A Short Sale is when a homeowner owes more on their home than the home is actually worth (similar to being “upside-down” in a car), and a lender agrees to accept less for the home than the borrower owes. Short sales can sometimes be a good buy, if the buyer is willing to accept the risks and liabilities, and has the patience to wait while there is no communication from the bank, or even an acknowledgement that an offer has been received.
Very often, homes are priced very low by the listing agent (without lender approval) just to generate interest, draw traffic and multiple offers and or postpone a pending foreclosure, and then sell well above the list price shown in the MLS. Multiple offers are common, however the bank has the final say. Multiple offers often received within days, but still shows active while lenders wait for better offer.
Short Sale homes can be in poor condition; overgrown landscaping and neglected maintenance; sometimes trashed by the owner, especially while foreclosure is in process. I saw one in which the electrical wiring was cut inside the wall.
Short Sale homes often do not have any Seller Property Disclosures (SPDS) and Insurance History documentation (CLUE).
Almost always sold AS IS, therefore no repairs will be made on the property. However, it is extremely important for a buyer to conduct a home inspection to establish what “AS IS” actually is.
The goal of Banks’ Loss Mitigation Departments is to sell homes for as close to market value as possible. Lowball offers often get slow or no response.
Bank addendums can negate virtually all seller warranties in the Arizona Purchase Contract.
Releasing lien-not debt forgiveness. Sellers are often, not always, required to sign a promissory note for some of the difference between the sales price and debt. Seller may decline to sign promissory note—contract cancels. If seller has other assets, approval is rare.
Buyers are sometimes responsible for paying to have the utilities turned on for the inspections, contrary to the Arizona contract.
The MOST frustrating part of this process is the lack of communication or even acknowledgement that an offer has been received or that an attempt to communicate has occurred. Knowing this up front does help to ease the frustration a bit. There is often literally no communication or update whatsoever from the bank for months at a time. It is just a state of waiting in limbo.
Possibility exists that buyers may have to pay broker commissions, it banks decline to pay.
Just because the 1st lender agrees to a short sale, there is no confirmation that other lien holders will agree to accept a reduction in the debt. Examples: 2nd lender, Home Equity loan, HOA, Tax Lien, Child Support, etc. Without release of all liens, no sale occurs.
As a Buyers Representative, my contact would be with the listing agent who will communicate, as he or she is able with the bank. In a nutshell, short sales are not for the impatient. Do not call bank every day.
Rejections or falI-out rate is about 75% to 85%.
Once you get approval, the deal must close on time, or there is usually a per diem (penalty) charge.
Although the process does vary from lender to lender, here’s the generic process:
1. Lenders have pretty much set the standard that they will not even discuss a possible short sale until a borrower is delinquent on their house payment.
2. A seller must compile required paperwork which includes such things as a Hardship Letter, Proof of Income and Assets, Bank Statements, etc., however, the bank will not begin the short sale approval process unless and until an offer is presented with the required paperwork. If seller is missing even one document, offer will not be considered by bank.
3. When an offer is made, it is signed by the seller and then submitted to the lender at which point a Loss Mitigator Specialist or a Negotiator is assigned.
4. Lender response time can be from several weeks to many months. It is hard to understand why response to an offer takes so long. With the real estate market in decline over the last couple of years, many banks have downsized considerably, so they don’t have the staff to support this huge surge of delinquent loans.
5. Upon receipt of an offer and the short sale paperwork from the seller, the bank orders an appraisal (BPO=Broker Price Opinion) of the property to help them evaluate what price would be a reasonable number for them to accept from their delinquent/short sale borrower. Remember, the list price on the MLS is often a below market price set by the Realtor and the owner, without lender approval and is often not acceptable to the lender.
6. When the appraisal is received, the bank chooses one of five options which can take from several weeks to several months:
a. Ignore the Offer … this DOES happen;
b. Accept the offer as written;
c. Counter the offer;
d. Call for “best and final offers if there are multiple offers and there often are;
e. None of the above, send it to collections, trying to make the borrower pay in full; with no assets, it’s usually futile;
f. Initiate Foreclosure proceedings on the property, by notifying the seller and setting a Trustee Sale, with 90 days notice. (Often Trustee Sales do not have a successful result, because no one wants to pay the bank reserve limit, the bank takes a loss anyway and they get the property back which then become the “bank owned” (REO) property.
7. If the banks have an acceptable offer and IF they agree to a short sale, they submit their bank addendums to the buyer for signature. These addendums always supersede the purchase contract and often remove all seller warranties.
8. Once all the addendums have been signed and returned to the bank, they are ratified and sent to the buyers. (This process also can take several weeks.)
9. Upon receipt of the ratified contract and addendums, the approximate 30-40 day time period to Close of Escrow begins, and a normal loan application process, inspection period, CC&R request etc. commences.
You may be waiting for an offer that has little or no chance of being accepted.
Stephanie Weiss, REALTOR®