Short Sales: Are They Worth The Wait?
December 3rd, 2008 categories: Foreclosures, Real Estate, Short Sales
When Is It Time To Give Up?
This past year the majority of homes that have sold have been either foreclosures, REO’s or short sales. This post will focus on short sales because although they tend to take longer, are probably the riskiest, they also have the potential to be great deals. I have closed a number of them this year and have helped sellers get out from under a mortgage that had a rate adjustment or got caught in a relocation they didn’t expect. The buyers gained because these homes are usually well maintained and have good locations. In the previous market these are the homes that would sell quickly. 
First of all let me define what a short sale is: When the bank agrees to take an amount short of what is actually due on the loan or loans against the house. If there is more than one loan then position will dictate who gets paid first and who stands to lose the most. For example: A home was purchased for $400,000 and the loans originally taken were for $300,000 (1st position) and $100,00 (2nd position) with different banks. (This was how a lot of people avoided paying PMI (Private Mortgage Insurance) which can increase your monthly payment by hundreds of dollars.) The seller lists the home for $320,000. An offer comes in at $310,000 and the 1st bank approves the amount at $310,000 because the cost to do business:realtor fees, title fees, taxes, etc. comes in around $20k so they will take a short amount of about $10,000. The problem lies with the 2nd lien holder. They are stuck with nothing so the agent needs to negotiate with them to accept a small amount to come off title so the house can reconvey to the new buyer. This is where you need to make sure you have an agent who is dedicated to seeing this transaction through.
Patience is the key to a successful short sale. I have a client who will be closing escrow on a short sale that we first made an offer on in March 2008. We will close this Friday so, doing the math, it took 9 months to deliver this baby. There were some interesting twists along the way, one of which was a reduction in price of $15k because by the time the bank decided it would agree to the short sale the market had dropped. My appraiser said he couldn’t come up with any closed sales to substantiate the price so the bank had to reduce the sales price or lose the buyer and start the process all over again. This is very costly and even though the NOD (notice of default) was filed and the bank was ready to foreclose they were willing to reduce their price because it saves them money in the long run.
Another short sale I will be closing on next week has a very happy buyer because the rates dropped last week and his interest rate went down. We asked the bank to extend the closed date and they agreed and the buyer now has a lower monthly payment. The seller is happy because he managed to keep his credit intact by keeping all his other bills paid on time so the hit from missing only one payment didn’t damage his credit rating too badly.
The dirty little secret about short sales and the real estate community is that agents don’t like to show short sale properties. Why? Because it takes so long and the potential for the sale to NOT close is greater. Conversely when the sale does take place there exists a possibility that that buyer could realize some equity in the property even in this down market. The reason that is possible is because finding an equal comparable property that has closed escrow within the past 3 months is hard to come by so the appraisers only recourse is to use what actually closed. In some areas there isn’t a true equal comparison. It’s the different between finding a home with the same square ft. and lot size but the interior has been completely remodeled vs. one with original equipment.
There are so many variables when purchasing a short sale but the old adage of location, location, location still rings true. The fear of not closing the sale is very real when trying to purchase a short sale and the agent representing the seller needs to be flexible and willing to do the extra work to get it across the finish line. So when is it time to give up? I would say that if you have a timeline that doesn’t allow you to wait. If you absolutely need to get settled quickly, can’t stay in your current home or need to focus on something else (like a new job) then don’t get involved with a short sale. But if you have the time to see it through then find an agent who is patient and will work with your situation. Grandma was right, good things come to those who wait.
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I had no idea there was so much involved with short sales. I know that a lot of people I know are very close if not already over their heads in their homes. Great article!
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