, whichever is greater.
- The people at the bank do not care whether the property sells or not. What they do not what to do is to be caught making a mistake. Bank employees are far better off doing nothing than getting caught making a mistake. So, the slightest blemish on the documents can result in having to restart the entire process, making the time to approval unpredictable.
- The bank may choose to submit the property to auction even though you have a contract on the property. If they accept an offer at auction, you will receive your earnest money back but nothing more.
- The bank may agree to a short sale but refuse to release the seller from the remainder of the debt. In my experience, sellers will not agree to this and the short sale will fail.
- If you choose not to continue with the short sale and terminate the purchase within the terms of the contract, you will receive your earnest deposit back. However, your earnest deposit is held by the title company usually starting two business days after the purchase contract is accepted by the seller. So, your money can be held for months before you even know whether the short sale will be approved.
- If the short sale is managed by a short sale company, it is likely that the buyer will usually have to pay them a fee. This is usually in the range of 1% to 2% of the purchase price.
- If the loan was backed by Fannie Mae (or some other federal agency) you will have to pay the real property transfer tax which is $5.10/$1,000 of the sale price. Normally, the transfer tax is paid by the seller. Having to pay the transfer tax increases your purchase price.
Why do short sales appear to be great buys? By law, the seller of a short sale will not receive any proceeds from the sale so they do not care what the listing price is. Many inexperienced agents list the properties well below market value in order to get it under contract hoping that somehow things will "work out". They don't "work out". For example, you could have a property under contract for $100,000, wait 8 months and have the bank approve the short sale at $200,000. We've handled over 40 short sales representing both buyers and sellers. The fastest one took 6 months and the longest took 3 years. Two were never approved. All sold at current market value; none sold at a discount. Short sales only appear to be a bargain but they are not bargains. Short sales will only be approved at full market value, the same price you would pay for a similar non-short sale property today.
In this article I presented the challenge with short sales. We have handled more than 30 short sales, representing buyers and sellers. Today, except under special circumstances, short sales offer no benefit to the buyer and do carry multiple problems. In general, we do not recommend short sales for buyers.