What Are Short Sales And How Do They Work

What Are Short Sales And How Do They Work

I had a client ask me this week what a short sale was and I realized that a lot of people don't know...or have misunderstandings about what a short sale actually is.  A "Short Sale" is a property where the homeowner owes more than the property is worth and they need to sell for some reason, most often because they are no longer able to make their payments.

In this market with home prices rising, there aren't as many short sales available...but never fear!  The market cycles and I'm sure they'll be back;)  The name "short sale" derives from the fact that the seller and listing agent (and in some cases a short sale negotiator) are negotiating with the bank(s) trying to get the bank to agree to take a "short" payoff on the lien.  They are more complicated and difficult to get done if there are multiple liens on the home as all lienholders have to agree to the proposed terms prior to the sale going through.  On average only about 1 in 3 short sales under contract close.  This figure is slightly misleading because, due to the length of time it takes to get a short sale to go through (3-6 months on average although I've seen them take up to 9 months) many times the buyer will bail and it will go back on the market.

Here's how the process works; seller generally starts to default on their payment, they hire an agent to sell their home as a short sale.  Thye agent puts the home on the market and gets an offer.  Once they have an offer they can begin negotiations with the bank trying to get the bank to agree to the terms of the contract.  One misconception about short sales is that they're always great deals...not always true.  Banks aren't stupid (well not generally;), there are advantages to doing a short sale (we are a public trustee state so foreclosures go through the public trustees office instead of through the court system like other states who allow "judicial" foreclosure).  It's more expensive in Colorado to foreclosure on a property and it takes longer (like anything else with the government).  In the interim, the property is vacant, potentially getting vandalized, the yard is dying, pipes can burst etc.  So the value of the banks collateral can diminish in addition to the expense of foreclosing.  So it is actually usually better for the lienholders to do a short sale rather than a foreclosure (especially junior lienholders who often do not get paid at all if the property gets foreclosed on).  However they are going to do valuations on the property (appraisals, BPOs *Broker Price Opinions, AVMs *Automated Valuation Models etc) to make sure they aren't selling the home for way under market value.

There are different types of short sales as well; non-recourse, full recourse and partial recourse.  This pertains to the seller and whether or not the bank can come after them for the difference in sale price to amount owed.  Obviously, sellers want non-recourse short sales.

Things you should know as a buyer:

1. Not all agents are created equal.  Make sure the listing agent knows what they're doing....you're just spinning your wheels if they don't.

2. Your "accepted offer price" can get countered by the bank.  So just because the listing agent listed the property 50K under market value and the seller accepted your offer does not mean that the bank is going to agree to take a $50,000 loss on top of the difference in mortgage amount owed to market value.

3. Don't do earnest money until Short Sale Acceptance

4. Make sure you put provisions in the contract to make sure the sellers aren't letting the yard die, the pipes burst and the home to be vandalized while you're waiting for approval.

5. If you're planning on closing in the name of a Trust...make sure the lienholder allows that.  Many don't because of the fraud that was going on where people were basically having a family member buy the property in the name of a trust in order to lower their payment and not get foreclosed on.

6. Your agent should do a market analysis on the property for you to make sure it's not drastically under priced.  If the banks not going to take your offer, they're not going to take your offer regardless of what it's under contract for. 

Feel free to contact me if you have additional questions about short sales! 

Sarah Rowan Headshot
Phone: 970-397-5774
Dated: February 25th 2015
Views: 396
About Sarah: Sarah was a licensed real estate agent for 10 years before transitioning into the mortgage industry ...

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