I recently listed a short sale property and quickly learned from viewer comments that many consumers still do not know what a short sale is. This despite all of the talk about it in the news and at the water cooler.
It is easy to forget that as a real estate professional spending each day immersed in the business, that these are complex times and not everyone is up to speed on all that is going on in the real estate industry.
So I will clarify here what a short sale is, what it is not, and the good /bad points of a short sale. This will help to clarify all of the myths and make you completely educated on the ins and outs, good and bad of a short sales.
Many believe that the word "short" relates to the time frame in which a property will sell. I believe that the thought process here is that the seller needs to dump the property, hence pricing it low for a quick sale. THis is not a short sale.
A short sale is a solution for homeowners when they are "upside down." This means that loan amount is greater than what the property would sell for under current market conditions. Short sales first came into vogue in 2008 mostly because of the adjustable rate mortgages that were so prominent during the fast market environment. More on this later. The mortgagee can no longer make the ever increasing mortgage payment. In typical times of increasing equity, a mortgage refinance would be the solution. Ditch the old loan for a better, more manageable fixed rate mortgage.But it is not possible here because all banks need the property to meet a bank appraisal by meeting or exceeding the current mortgage amount. A short sale is also a solution for one who simply is finding a hard time making ends meet due to loss of income and can no longer meet the mortgage payment. Provided there are no other assets and there is real hardship, the mortgagor (bank) or lienholder will allow a short sale.
The property is now listed by a real estate agent who lists the house at the current market price and once sold, the lienholder will take a loss on the difference b/w what is owed and what it sold for.
This is a short sale.
The mechanics of a short sale are anything but easy. The department that handles a short sale is the loss mitigation department. They negotiate the loss with the investor who owns the loan and they submit a claim to the mortgage insurance company. This line of communication, or lack thereof can take months in some cases. The risk is that it can take so long to get the short sale approved, the foreclosure department is waiting to take action on the homeowner and force a foreclosure sale.
Say what! Yes, that's what I said. An offer from a buyer to purchase a short sale property is almost always higher than the price it will sell for at foreclosure.But if it cannot be approved/processed quickly enough, each month the mortgagee is falling behind in their payments, puts that short sale closer to a foreclosure. This is the biggest risk with a short sale. Waiting to close on a property that you cannot buy. I know what you're thinking. The answer is no. You are not in line to buy that same property as a foreclosure. The ownership actually changes and this takes time. It doesn't just transfer over from the mortgagee to the bank. The bank auctions it off, usually buys it back, and then at some point, lists the property with an agent to be sold as a REO (real estate owned property.)
Despite the above misgivings of a short sale, they can and often do represent terriffic buying opportunities for the buyer.They are usually occupied properties which means it is still being cared for and lived in and a buyer can get the property at a great price. Many times you are the only bidder on the property which means no bidding war, and typically you are not paying for the home inspeciton or appraisal until the short sale is approved. Once approved, you can move forward just like a typical transaction. The tradeoff is the wait.
There are good short sales and nightmare ones. The difference b/w them is how knowledgable and expereinced the agent is that is handling the short sale, who is the lienholder, and how close to foreclosure is the mortgagee. As an agent, I have a certain protocol when working with buyers to make sure that it is a viable opportunity. I interview the list agent to be sure all of the critical elements are in place to make it a transaction worth entering into. This is what a good real estate professional will do for you.
In closing a short sale is not short at all, they take typically b/w 90 days for a good one and uo to 7 months on a bad one. If the deal is worth it, then so is the wait. For those who have their heart set on the tax credit, then a short sale may not be the way to go as the tax credit deadline looms near. However, some buyers feel that getting a terrific property at a great price outweighs the tax credit. So many properties listed at lower prices are in such need of repair that are not cheap to do, it is worth the price of waiting for many.
Look for more info on short sales versus foreclosures for buyers and critical info for potential seller in next blogs.
Elise Vetri is a licensed Realtor with Keller Williams, Lincoln, RI and specializes in 1st time homebuyers and HomeStaging for sellers.
For further information on any real estate related topic or listings that represent great values, email your request to elise@elisevetri.com