What is a Short Sale?
A short-sale occurs when the individual selling the property is selling the property for less than what they owe for the property. This means that after the seller agrees to the price, the lender (who will be losing money on the transaction) must also agree to the price. It’s not called a short sale because the transaction happens quickly. It’s called a short sale because the seller is short of funds. This creates a circumstance that can be confusing and frustrating for a buyer. We’ll explain this and give a series of tips below.
About Short Sale Pricing
In a normal real estate sale the seller want to get the most money possible for his property for obvious reasons. But in a short sale, the seller won’t get any money from the transaction at any price. A short sale seller just wants to get out of the deal. For this reason, the pricing of a short sale is not always realistic. The lender will ultimately do a study and determine at what price it makes more sense for them to foreclose rather than take a short sale. To do a foreclosure the bank will spend money on attorneys and other fees, so it can make sense financially for the bank to take a short sale.
It takes months for the bank to determine it’s price and then that work is reviewed by a committee and negotiator who comes out with an “approved price”. But the bank won’t tell the seller what the approved price is unless they have an offer to consider. This system encourages sellers to list their homes for impossibly low prices just to get an offer just so they can start the approval process. Once the bank turns down the ridiculous offer the seller can now advertise the property for sale with an “approved price”.
If a buyer offers the approved price the transaction will proceed to closing like a normal sale. But the buyer tries to negotiate the approved price the bank will once again do a study to determine what makes the most sense. Most often there is little or no negotiation from the approved price.
Closing a Short Sale
Short sales are anything but short. After the buyer and seller agree to a price the seller’s lender hs to agree to the price. Firstly, banks are always slow to make decisions. This is because banks make decisions by committee. Those committees rely procedures and processes which are designed to protect the bank’s interests but which take a lot of time. These days there are more short sales than ever so those already slow processes are overwhelmed. It usually takes 3 to 4 months to process a short sale, but it can take a year. And there is no guarantee that the process will end in a positive result.
Because of the process of getting an approved price a short sale is anything but short. If you’re a buyer who is in a hurry don’t even consider a purchasing short-sale. Short-sales work best for investors who have no emotional attachment to a property. Short-sales work well for investors who won’t need to live in the home. Short-sales don’t work well for home-buyers who are on a schedule.
The Multiple Listing Service requires that once a property (any property) has a contract, the property is marked as such in the MLS. Homes that are under contract will not show up in your home search on our site. However, a few Realtors don’t understand that this requirement applies to short sales as well. They think that because the home sale has not been approved by the bank then the home is still available for sale. As a result, many short sales that you see listed for sale, already have a contract (or two) on them.
If there are multiple offers on a property, we advise you to walk away. If you make an offer on a property with multiple offers there are only two possible outcomes:
- You waste your time pumping up the price for someone else;
- You paid more than anyone else. If you paid more than anyone else, you didn’t get a bargain. If you paid retail for a short-sale, you paid too much.
Find out if there are multiple offers or worse yet contracts before you even look at the property. There is no sense looking at something that isn’t for sale.
Summary of Short Sale Pitfalls
Here are some of the frustrations that can occur for short sale buyers.
Time to close
Short-sales take a long time to close. Although lenders are getting better in short-sales, they are notorious for making slow decisions when negotiating. I had a client who agreed to pay cash and purchase a short-sale in 3 days. The seller accepted the offer but the lender took 4 months to agree to the offer. When buying a short sale, you have to act quickly. After you act quickly, you often have to wait a long time.
Short-sales often involve competitive buying. That is to say, there are multiple offers on the property. Despite what you may have heard about this being a buyers’ market, there are ALWAYS buyers who are interested in something for nothing. In addition the Northern Virginia economy has not been impacted the way places like Detroit affected by the recent economic news. In Alexandria, in Arlington and anywhere near the metro, there are many folks who want to buy homes. Homes that are nicely priced, in good condition and in good locations are selling quickly.
The property isn’t really available
At one time, fully two-thirds (maybe more) of the short-sales listed for sale right now … ARE NOT AVAILABLE. This is perhaps the most maddening part of short-sales as a considerable portion of my day is spent sorting through properties that are listed as ACTIVE in the MLS but they are in fact not on the market. MRIS has started cracking down on this, why are these properties listed for sale when they are active?
The last and worst part of a short-sale is the bank’s counter. The lender will only counter-offer after the buyer has invested a lot of time and effort negotiating the deal. After months of waiting and waiting the bank will finally respond with a price that is five or ten thousand less than the market price of other homes currently for sale. Yes, it’s a bargain but at what price.
You can use tools on our site to search for short sales. If you have the time and patience, you might get lucky and score a real deal!
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