Short Sales - Banks Don’t Like Losing Money & Why buyers should avoid them.
A short sale is when a seller has to sell a home but owes more than it is worth. Because the seller can not pay off the loan through the proceeds of the sale, they need to petition the lender to lower the loan amount equal to the net proceeds from the sale. The term short sale refers to the lender accepting a payoff, short of the full loan amount. Or as Penny so eloquently puts it, “the lender takes it in the shorts”.
There is a lot of myth surrounding short sales, so here’s the skinny. For a buyer they are usually a complete waste of time. Less than 20% of short sales actually close escrow. It usually takes a lender about 60 days or more before they might even respond. And if they do come back with a willingness to cooperate it is most often at a much higher price that what the buyer and seller proposed.
Why do most short sales not get approved? There are several reasons. First a seller must have Real hardship, like medical issues or job loss. Secondly, often times there are two loans. It is very difficult to get both lenders to agree to reduce the loan amount. Why would the first agree to lower their loan amount if the second trust deed holder isn’t being completely wiped out. And if the second trust deed isn’t going to get any money, why would they agree to help the seller?
Finally, banks simply aren’t set up for short sales. The amount of paperwork required to complete a short sale is overwhelming. The seller must provide complete financial documentation showing their hardship. The lender needs to have several appraisals so that they feel confident they are giving up as little as possible. This all has to happen before the property goes into foreclosure. Because if the seller is making the payments they won’t consider a short sale and if they aren’t making payments then foreclosure is only 4 short months away.
Then there is the whole issue of whether you are even speaking to a decision maker. Maybe the lender is just servicing the loan and the true investor is unreachable.
For a buyer there are two issues. First is the time factor. If it takes two months to negotiate a sale and only one in six goes through, it will take the average buyer about one year to buy a home through the short sale process. Time translates into missed opportunities. Just think of all of the great deals a buyer would miss over the course of one whole year. There are plenty of the well priced foreclosures and motivated sellers that have clear and marketable title ready and waiting.
The second issue is equally important, and that is price. The ultimate decision maker regarding price is the lender, NOT the seller or listing agent. Yet the seller sets the list price and negotiates the sale. So a buyer needs to realize the list price is irrelevant and often times unrealistically low, and whatever is negotiated with the seller is irrelevant. The real sales price will be what the lender decides based upon their appraisals, which in most cases is higher than true market value.
Our recommendation should a buyer want to submit an offer on a short sale is to realize that the real price will be revealed only after several months of waiting, and to keep looking. Or simply to wait 3-5 months until it comes back on the market as a foreclosure.
