BY GORDON HUNT | FEBRUARY 2008
The Salt Lake County real estate market is seeing more and more properties advertised as a 'SHORT SALE' due to recent market conditions. Therefore, I want to provide information for home sellers and buyers about this often misunderstood 'buzz word' real estate concept.
A short sale is when a home seller is offering a property for sale at a price, that after paying selling costs, the remaining proceeds will not pay off the loan(s) entirely, causing a deficiency or loss that the lender must agree to incur. Not all sellers or properties qualify for a lender accepted short sale. Lenders have rules in order to approve a short sale. Typically the seller must be behind on payments (but not in all cases), have no equity in the property, prove specific types of hardship, prove that the property value has decreased below the loan amount, and that the seller has no other properties with equity. A short sale has a negative effect on seller's credit which prevents being able to qualify for a new mortgage loan for 3+ years. And, lenders may require all or part of the deficiency to be paid back by the borrower in the form of an unsecured loan or seek a court judgement. There may also be tax consequences on the deficiency amount. A lender must deem a short sale as a financially attractive option as opposed to a foreclosure, and therefore only accept short sales that bring very close to market value, averaging 90% or more.
Attempting to purchase a short sale is certainly not for everyone. Keep in mind that in the beginning phases of marketing a short sale property, they are advertised at a price that is not approved by the bank and may be deceptively low to encourage offers. Also, until an offer is received on the property, the seller cannot even apply for a short sale with the bank. Therefore, potential buyers do not know at this point if the seller's situation even qualifies for short sale approval.
Once an offer is received on the property, the bank (referred to as the third party) must qualify the seller for a short sale, and do a BPO analysis and determine what price they are willing to sell the property for. This process is further complicated if the seller has a second mortgage with another bank, tax liens, judgements, etc. Due to the bureaucracy within banks, mortgage insurance issues, and the process of getting all lien holders to agree on who gets what, this process of pending price approval can take 8-12 months to get the seller and the list price approved. Then, the price can come back much higher than the original advertised list price. And, during this whole process, the seller may decide to declare bankruptcy or the loan servicer will instruct the trustee to foreclose, which cancels your offer and puts you back to square one.
Because of the waiting time and potential higher price, the buyer that submits the original offer most often cancels because they find another property or don't like the actual approved price. Due to the process, many banks only process one offer at a time. And many listing agents will only submit one offer at a time anyway, to expedite the process for their seller that may be facing foreclosure. Therefore, listing agents with an offer pending may stop showing a property or take secondary back-up offers that do not get submitted to the bank unless a primary buyer cancels. In that case, they reserve the right to only submit the single best secondary offer, which often creates a bidding war above asking price.
Once a property has undergone the 8-12 month price approval process, banks can typically respond back to the primary buyer in 6-8 weeks. So, under ideal conditions, the key is to find a price approved short sale where the buyer has dropped out and there are no secondary offers to compete with so your offer will be submitted to the bank. However, these are extremely difficult to find. Expecially in high demand areas.
Therefore, making an offer on a short sale that is not price approved requires much time and risk. It can take up to a year to find out if your offer is accepted. You don't know at what price the bank's bottom line price will be. Also, you risk missing out on tax credits and risk interest rates going up. Remember that a 1% increase in rates is the same as paying 10% more for a home, which defeats any purpose of trying to get a deal by going after a short sale.
Also, keep in mind that in most cases, the property is sold 'as-is' because the seller has no money to make repairs and banks will typically not make repairs, even if you require repairs to get an FHA loan.
And, banks reduce real estate brokerage fees, which according to buyer agency agreements, the buyer ends up paying all or part of the real estate fee (which may require cash) for the skilled help in dealing with these complex transactions.
I hope this shines some light on short sales.
CHAPMAN-RICHARDS & ASSOCIATES
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