A short sale happens when the proceeds from a sale of a home are not enough to pay off the seller’s mortgage balance. In other words, the seller has come up short of money. The seller’s lender(s) must approve this type of transaction, as the bank loses money on the loan.
Property values have dropped since their peak in 2005, and that means that many sellers cannot recoup what they paid for the house several years ago. The best option for homeowners would be to hold on to the property until the home appreciates in value, but sometimes the home must be sold quickly due to relocation, death, divorce, etc.
Sometimes the homeowner can no longer afford the monthly mortgage payments due to the rising interest rates of Adjustable Rate Mortgages (ARMs), job loss, illness, unforeseen expenses, and the general downturn of the economy. Many of these sellers were qualified for no-downpayment (100% financing) loans in which they have no equity in the property. In this circumstance, the owner has limited choices, one being to refinance the home (which is not always possible), another being to sell the home, or to let the home go to foreclosure.
When a mortgage goes unpaid, the bank starts proceedings to terminate the borrower’s right to the home. I call these homes pre-foreclosures. Often, a bank will hire a trustee or law firm to conduct the proper advertising, paperwork, and sale of the home. Many times, the home goes to public auction, and is either purchased by an investor or, if no one bids on the home, it is taken back by the bank to re-sell on the retail market.
I’ll talk more about pre-foreclosures in another blog, but most “foreclosures” that buyers see listed on the Multiple Listing websites are homes that have already been foreclosed upon and have been taken back by the bank. These are also known as Bank-Owned, or Real Estate Owned (REOs). These are generally listed with local realtors, and buyers can go visit them.
- Both short sales and foreclosures will significantly affect the seller’s credit. It may also affect the ability to purchase another home; typically the waiting period for a person with a short sale on their credit report is less than if they had a foreclosure on their record.
- If doing a short sale, sellers must not walk away from the transaction with a profit.
- The “forgiven debt” on a short sale may be considered taxable income. Check with your local tax professional.
- Be aware that when you buy a short sale or foreclosure, you are typically buying the property in as-is condition. Depending on how you write your offer, you can still have a home inspection and cancel the contract if you change your mind. However, the bank will typically refuse to make any improvements to the home.
- When writing an offer on a foreclosure, you can expect the bank to respond to your offer in about 3 business days. They will either accept, counter, or reject your offer.
- When writing an offer on a short sale, I always tell my clients not to expect any updates for months. It’s pretty typical for a bank to not even review an offer for 4-6 months (sometimes longer!) .
- Make sure that your agent stipulates in the contract that your contingency periods/earnest money deposit do not start/get cashed, until the third party (the bank) delivers written approval.
- If the seller of a short sale property were to damage or remove items from the property, it may be difficult to penalize the seller because they are not profiting from the transaction. You should talk to your realtor and local real estate attorney about your recourse. However, DC area contracts state that the property must be in generally the same condition as when you wrote the offer, otherwise, a buyer could refuse to proceed with the sale.
- You can select your own settlement attorney, but sometimes going with the bank’s settlement attorney can save you money.
- When dealing with multiple offer situations in both short sales and foreclosures, the bank only wants to look at the top offer, so make sure you submit your highest and best. They will not tell you the amount of the other offers.
MY OPINION ON SHORT SALES AND FORECLOSURES
I love selling foreclosures. The price listed in the MLS for a foreclosure has already been approved by the bank. However, you CAN negotiate a lower offer. You get a quick response from the bank and they are generally easy to work with. Banks want to minimize their loss and sell it quickly. They are not emotionally tied to the property. It takes about 1 to 2 weeks for the bank to deliver the written approval (bank addendums), but after that has been received, they can go to settlement quickly. Often within a week, if a cash deal, and a month if getting financing. No one from the bank attends settlement, so the process takes half the time.
I think short sales are a waste of time. I have written many offers on short sales, and none of them have been accepted, even if the offer is fair market value. The price in the MLS has NOT been approved (there are some pre-approved short-sales, but it is still a lengthy process). It is a frustrating process for everyone involved — buyers, sellers, and agents — because of the lack of communication from the bank. As I mentioned earlier, it can sometimes take 4-6 months before an offer is even reviewed. It’s hard for the buyers and sellers not to get their hopes up. At this time, the home may still remain on the market and other offers can come in.