With so many short sales on the market it's hard to ignore them. A short sale is where the seller owes more on the home loan than he can sell it for. So, he'll come up "short" on paying back the full loan amount. If the seller has cash to make up the difference he can pay the short fall. If not then he will need to pursue a short sale, where the bank agrees to take less than the amount owed. This presents problems for the seller and buyer because both are at the mercy of the bank's decision whether to allow the home to be sold at a loss to the bank.
1. Seller sets list price, not the bank. The person who originally bought the home is the seller. The bank doesn't own the home and doesn't give input on the list price. Banks usually won't get involved in a short sale until there is an offer on the home. The seller, with the help of his agent, sets the list price. Because it's unknown what price the bank will consider, even if you make a full price offer, the bank may come back demanding a higher price after an appraisal done.
2. You will wait. If your offer is accepted by the seller, you will wait a long time for approval. Not weeks, but usually many, many months. Most buyers think they can wait, but after several weeks of waiting it can become stressful watching other homes come and go on the market. A short sale doesn't involve a simple bank approval. The bank has to review seller financial documents, make sure that the sale is due to a hardship (even though this isn't required), order appraisals and price opinions, etc. Because an approval involves many people the time to get an answer can be staggering. In the end, the bank may not even approve the short sale.
3. You will receive very few updates. Of course you want to know what's happening. The agents do too. Most likely, there is nothing to know and so the update will be, "Nothing new." Because the process is so far removed from the agents' control it doesn't mean that the seller's or your agent isn't trying to get information. This just goes back to waiting and waiting to hear anything.
4. Don't count on repairs, a home warranty, or termite inspection. The seller is already asking the bank to take a loss so don't be surprised if the seller can't do repairs, give you a home warranty, or anything else that costs. These terms can usually be negotiated in a non-short sale, but I'm seeing more and more banks not approving anything that takes additional money from it.
5. If you commit then commit. It's so easy to put in an offer, get it accepted, and keep shopping for a home. Then if you find something else, you cancel your short sale offer. This happens so frequently and really puts the seller at risk. The seller accepted your offer in good faith, expecting you to ride it out to the end. If you walk away from the deal because you found something else, you shouldn't have put the offer in. If you know and accept the risks associated with short sales then stay committed. If you cancel after doing this the seller has to start all over.
6. A foreclosure isn't always looming. Many buyers believe that if there is a short sale, the owner must be facing foreclosure, so they low ball the price or wait until it becomes a foreclosure. This isn't true. While that scenario is happening a lot right now, there may be other reasons the sellers are trying to sell the home. The sellers may be getting a divorce, a job transfer, a military order, etc. Whatever the reason, low balling doesn't work. The bank approves the price based on appraisal and other information.
7. There is no guarantee of approval and circumstances may change. I had someone recently contact me for my opinion. She waited out a short sale approval for 7 months. She was using an FHA loan. Because FHA condo approval requirements changed while she waited, she could no longer buy the home. Laws and policies when buying a house changes rapidly and the circumstances you faced when making an offer may be different than what is happening when the approval is given. Plus, even if you wait it out there is no guarantee that the bank will approve the short sale.
So how do I protect myself? The short sale approval process is finally getting some attention. Hopefully we'll see some changes soon that speed up the approval process. If you pursue a short sale you are at the mercy of the bank. Some things to keep in mind:
First, in the offer you can include a provision that you must get approval from the bank by a certain date or you can cancel the contract. I have yet to see a bank respect the date, but at least it gives notice of how long you are willing to wait before looking for a different home.
Second, ask your agent to get as much information as possible about the seller and the loan. Sometimes that information will help you decide whether or not to make an offer.
Third, offer a realistic price so that the bank doesn't have to reject the short sale because it's lower than the appraised value.
Fourth, if the bank responds wanting a higher price or additional cash from you, and you can't go forward because of it, see if the bank will negotiate. The bank doesn't always respond well to this, but if the change is something that keeps you from buying the home, then it may helpful to try negotiation.
Deborah Engel, Prudential California Realty, is a recognized San Diego and Carmel Valley Realtor for top client satisfaction. If you'd like to learn more about Deborah, visit her website, www.PropertyByDeb.com, email her, Deb@PropertyByDeb.com, or call her at 858-829-1989.