Confused about short sales?
As many buyers are noticing these days, short sales make up a significant portion of today’s market, as much as 30% in some Portland neighborhoods (May 2011). This isn’t true in all areas of course but the fact is if you are actively looking for a home you will probably come across them. Short sales are complex and can be very confusing. Even the name is a misnomer to some extent, as a colleague joked to me the other day, they’re never short and they’re rarely sales! Here are five things to know that will hopefully give you a better understanding of the short sale process.
1. The basics – The homeowner owes more on the home than it is currently worth. Imagine a person bought a home for $500,000 in 2007 and now it’s valued at $4oo,000. Now imagine the homeowner has paid the mortgage but still owes $450,000. In order to sell the home for the market price of $400,00 the bank holding the mortgage will have to approve the sale of the home “short” of what is owed on the loan.
2. The Process – When making a short sale offer it is first presented to the homeowner just like a traditional sale. This is usually the easy part because the homeowner is already prepared to sell the home without any profit and in most cases just wants to move on. Once the homeowner has signed the offer it is off to the bank’s processing department, which is similar to a black hole. The bank may or may not have had a BPO done (brokers price opinion – the bank hires a 3rd party broker to value the home for them). If they haven’t you will need to wait for the BPO which helps the bank determine if your offer is a fair. Once the BPO is done the bank will spend an ungodly amount of time “reviewing” the offer; weeks to months. If the offer is unrealistically low the bank may simply never respond. Keep in mind that the home will not go pending as it would with a traditional sale while you are waiting to hear back from the bank. They will continue to market the home and other buyers can put in offers. There is some variation in regards to how they deal with offers. For instance, Bank of America will only process one offer at a time but will accept back up offers while they review the first one whereas Chase will take offers continuously which can turn into the dreaded wait-six-months-and-get-bumped-by-a-slightly-higher-offer scenario. Remember that the bank has one goal: limit their losses, for this reason I would recommend sticking near market price or slightly under as they will certainly be able to figure out what fair market value is.
3. How long does it take? – There is no set timeline with short sales. Generally we recommend people to expect a wait time of 3-6 months to get a response at which point the traditional timeline of 6 weeks would begin. I have had agents brag to me about their 90 day response times to give you an idea of what is considered fast. Patience is key. Also, don’t think of a short sale as a sure thing by any means until the bank has accepted your offer and you are in the inspection period. If you find a home you want to buy that happens to be a short sale I recommend putting in an offer and continuing to look, if you find something else you can cancel your short sale offer easily assuming it is still being reviewed by the bank and you haven’t past the 10 business day inspection period.
4. As-Is – Most short sales are sold as-is. More often than not the seller is in a financial bind already and will not be able to pay for any repairs that could be negotiated in a traditional sale. The bank will usually not repair anything for you either. If you are getting a loan this is especially important to keep in mind because you do not want to have any “lender required repairs”. The lender financing your purchase will have the house appraised and certain conditions must be met. An example of this would be a heat source. If the furnace is broken and there is no other heat source you will not be able to get a loan. This creates a situation in which the whole deal will implode unless someone fixes or replaces the furnace…you can imagine who that someone ends up being. When you look at a home that is being sold short be on the lookout for condition issues that may raise a red flag with the lender, you can save yourself a lot of time up front by recognizing and avoiding homes that will have financing issues.
5. Don’t forget to ask -How many loans are there and who is/are the lender(s)? There will usually be one or two loans on the home, two is difficult because both lenders have to agree how big of loss each will take. Has a BPO been done? Ask up front, sometimes the listing agent will market the house at a price the bank will never accept. This tactic is used to get quick offers and jump start the review process. Are there other offers? Remember, the bank will continue marketing the property while offers are reviewed. Are there other liens that the seller or agent are aware of? Oftentimes a homeowner who is selling short will be behind on their taxes, HOA payment etc…
Hopefully this will help you navigate the perplexing world of short sales. If you have any questions feel free to email or call.