What is a Short Sale?

One of the original purposes of this blog was to help educate my readers about purchasing a foreclosure and since my busy academic life is now affecting our renovation progress I'm going to revisit this notion.

So let's talk about our house search and the types of listings we considered.

We would have loved to consider conventional listings - houses listed for sale by the owner through a real estate agent. Sadly, once we began looking we realized that it was unlikely we would be able to afford such a house, at least one we'd be willing to live in and in an area that wouldn't require flack jackets.

Next then were the options of listings on the market as foreclosures or short sales. Both of these have been major buzz words since the bottom fell out of the real estate market. Despite all the negative press around short sales I was SURE that we could successfully find, make an offer on, and purchase one of the great deals. I mean, I grew up in real estate right? Wrong... so wrong... The process was so exhausting, fruitless, gross and difficult we ultimately decided it wasn't for us.

What is a short sale you ask? That is a popular question. Here's the quick and dirty:

1. A short sale is a home being put on the market by the owner of the house, not a bank.

2. The owner of the house is often significantly behind on their payments and/or is experiencing extreme financial difficulty.

3. The house is no longer worth what was paid for it or the owner is upside-down in the house. This could be due to market trends or damage/condition of the home.

4. The owner is going to submit a request to the bank to request that they accept less money than they actually owe as full payment for their loan.

5. By no means does "short sale" mean it will be a short process, it can take months and only a very small percentage actually go to sale.

6. Often times many offers are being submitted and considered on a short sale at one time.

7. This may not be true of all short sales, but was true of all the ones we saw. They are not going to be in good condition. We went into some very gross houses and if they weren't gross, they still had significant issues that would need to be resolved. Also, unlike foreclosures the family may still be living in the home.

8. Expect to pay more than the listing price. My agent explained it well when she said they could list the house for $1 if they want. Essentially they're putting in a low price to solicit offers from multiple buyers.

Let me give you an example. Mr. & Mrs. Smith bought their house in 2006 for $400,000 with an interest only loan. In 2009 Mr. Smith lost his job and now Mr. & Mrs. Smith are behind on their payments and are at risk of losing their house. They have their house appraised and because the housing values have decreased in their area their house is now only worth $315,000 - $85,000 less than the amount of their loan.

As a last ditch effort not to be foreclosed on they list their house on the market as a short sale for $315,000. I make an offer of $315,000 and then Mr. & Mrs. Smith must submit this offer to the bank with the financial hardship letter asking the bank to accept my $315,000 to pay off their $400,000 loan (essentially, they are "short" the amount of money owed - hence the "short sale.")

This is where the process hits the stopping point - banks take forever and don't have any real incentive to accept this sale as they are taking a loss. Sometimes it makes more sense for the bank to let the house go into foreclosure if they can make a better profit selling it themselves. The bank will likely ask me to pay more or tell the family they have to bring money to the table both of which may kill the deal. This can take months - I've heard of people submitting an offer and not hearing anything for up to 6-8 months (if ever.)

Is it impossible to purchase a short sale? In a word, no. I know a few people who have successfully navigated the process. Is it easy? No. Is it fast? No. Is it a huge PITA? YES! Can you get a good deal? Maybe.

Things to look for or consider that may help ensure a successful short sale purchase.

1. The seller has already submitted their letter of financial hardship to the bank and the bank has approved it.

2. The bank has already set a price of what they would be willing to accept.

3. A seller that is only submitting one offer at a time. (Often times sellers will submit any and all offers throughout the entire process which makes it infinitely more complicated.)

4. A patient real estate agent who is well versed in the short sale process.

5. Find out which bank the short sale is being submitted to and do research about whether or not they regularly accept short sales.

6. ALWAYS get an inspection!! The house may have fallen into significant disrepair during the owners financial difficulty.

If you're planning on shopping for a short sale I wish you luck and patience. We decided to move on from short sales to foreclosures, a summary of that will come next!