A short sale occurs when the bank holding the mortgage lets a homeowner in financial trouble sell their property for less than they owe on that mortgage. Short Sales are more and more common due to the current economic environment in the United States. It is vitally important that you understand the process of buying a Short Sale prior to making an offer. It can be a very long road that you need to be prepared for in exchange for the potential gain of getting a property at a great discount. A short sale is not a foreclosure, click here for foreclosure information.
For information on selling a short sale or foreclosure home, click here.
Short Sale Overview
The problem with short sales is that there are no guarantees for the buyer. In addition, the bank holding the mortgage often does not allow ANY changes to the contracts meaning that your attorney cannot make the standard edits utilized to protect you.
Short Sale properties are technically owned by the people on the deed. However, the bank holding the mortgage is the decision maker. The bank holding the mortgage opts to sell as a Short Sale in order to avoid foreclosure proceedings and costs.
Although attempting a Short Sale, the bank does what they want, when they want. They have little consideration for potential buyers, the REALTOR involved, the seller or the standard process practiced according to the Realtor Code of Ethics.
How this affects you, a potential buyer is that you must have A lot of patience (6-12 month’s worth) and be willing to move quickly - when and if the bank agrees to the sale. At that point in time, you will have to execute the purchase & sale document within 48 hours - prior to having the home inspected (which is the opposite of the typical buying process). The bank will not negotiate with you at all if the property has problems or requires repairs. The deal will close if you are willing to assume any/all repairs to the property, the commitment on your loan is approved and the bank holding the current mortgage does not change their mind.
Making an Offer on a Short Sale
When you make an offer on a Short Sale property, you should expect to wait several weeks before hearing a response from the bank holding the current mortgage. There is no room for negotiation as short sales are typically many 10’s of thousands of dollars less than the current mortgage on the property. If the property is priced unrealistically high, then the bank will not take a low offer, even if it IS a realistic offer; at least not until the property has been on the market for another several months!
The bank holding the current mortgage does not typically counter offers. In fact, they reject offers for being ‘too low’ - several weeks after submission and sometimes weeks after previously accepting that very same offer!
The bank holding the current mortgage can change their mind at any point during the transaction. Should they do so, you DO get all of your deposits back (typically 5% of the purchase price). You lose nothing besides the time you have already invested and cost of a home inspection.
It is not unusual for the bank to ‘kill the deal’ the day before the closing.
If the listing agent is not familiar with short sales, the process can be very difficult and painful. The bank holding the current mortgage has all the power and oftentimes do not appropriately work with the agent representing the seller (themselves). Ideally, the Listing Agent will stay on top of the mortgage holder and work to get a response from them. Even so, the bank may still choose not to communicate with their agent.
Although the Listing Agent (representing the seller) provided an in depth analysis’ of the subject property in order to educate the mortgage holder about the relevant real estate market and realistic pricing, the vast majority of banks are being shortsighted by not accepting good offers on their Short Sale properties.
The banks are likely NOT to accept your offer unless the subject property has been on the market for at least several months or your offer is well over asking or yours is the highest of multiple offers (if the property is priced BELOW current market values which can happen very quickly). And still, they may kill the deal at any time.
‘Approved for Sale’ and Accepted Offers
After trying for several months to sell a short sale property, lenders may eventually approve a specific dollar amount that they WILL allow the property to be sold for. You will see ‘approved for sale’ in the property description though you still do NOT know how much the bank is willing to accept!
If the mortgage holder does accept your offer, which typically takes 1-8 weeks, they expect a fully executed purchase & sale agreement accompanied by 5% deposit within 48 hours of giving you acceptance notice.
Purchase & Sale
Unlike regular purchase transactions you will execute the purchase and sale BEFORE having the property inspected. The seller/mortgage holder does not allow any changes to the purchase & sale document or to any of the extensive addendums that they also require you to sign.
Your attorney should review the documents the mortgage holder provides even though changes cannot be made to them. Your attorney will ADVISE whether or not you can afford to sign the documents and move forwards. Sometimes the documents are so severely detrimental to the buyer that your attorney will advise against the purchase. (If for example, the documents the bank provided state that you LOSE your deposits should you decide to withdraw from the transaction based on home inspection results; your attorney should advise against moving forwards in such a situation.)
If the mortgage holder allows it, you may have the property inspected at your own expense. If the property contains any defects, the mortgage holder will NOT negotiate with you. You MAY choose to withdraw from the transaction and get your deposits back. You will have paid for the home inspection but are not penalized for withdrawing (assuming your attorney confirmed existence of necessary language in the bank-provided contracts).
If you move forwards with the purchase, you are buying the property in ‘as-is’ condition. You alone will have to deal with any/all repairs or work that the property needs.
You DO get your deposits back if the bank kills the deal at any time. If you do not abide by the restrictions and requirements in the executed documents, you will probably be required to pay daily monetary fines until the deal closes even if the delay is not due to your actions.
It’s a good idea to close on a Short Sale purchase as soon as possible so that the mortgage holder doesn’t have more time in which to change their minds. A frequent problem with closings is that the mortgage holder will not set a closing date or will extend the closing date repeatedly because they claim that they are ‘not ready’. Remember, the bank does expect YOU to be ready to move quickly as soon as they say that they are ready.
A short sale is not a foreclosure, click here for foreclosure information.