There is Nothing Short About Short Sales
By: Eddie Stanfield
From reality shows about flipping homes to infomercials that promise you’ll get rich quick, the message is the same: Buying a home that is facing foreclosure (also know as a "short sale") is a sure way to financial security. However, considering all the hype surrounding short sales, it’s important to separate the facts from the fairy tales. There are some important points to consider before you waste a lot of time chasing after these deals.
What Exactly is a "Short Sale"?
It’s when the bank agrees to accept a discounted payoff when a property sells for less than what is owed on it. Here’s how a home usually ends up in this category:- When a homeowner stops making the mortgage payment, he eventually receives a notice of default from the bank that threatens foreclosure proceedings if the debt is not cured.
- In an effort to avoid foreclosure and any more damage to the homeowner’s credit, they try to sell the home to pay off the loan.
- Most of the time, what the homeowner owes on the home is more than the value of the home. This is due to the dramatic drop in home values over the last two years. The amount owed will be even greater if the homeowner took out a second loan based upon the equity that used to be in the property when values were high.
- The bank agrees to accept the amount and consider the loan paid in full, even though it is less than what is owed.
Based upon what you read or hear, you may believe that banks are willing to take fifty cents on the dollar just to unload these distressed properties, making the houses real bargains just waiting to be purchased. Unfortunately, the reality is quite a different story. In fact, in Santa Maria, California, where about 70 percent of all listings are in some stage of foreclosure, you can’t be in a hurry if you are considering buying a short sale home. In fact, you may find that you’ll pay less for the home if you wait until the bank has taken ownership of the property.
Why Does the Short Sale Process Take So Long?
The homeowner who is facing foreclosure decides what the selling price should be for the home without knowing what the lender and loan servicer will accept. As a result, what might sound like a great price could end up being rejected by the parties who provided the loan.
When a buyer makes an offer on a home that is facing foreclosure, most of the time the bank is not the one that holds the note. The offer has to be presented to the investor who bought the mortgage-backed security for approval. According to one manager from a large, national loan servicer, the lender needs to present the loan investor with a short sale package that includes:- A Broker Price Opinion: the lender hires a real estate agent to provide them with a detailed market analysis to determine the current market value of the home.
Current Appraisal: provided by a licensed appraiser.
- Proof that the property is listed on Multiple Listing Service.
- Documents that prove hardship for the seller such as
current bank statements, pay stubs and copies of tax
return.
All of this takes time to accumulate and
verify. Sometimes the seller slows down the selling
process because the paperwork is not turned in on time.
It is an emotional time for these homeowners, and they
may be distracted due to the situation. In most of these
cases, the lender does not make the decision—it’s up to
the loan investor, who is going to lose money and wants
to know why. Decisions are made based upon the facts
presented. In addition, the lender needs to verify facts
about the homeowner and provide these facts to the loan
servicer. They need to see documents that support the
current financial situation and the seller must prove
hardship. In the Santa Maria, California area, it’s
typical for a buyer who has made an offer on a
pre-foreclosure to wait for several weeks (or months)
before getting a response from the lender because of the
steps described above. Typically, the buyer will receive
a higher counter offer.
Short Sales Aren't Alway
A Great Deal
What is really noteworthy is that it
is not unusual for the lender to reject an offer for a
short sale, only to list the property at a lower price
once it has gone through foreclosure. This is occurring
much more frequently in the Santa Maria area, and as a
result, buyers are advised to shop for a bank-owned home
instead of a short sale. Not only is a short sale a long
process, but it may not be the great deal you have been
lead to believe.
Eddie Stanfield specializes in residential home sales, land purchases and foreclosure properties on the Central Coast of California. He offers Tips on How to Buy A House in Foreclosure , and information about Central Coast of California real estate on his website.
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