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 alot 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. 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’ve been lead to believe.
I'd like to say it depends on two factors for successful short sales. The first is that the owner make all the upfront calls to the lender and has the short sale package from their lender ready to go. The second is that the authorization letter for the Realtor be at the lender as soon as the house is ready to go on the market. An agent should not put a house on the market until all of the owners paperwork is ready. To many agents wait to tell the owners to get it together AFTER the house is already on the market. I've successful closed two short sale listings in less than 60 days and I have a third one now that is with the final negotatior after 45 days. Prep work is key!
Those are really good points and great advice, especially if you're listing the home.
How about selling price? Are you seeing any offers getting rejected by the lenders as short sales only to have the house listed for less after once it becomes bank-owned?
You just said a mouth full there....."short sale" ..that's like calling a bald guy..."Harry"...
Hello,
I would like to welcome you to Active Rain!
I hope to see more of your blogs in the future!
Educate us, learn from others and don't forget to have a little fun while you're at it!
Take care!
Hello Eddie,
Welcome to Active Rain and congrats on your first post! The opportunities to learn and network are incredible here. Best of luck to ya!
-Keith
Eddie, Welcome to Active Rain and congratulations on your first blog post. Good luck and happy blogging.
Hey Eddie,
This is a great community for learning as well as presenting. Check out some groups and some blogs, but watch out - it's addictive!
I look forward to reading some of your future posts.
Welcome to the Rain, make sure that you browse the site and become familiar with everything this site has to offer. The more you browse the more you will learn. I have found this site to be really helpful to me. If you have any questions, please don't hesitate to email me, I will do whatever I can to help.
http://www.Doreneshirley.com
Welcome to Activerain. Congratulations on your first post. That is a great way to start. Make sure to get around and check out other blogs so you can cut the learning curve!
Welcome to Active Rain and congrats on your first post. Be sure to spend some time looking around at what and how others are blogging here. It is a great education and lots of fun. Looks like you're off to a great start...keep it up!
Welcome to ActiveRain!
If you would like a few tips on getting the most out of ActiveRain, please visit my blog Welcome to Active Rain. It has a few simple steps of what to do now that you have joined.
If you ever have any questions, just let me know.
Troy Trumm
Eddie, welcome to activerain and congratulations on your first post.
I see that you are new to Active Rain and I just wanted to welcome you. I hope that you enjoy it as much as I do and that you find it a great resource.
I see that you are new to Active Rain and I just wanted to welcome you. I hope that you enjoy it as much as I do and that you find it a great resource.
I see that you are new to Active Rain and I just wanted to welcome you. I hope that you enjoy it as much as I do and that you find it a great resource.
I just stopped by to welcome you to Active Rain. I hope that you find it a great benefit to your business and that you see the value that I have also found here. I am from Charlottesville Virginia and using Active Rain has really increased my business!
My main blog on Active Rain is here: Charlottesville Real Estate Blog, not the link at the bottom of this post.
I hope you will look into the many groups as there are some great group both local and broad based,....
enjoy!
Eddie,
Great post and GREAT to see you on ActiveRain! There are so many different groups here to contribute to and learn from.
The Internet is where everyone in this business needs to be, and position is important-but the internet is a communication tool to assist in servicing our clients and customers in the best, most efficient ways. ActiveRain is a great multipurpose, interactive site that is a great learning tool and referral/revenue source-either directly or through links and sites associated with ActiveRain. I've been here a couple of years now, and-for a FREE site--this has been one of the best investments of time and energy for me.
Welcome fellow "Rainer"! - Pam