What is a Short Sale?

It seems nearly every day I am asked by my website users to explain what a short sale is to them.  The question is so common that I decided to just write a page about it on my website so I don’t have to keep telling the same story as it may.

Short sales are new to many people and seem to be a creation of a sharply declining housing market.  A short sale is when a seller attempts to sell their property at a price that is insufficient to cover their mortgage and related selling expenses.  The idea is that a seller can avoid foreclosure by finding a buyer for the bank.  The bank may decide that rather than foreclosing on a client they may just grant a short sale.  You might wonder why a bank would do this?

The banks position:  The bank realizes that the homeowner is in trouble and is not going to be able to continue making payments.  The bank can choose to foreclose on the seller for nonpayment.  In order to foreclose, costly legal proceedings and time must be accounted for.  It is estimated that an average foreclosure in the US costs a bank from 40-50k dollars.  The bank may decide that allowing a short sale is the lesser of two evils; a way for the bank to cut its losses and go on.

The sellers Position:  The seller will want to perform a short sale to hopefully keep their credit from being hurt by the hit of a foreclosure.  Short sales are generally forgiven and the client does not have to pay the shortage back in many instances.  The credit repercussions are generally much less harsh than a full foreclosure.  Recent tax rules signed into law stipulate that the perceived “profit” from the short sale not be taxed.  The tax break is for primary residences only.

So do I want to buy a short sale?

Think very carefully before embarking on a short sale hunt.  Be very aware that these types of transactions are neither fast nor easy.  Many times banks will stall for months before countering an offer on a short sale.  Many times a short sale may be listed for sale and the bank may not have been made aware of it, and definitely not approved it.  I find that short sales generally take at least 90 days to close, sometime much longer.  Many times they will never close and are instead foreclosed on.

Keep in mind that when you see a short sale on the market it will normally have a very attractive price.  Short sales are priced low for a reason.  People know the hassles of short sales and generally stay away from them.  Knowing this, the listing agent and seller price the home at a sometimes unbelievable low price.  This low price has not been approved by the bank, and instead usually a “teaser price” in order to garner multiple offers.  The bank will wait a period of time and will usually start countering the offers at market prices.  Keep in mind that the banks are fully aware of market price and are not in the habit of giving properties away.  Even if you offer the full asking price, or even above it, there is no guarantee that the bank will accept the offer.

Some short sales are better than others:

In my experience there are several tell-tale signs that a short sale is going to work or if it isn’t.

1. Is the seller qualified to perform a short sale?  Only a person facing some type of financial pressure is allowed to pursue a short sale.  Usually a loss of work, sickness or some other issue is warranted.  Banks will not allow you to short sale just because you invested in a property that lost value and now you want out.  They look for genuine hardship to consider working with the seller at all.
2. Has the listing agent contacted the bank and obtained a short sale package?  The bank will let it be known quite early if they are willing to proceed with a short sale.  Ask to see proof that the bank is willing to facilitate such a sale before entering into a listing agreement.
3. How much is owed against the property?  If a property has a serious delinquency between selling price and the priced owed, the bank may choose to foreclose.  They may feel that they may have better luck selling the home as a REO or real estate owned property.
4. How many mortgages are on the property?  Find out if there is just one or multiple mortgages.  A property with one mortgage will have a much better chance at closing than multiple mortgages.
5. If there are two mortgages, are they from the same bank?  In my experience, if there is a first and second mortgage on a property and they are both from the same company; you have a better chance of closing the short sale.  If there is a primary mortgage by bank “A” and a secondary mortgage by bank “B”, bank “B” will be hard to convince that a short sale is beneficial to them.  The second mortgage always gets paid last, and many times that means they may get nothing at all.

With all the caveats of short sales, there seem to be some people that are more suited as buyers of them than others.  If you have plenty of patience and no timeline on purchasing a home, short sales may be an avenue for you.  If you need a home within the next few months and like to know exactly what is going on with your offer at all times, you may want to look elsewhere.  If you would like to learn more about Florida short sales, just give us a call at 941-740-8000.

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