Once upon a time, Short Sales were a little-known phenomenon. Now, they are a staple in the diet of the real estate industry.
Circa 2007, agents and the general public were all forced to climb a very steep learning curve in relation to Short Sales. Now, in 2013, that they have become so common, do we know everything there is to know about them? If only that were so.
For those readers who may not be familiar with the term, a Short Sales refers to the sale of a property that is no longer worth as much as the homeowner owes on the mortgage. This is not necessarily a problem unless the owners are forced to sell for one reason or another. Perhaps they got a new job in another city; perhaps there was a divorce; or maybe they simply can’t afford the payments any longer.
In these situations, the owners may approach the bank that holds their mortgage and propose a Short Sale rather than a foreclosure since it is often less harmful to the homeowner’s credit rating. If the bank agrees, the homeowner puts their house up for sale at current market value. The bank accepts that amount and usually (but not always) forgives the remainder of the debt because it may lose less money selling short than foreclosing. Since the bank is taking a significant loss, it takes control of the sale, including approval of the final purchase price and the buyers. The sellers sign the Purchase and Sale Agreement, but do not receive any monetary benefit from the sale, so their motivation can be pretty low.
In theory, the buyer benefits by paying a purchase price that is less than comparable non-Short-Sale homes. The “catch” for buyers is that the average Short Sale takes several months to close, and a large percentage never close at all. There is very little, if any, room for negotiation with the bank. It is typically a “take it or leave it” situation for the buyer. The property is generally sold “As Is”, and it is seldom in great condition. Buyers are allowed to conduct a home inspection before buying, but it is for informational purposes only. The bank will not (except on rare occasion) complete any repairs or consider any price reduction based on the findings of the inspection. In other words, the bank makes all the rules, and therein lies the biggest problem. Since the banks make the rules, it also gets to change the rules whenever it feels like it. The procedures an agent followed to successfully close a Short Sale last week, can change without notice this week. When this happens, the timeline gets even longer. Sometimes, time for a Short Sale option runs out and the bank forecloses anyway, even if there is a buyer with an active offer on the property. When that happens, the buyer’s offer is terminated. If they still want to buy the property, they must either buy it at auction or wait until it comes back on the market as a bank-owned property. This can mean a delay of several more months since there is a 3-month (or more) redemption period providing the former owner an opportunity to buy back the property.
A client recently asked me if I have much experience as a buyer’s agent, closing Short Sales. I freely admitted that I don’t. There are several reasons why I don’t feel bad about that.
First, I encourage my buyers to look at Short Sales only as a last resort. In most cases, the monetary savings pale in comparison to the additional time and trouble involved in purchasing a Short Sale. It is not unusual for a buyer to make an offer on a Short Sale, wait 3 months for an unsatisfactory response from the bank, then repeat the process again and again. Before you know it, a year has gone by, home prices have increased, interest rates may or may not have increased (they can’t stay this low forever) and the buyer’s still don’t own a home.
Second, I believe it is the experience level of the listing agent that is more critical than the experience of the buyer’s agent when purchasing a Short Sale property. The buyer’s agent simply needs to follow instructions and do whatever the bank requires. The listing agent, on the other hand, has to navigate those ever-changing rules. If s/he doesn’t keep up with the bank’s changes and new requirements, the process gets lengthier, and the buyer usually won’t know why.
It’s probably worth noting that bank employees are typically paid an hourly wage. They earn the same amount of money whether or not your Short Sale closes. They have very little incentive to shorten or simplify the process. (If you are a bank employee and I’m wrong, please tell me!).
Lastly, the percentage of Short Sales that actually close, hovers around the 50% mark. This is due, in part, to the fact that so many buyers withdraw their offers before they even get a response from the bank. A lot of life happens in 90 days; it leaves a lot of time and opportunity for monkey wrenches to get thrown in the works.
Have you bought a Short Sale property? If so, I’d love to hear about your experience. Would you do it again? Would you recommend it to others?
Here’s your chance to share your wisdom using the comment box below.