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For a mini-education on Short Sales, please read this Short Sale Q & A. (This page is not very short, but then, neither is a short sale.)
First of all, what is a short pay, or short sale?
Basically, a short pay, or short sale, is where the seller is short of what they will owe the bank on the balance of their mortgage when they sell their home.
I want to search for short sale listings right now! Where can I find them?
You might want to know more about short sales before you decide whether you want to search for them...or not.
To search for short sale listings, please CLICK HERE which will take you to my Search Page, where you'll have an option to search specifically for Short Sales. The search pages are updated daily and include the entire MLS.
By the way, when you're searching for properties, you will usually not know which ones are short sales. This is because that information is not required to be included in the public information by the listing agent. However, the information is required to be disclosed to other Realtors. So just ask me, and I will do the research for you, to save you time and frustration.
How does a property get into a short sale situation?
This usually happens because either the seller bought at the top of the market and the home has since lost value, or perhaps the seller bought low but later re-financed and pulled money out. In either case, the seller may not have enough equity in the property to pay off their loan(s) at sale, and is either unable or unwilling to make up the difference.
How could it benefit a seller to sell their home as a short sale?
A seller who cannot make up the short-fall, and/or is trying to help his credit score may opt for a short sale rather than a foreclosure. Although a short sale or a foreclosure will have exactly the same negative effect on a homeowner's FICO score, the benefit is when the homeowner goes to re-establish credit. After a short sale, it takes 2 years to re-establish credit. But after a foreclosure, it can take 5 years. If you're wondering what circumstances may offer a seller the best chance for the successful closing of a short sale, some of them can include: when there is a true hardship situation; when there is only one lienholder involved; and when their listing agent is experienced with the short sale process.
How could it benefit a lienholder to approve a short-sale?
A short sale is a less expensive process than foreclosure for the lender. But -- in practice, will the lender approve a particular short sale? Depending on many factors, sometimes they will, and sometimes they won't. But generally the bank won't even begin to address the possibility until after they see a purchase offer on the house that has been accepted by the seller.
I noticed some short sale prices are way below market...what's the catch?
In order to get an offer quickly, many times the listing price on the house is set so far below the market value of the property that buyers can't resist making an offer. But the reality is that a very, very low offer would not be at a price the lienholder would consider accepting, so this very low price can be a real waste of the buyer's time. When a property is priced correctly for the best chance of a successful short pay, it will be priced somewhat below market value. This makes it enough of a bargain to satisfy a buyer, and as limited (as possible) a loss for the lienholder.
Is a short sale going to be at a better price than a foreclosure?
Maybe, maybe not. More times than not, I've seen a long-listed property go from short sale status to a foreclosure, and noticed that the listing price on the foreclosed property was lower than the listed and/or approved price when it was a short sale. It's best to have your Realtor (that's me, right?) check comparable sales for you, so you can see for yourself the market value of a property.
Who owns the house in a short sale -- the seller, or the bank?
The seller, not the lender, is still the owner of the property. When an offer comes in on the property, it is presented to the seller. An accepted offer would be then forwarded to the homeowner's mortgage holder(s) to request approval of sales price and terms.
How soon does the seller's lender give their response to a short sale?
On a short sale that has not yet been approved by the bank, I've seen it take from about a month, to about a year, to get a written response from the lender. It takes a lot of time for the lender to process the file, because this is not the only property file they have on their desk. Average waiting time would be several months, so if you're trying to make a deadline, an unapproved short sale is not for you.
What is the seller's lender doing during the waiting period and what are some of the roadblocks to a successful short sale?
Once the offer is received by the seller's lender, the lienholder considers the seller's finances, whether the seller is in a hardship situation, the market value of the home, the prospective buyer's financial qualifications, the buyer's offer on the home, as well as other factors, so the lender can make a decision about whether or not to forgive the short-fall, and what price they will accept. The lender will also want to find out whether the property is the seller's primary residence or if it is their investment property; if it is the latter, it is unlikely the short sale will be approved. Another roadblock could have to do with the seller's original loan when they bought the property -- if the seller did a "stated income" loan, the lender may match the amount of the seller's stated income to their tax return to make sure the two numbers match, so the lender can see if loan fraud was done by the seller at that time. Generally, the lender wants to make sure that a short sale will be in their (the lender's, not the seller's) best financial interest.
If there is a second lienholder involved, that lender will be doing their own investigations and deciding on their own terms for releasing their lien on the property. The holder of the first lien would usually offer the second lienholder a small amount of money (sometimes a few thousand dollars) to encourage them to release the lien. Sometimes the second lienholder will accept that offer, because if they do not release the lien and the property gets foreclosed on, not only will a short sale fail, but then the second lienholder will get no money at all.
Perhaps the holder of the 1st lien offers the holder of the 2nd lien $3,000, but that bank really wants $6,000 to release the lien. Due to a recent law, the lender cannot ask the seller to make up a shortfall...but they can ask the buyer to pay it. If the buyer is willing to do this, that amount cannot be rolled into their loan when they buy the home; it must be paid up front. Same with HOA dues that are back-owed; if the buyer agrees to pay them, they get paid up front at close of escrow.
What about the effects of the long wait on the buyer? Is there relief in sight?
Because the process can take a long period of time, it is not uncommon for buyers to get tired of waiting, and they often will back out of the transaction. Because of this, the seller may want to accept a back-up offer on the house.
There is good news to report -- legislation that addresses streamlining the short sale approval process is in the works, with a plan for having banks pre-approve a short sale including the price and terms. Also the new HAFA program is helping sellers with the process. And short sales that are put through the revamped Equator system (that Bank of America started using first) have been for the most part relatively fast. Hopefully programs like these will soon make a big difference in the short sale approval process, and the long waiting period will be a thing of the past.
Will a short sale always close escrow?
Unfortunately, many times, short sales do not go through for many reasons. Some of these reasons from the seller's and lienholder's side of the transaction may include the ability of the seller to repay the shortfall if required by their bank, issues with the appraised value of the property, the willingness of the holder of a second mortgage to cooperate with the short sale, the seller's pursuit of a loan modification or bankruptcy which would hurt the process, or just running out of time while pursuing all the steps, before the foreclosure clock runs out.
Even if the bank finally comes back with an approval, the approved sales price is often much higher than the buyer thought they were going to pay for the property. The approved price will usually be a percentage of what the bank perceives is the current market value of the property, not necessarily the price the buyer offered for the home. And there may be extra costs involved for the buyer and/or the seller.
Many buyers get discouraged by the long process of waiting and waiting, and then in the end, not getting the answer they had hoped for. I have heard it said that an unapproved short sale can have a pretty good chance of closing, IF all the pieces are in place and the listing agent knows what they are doing. But more often it has only a 0-20% chance of closing! But, as you see, manyof them do close, and do so at an excellent price.
Click here for an article by Inman News about short sales in California
What's an "approved" short sale?
It's a good thing! This means a short sale has been approved in writing by the lienholder(s) and the buyer and seller know up front what to expect. If all parties are in agreement as to price and terms, the transaction should then be able to proceed in the same time frame as a regular sale...but see the next section for a caveat on extra fees.
On an "approved" short pay, the price is the price, right?
Not necessarily. A sales price that has been approved in writing by the bank might have extra fees included which often need to be paid for by the buyer. These should be spelled out in the approval letter. These costs can include -- but are not limited to -- termite-related repairs, back-payment of homeowner association dues, cost of an environment hazard report, or a payment to satisfy a second lienholder's shortgage, which can be in the thousands of dollars. Similar to a foreclosure, the home is usually sold "as-is" with no repairs made to the property, so there may property repairs that need to be paid for either before or after close of escrow. Also a buyer's home warranty -- customarily paid for by a seller -- would not necessarily be included, and the buyer might want to obtain one.
These costs would be over and above the approved sales price. It would be great to be able to ask the seller to help out, but because the seller is in a hardship situation, it cannot be expected, so the additional costs would ordinarily fall to the buyer.
Am I the right kind of buyer or seller for a short sale?
Short pays are for buyers who have a lot of time, want the opportunity to get a good price, and don't mind uncertainty.
Short pays are for sellers who want to avoid foreclosure, are willing to do the extra paperwork involved, have patience, and don't mind uncertainty.
Short sales are not for the faint of heart. :) But if you want to do a short sale, I am a certified CDPE - Certified Distressed Property Expert - am am here to help.
But wait, I have more questions...!
Contact me and I'll answer all of them!
(This page c. 2010 by Felicia Grady and may not be reproduced without permission)
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