Buying a short sale - a great deal but can you handle it?
Charleston Real Estate Site
There is nothing "short" about a "short sale". Among the real estate misnomers, this is a classic one. Short sales take a long time. They are hard for the seller. They frustrate buyers. They are among the most complex and challenging transactions for agents.
If you are looking for a home and have not heard about short sales yet, you will. Short sales have been around for quite some time but have not been well publicized until recently. Short sales can be interesting and dynamic; yet, they are usually frustrating for buyers. For a buyer who has the patience and is in a position to wait, a short sale can be a very good financial opportunity.
What is a short sale?
A short sale is simply a situation where a home owner is in a position where they need to sell their home but their home is currently worth less than what they owe on their mortgage or mortgages. In addition, the sellers have demonstrated some degree of financial hardship to their lender in order to secure their lenders blessing in allowing the short sale. The sellers lender has agreed to work with the seller by sharing some or all of the loss resulting from having to sell the home for less than what is currently owed.
It sounds very simple yet it can be complex and convoluted. Most short sale situations take much longer to complete than ordinary sales. Buyers who are considering purchasing short sale properties need to be prepared to be very patient. They also need to be ready for extended periods of time where they have no information about what is going on with the sale.
Banks are willing to do short sales for one reason - it saves them money. A short sale is usually more financially prudent for a mortgage holder than a foreclosure. Banks use loss mitigation departments to manage these transactions. These loss mitigation people are well known for their lack of flexibility and for their lack of compassion. They are also known for their lack of communication to all parties involved in these transactions.
For the seller who has realized the need to sell short, the first step is to speak with the lender and to submit a package explaining the reasons for not being able to meet their mortgage payment obligations. Their lender will review this information and make a determination as to whether or not the lender will be willing to allow the short sale. If the lender does agree, the seller is free to market the property as a short sale.
Any sales contract will be subject to a third party (bank) approval. That is, once the buyer and the seller have come to a meeting of minds by completing a contract for sale, the mortgage holder has the final say so on the deal. Why? Because the mortgage holder will share in the loss. If there is more than one mortgage holder involved, such is the case when there is a second mortgage, all mortgage holders will need to approve the terms of the short sale.
It's important to note that the price listed on the MLS as an asking price is usually just a best estimate by the seller and the seller's agent as to the value that the current lender will be willing to approve. This means that an offer for full asking price based on the MLS will not necessarily be accepted by the current lender.
Most buyers are under the impression that the MLS listing price for a short sale is always significantly higher than the bottom line of what the current lender will accept. Unfortunately this is simply not the case. Although there are cases where the buyer can get a dramatic reduction, such a dramatic drop in price should not be considered a foregone conclusion simply because it's a short sale. This is because the list price may already be in line with the minimum that the mortgage company will accept.
As we begin to climb out of the housing crisis, the difference between the ask price and the sales price will narrow. This has occurred and continues to evolve as sellers and buyers develop more realistic pricing expectations. This pricing adjustment effects the pricing of short sales as well. Today, short sales are listed more closely to the final price that banks are willing to accept. There are fewer opportunities now for buyers to get extremely low prices on purchases of short sales. Of course there are very good deals to be had but the number of those amazing deals is dwindling.
With that said, be skeptical when you see a home that is listed on the MLS as a short sale that is priced so exceptionally below comparable properties as to be shocking. The pricing may have been chosen for strategic reasons - to draw as many offers as possible. Keep in mind that, since there is third party approval required, the price as listed on the MLS may have limited validity. In reality, any price could be posted (ethics considerations aside).
Buyers who are already concerned about the extended time that short sales can take need to be advised that sellers/agents using a strategy of posting exceptionally low pricing may further slow the sales process and dramatically boost offer volume. High volume decreases the probability that your offer will be the winning bid. It also motivates the seller to delay responding to any offer as the many bids roll on in.
Once an offer has been accepted by the seller, the current mortgage holder usually employs an appraiser to generate a current appraisal on the property. That appraisal is submitted to a negotiator for the bank. At this point in the process the current mortgage holding bank determines whether or not to accept the offer, reject the offer, or provide a counteroffer.
With the large number of short sales on the market today, lending institutions are often overwhelmed with requests to allow short sales - and to process offers. These lenders have difficulty acting quickly because of the large backlog of short sale properties. It is not unusual for it to take more than 60 days to receive an answer from a bank on an offer. It is not unusual for it to take up to six months to close a short sale deal. It is commonplace for buyers to feel like their offer has disappeared into a black hole because they have to wait so long to get information.
If you decide to go the route of purchasing a short sale, you may be able to get a property at an excellent value.
Understand that if you have a real estate agent working for you, that agent will be kept in the dark as much as you will be. Most agents who work with buyers on securing these properties do their very best to keep clients informed. If you are purchasing a short sale, be kind to your real estate agent.
Short sales are some of the most difficult and time consuming transactions that real estate agents engage in. A good buyer's agent will do all that is possible to keep you informed; even so, if you are buying a short sale property, the information available to your agent will be extremely limited during the process. Your patience will help your agent be successful on your behalf and help you remain best of friends!
Sincerely,
Chris DeLoach, ABR, BIC
843-654-4578
Filed under: Buyer Information, Charleston new homes, selling in Charleston, Goose Creek, Hanahan, bank property, charleston real estate, charleston mls, Charleston market conditions, charleston home sales, charleston market, charleston homes for sale, mortgages, MLS, chris deloach, short sales, charleston, buyer advocates, goose creek short sales, charleston short sales