The Long and Short of Short Sales
Delicious, but not the right kind of short(cake) sale. Thanks Glenn…
I took a poll this week to see what people know or have heard about short sales. I got about 25 responses, which I’ll take as ‘decent’ for internet participation. Here are some similar, but incorrect guesses:
“Cheap/must be sold quickly.” “A sale that lasts a short time? I have no idea” “When the owner wants the sale done quickly”
I also had a number of correct guesses/got the gist:
“Bank agrees to allow sale of property for less than is currently owed on the mortgage(s)” “I don’t know exactly but isn’t when the seller is trying to avoid foreclosure? And the process can take forever and fall through after the buyer waits ages trying to buy the house?” “Selling for less than the value of the mortgage and other loans secured in the property. “I always thought it meant selling a property for less than you bought it.”
I hoped for a few funny answers but the internet disappoints. While I, too, was under the impression (years ago) that a short sale meant a quick sale, it’s the latter of the two responses that’s correct – an owner is trying to sell the house for less than it’s worth.
So why would someone want to sell a house for less than it’s worth? 1. They have a realtor who gave them a pretty bad comparative market analysis (hence why you should ask me for one instead!) 2. There are liens against the house (mortgage, medical bills, contractor bills, etc) that the owner cannot pay and the lienholders agree to accept less money than necessary to settle the debts.
The trickiest part is that lienholders do not have to agree to accept less money than they’re owed BUT if they don’t, the house is likely to go into foreclosure and the debts will continue to be unpaid. The benefit for the seller is that if the short sale goes through, their debts are more or less extinguished, they’ve avoided foreclosure, and their credit score is not hit as hard as a foreclosure.
So why do my realtor friends joke that short sales are actually “long sales?” That’s because the process involves a lot of people and a lot of number crunching (and we all have the same copy of Realtor Jokes 2019 ™ ). Here’s how the purchase of a short sale might go:
1. House is listed for $200,000. That’s what the seller thinks their house is likely worth.
2. Buyer makes offer for $190,000.
3. Seller can take 1 day or many days to respond and might accept the offer, decline the offer, or counter the offer.
4. Once the seller accepts the offer (the bank has not accepted it – just the seller), the offer is sent along to the seller’s bank/attorney/cadre to to determine the value of the house. This factors in lien holders, junior lien holders, etc. who may each want to do their own Broker Price Opinion (BPO, kind of like a comparative market analysis but more specialized) to determine the value of the house and the liens. This can take MONTHS. Literally. Brace yourself.
5. The bank/lien holders finally respond and can either accept the original offer, decline it, or counter it. If they accept it, then you’re able to do inspections (though don’t expect the seller to make any repairs since they are not in a position to spend extra money). If they counter, it’s up to you if you’re okay with the counter.
6. Complete your inspections, determine if you want to change your price or back out of the purchase.
7. If you continue with the purchase (either lowering the price or keeping your original price) then you can schedule a closing with your attorney.
Short sales (or ‘long sale’ har har) can sometimes be a little bit of a hassle. What are the benefits for short sales then? 1. The seller can avoid foreclosure and a large ding on their credit. 2. The buyer gets the house at or even a smidge below market value. 3. The seller’s lender avoids putting the house into foreclosure (which generally would net them less money in the long run)
Overall, short sales are not a good choice if you’re looking to move in the next 60 days but if you have time (or you’re even trying to delay your move into a place for 3-6 months) short sales can be a good option and you might get a very good deal out of the process if you’re patient!