When a home owner can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy and/or foreclosure proceedings. One of these options is called a "short sale".
When a mortgage lender agrees to allow a short sale on a property it means that the lender is accepting less than the total amount due on the home. Not all lenders will accept short sales or discounted payoffs, especially if it would make more sense financially to foreclose. Additionally, not all sellers nor all properties qualify for a short sale.
When viewing homes on YourHomeUtah.com it is technically impossible for us to designate which homes are short sales. You will need to contact us to verify the status of the home for sale. As a basic guideline, if the home price seems to good to be true, it is most likely a short sale.
Many sellers will list a home as a short sale prior to getting approval from the mortgage lender. As a matter of fact, most homes that are listed as short sales have yet to be approved by the mortgage lender as a short sale.
Purchasing a short sale can be a frustrating process. Your Real Estate Agent will work in your best interest to get you the home or at least get a response from the mortgage lender in a timely manner however, it can take months to get a reply.
Many times short sales are listed at a price that would represent a bargain under normal circumstances. This pricing spurs interest from investors and home buyers looking for a great deal. In most cases the listing price has NOT been approved by the lender. Most mortgage lenders who agree to a short sale will collect offers for a period of time before making a decision. For these reasons, many short sales are ultimately sold for more than the listed price. Additionally, lenders are looking for offers that contain no concessions and have a large cash down payment.
While it is not impossible to get a great deal on a great home by purchasing a short sale, here are some things to think about:
1) Sellers Paid Too Much.
If a home sold for $500,000 a few years ago and is now for sale at $400,000, that doesn't mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.
2) Sellers Borrowed Too Much.
Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower's loan balance exceeded the value of the property. Appraisals are subjective, and not all appraisers will place the same value on a home. Although against the law, some appraisers are pressured by banks to appraise at the amount the home owner wants to borrow.
3) Stringent Qualifications.
Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
4) Homes Sell at Market Value.
Lenders aren't naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.
5) Homes Sell "As Is".
If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:
* Suggested repairs disclosed on a home inspection.
* Pest inspections or work necessary to issue a clear pest report.
* Roof certifications or roof repairs.
* Home protection plans for the buyer.
* Deferred maintenance.
6) Length of Time to Close.
Depending on when the Notice of Default was filed, the lender's back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to three months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.
7) Lenders Can Change Conditions.
Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.
8) Lenders Discount Commission.
I don't know of any lenders who are paying traditional real estate commissions to real estate agents. They will want a discount. Moreover, agents end up doing two to three times the work of a conventional transaction and don't appreciate getting paid less to do more work. If you have agreed to pay your agent a certain percentage under a buyer broker agreement, you could be liable for the difference between what the lender will pay and what your contract stipulates, if your agent refuses to waive the difference. (Dorene and I will waive the difference, we will only accept commissions paid by the lendor.)
9) Higher Buyer Closing Costs.
Because lenders rarely will pay for any extras, like a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.
10) Lose Control of Transaction.
If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.
11) Little Seller Motivation.
When the seller discovers that the short sale effect on credit is identical to that of a foreclosure, there is little incentive for a seller to cooperate with a short sale. There is no benefit to a seller to consider a short sale and move out before the foreclosure is concluded, except for peace of mind that the nightmare is over.
When does it make sense to pursue a short sale?
1) The home you're interested in has been approved by the seller's mortgage lender for short sale - or - you understand that the lender may require a higher purchase price to accept the short sale.
2) You have been pre-approved by your lender for the offering price.
3) You have NO contingencies such as a home to sell.
4) You have cash for down payment and closing costs.
5) You're not in a hurry, you have up to two months to wait for an answer.
If you have additional questions please call Doug (801) 913-5869 or Dorene (801) 824-5070, we're always happy to assist you.
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