I want to give you a more detailed explanation of how a short sale works. A short sale can be a great way to purchase a property at a discount. But short sales are not for everyone. If it is something that you want to try it is important to go into it with your eyes open.
SHORT SALES BASICS FOR SELLERS
The first thing to know is that a short sale can occur when the market value of the home is less than the seller owes on his mortgage. Therefore if a likely sale is approved, the seller will be ‘shorting’ the lender. Before a bank will consider a short sale, the seller will have missed at least one mortgage payment. In a short sale, the seller will have listed the home for an amount that is less than what he owes on this mortgage. So the list price is a “fantasy price” that the seller hopes will be low enough to tempt a buyer but high enough that the bank may agree to accept the offered price on behalf of the seller.
STEPS TO A SHORT SALE PURCHASE FOR BUYERS
As a buyer you will tour the home and make an offer just like with any other sale. The Virginia Association of Realtors (VAR) provides the forms for our contract offers, and there is a special “short sale” form that is used as part of the buyer’s offer. The part that is different is that after buyers and sellers agree on the offer, it will still have to go to the bank for approval. The bank will want to see a strong offer with very few or better yet, no contingencies. They want to feel that the buyer will be able to proceed to settlement. The buyer will make formal loan application at this time and may also have a home inspection. It works even better if the buyer already has loan approval from a lender at the beginning of the process. The home inspection will be ‘information only’ for the buyer (the seller will not be conducting repairs). The home inspection and loan application take place at the beginning of the process… before the bank has approved the sale. The home owner is not allowed by their lender to have enough money to make any repairs, so a buyer should know that there is likely deferred maintenance since the seller has been struggling to make mortgage payments and has not had extra money for upkeep.
SHORT SALE TIMING AFTER OFFER BECOMES A CONTRACT
The offer will be sent to the seller’s lender for approval along with a hardship letter from the seller outlining the events that led them to being unable to pay their mortgage. This is where it can become frustrating. The bank can take anywhere from 3-12 months to approve the short sale, and neither buyer nor seller will have much feedback during that time. While waiting for bank approval, if the buyer has a loan rate lock deadline, the buyer can lose their loan because their rate lock has expired. At the same time, another department of the bank is proceeding towards the foreclosure of the property; sometimes it seems like there is a lack of communication within the bank. It is not uncommon that the week before the short sale is due to close, the bank completes the foreclosure and the buyer is out; the short sale has ended and the property has gone into foreclosure.
The last short sale that I was involved with took nine months before the bank approved the sale. During that time the buyer lost one loan and had to go to a different lender at the last minute. Also the bank can come back to demand more money when they finally go to approve the sale.
CLOSING A SHORT SALE PROPERTY PURCHASE
And when the bank does approve the sale, both buyer and seller need to be able to close immediately. Often they will only give you 10 to 14 days to complete the settlement process. Every now and then a short sale can be completed in 3 or 4 months but that is the exception. If the sellers are using a professional short sale negotiator to negotiate with the bank, that negotiator will keep their eyes out to try to stop any approaching foreclosure. In the transaction that I was speaking about, foreclosure had to be stopped 4 times.
WHEN DO SHORT SALES WORK BEST?
I find that a short sale works best if the buyer does not need to buy in a specific time frame and has plenty of time to wait. Also it’s optimum if the buyers will not be heartbroken if it does not work out or if they aren’t able to get that particular home.
So think about whether this is a process that you want to undertake. It can become a complicated time-consuming process. Still, it can lead to a positive outcome despite the difficulties. It’s better to be upfront so you can go into it with your eyes open if you should choose to proceed.
I would be happy to answer any questions that you may have or discuss on the phone.