Tell Me Again… What is a Short Sale?

I didn’t realize that it had been so long since my last short sale post but it has been two years to the day. What have I been doing? I have been closing short sale deals and helping homeowners out of distressed situations. Since it has been so long since my last post and so much has happened in the world of short sales, I am going to start with the basics and work my way up.

While the term “short sale” has been around for some time, many people still don’t know what it is. A short sale is defined as – when a homeowner sells their home at a price that is lower than the principal balance due to the bank. This type of sale occurs when the homeowner is “under water” (value of the home is less than amount owed) and has to sell the property because of a defined hardship.

Most people ask why the bank would accept substantially less than what they are due; after all, banks are in the business to make money not loose it. Well, simple. A short sale in most cases will net the bank more than a foreclosure. When a homeowner is in a distressed situation and foreclosure is looming, the bank will consider a short sale as a way to cut their losses. However, the bank will first look at other options such as loan modification or refinancing before they consider a short sale. They want to try and keep the homeowner in the house rather than sell it at a loss. If this is not possible then the short sale becomes the next best option.

Next post – “What Are the Defined Hardships?”

Why Does a Short Sale Take So Long to Close?

Imagine that you are a buyer looking to purchase your dream home. It has been a long search and you haven’t found anything that you want to call home. Suddenly one night while searching on-line (for the one millionth time) – you find it. The pictures are awesome and you can’t wait to see it. You call your agent in the morning and go out that afternoon. It is everything that you want in a home, it is available to buy and it is in your price range. Hallelujah! You are batting a 1000 until your agent utters the following words…. “It’s a short sale”.  ‘Great’ you say because you think that means you can buy it faster.

Not really. Just to define terms – a ‘short sale’ is when the lender agrees to accept less in the sale of the home than the owner owes on the loan. In other words, if the homeowner owes $100,000 on their home but can only sell it for $80,000, the bank agrees to accept the lesser amount. Now there are many steps and layers to a short sale but that’s the basic definition. Because of the economy and current condition of the housing market, short sales have risen in popularity.

Back to your story. The house you love is listed as a short sale and your agent is reluctant to submit an offer. Let’s explore the reasons why:

  • First, there is nothing short about a short sale. I will explain the timing involved in a short sale in the next post but suffice it to say that if you need to be out of an apartment in 30 days, a short sale is not for you. 
  • Second, short sales are a relatively new area of real estate specialty. It takes training & constant education to know how to effectively manage a transaction of this magnitude. Many listing agents are not prepared for the level of detail and daily  management involved in a short sale and this can cause a delay in getting it closed.
  • Third, often the sellers are not always cooperative or timely with their documents. All homeowners in a short sale transaction by definition are experiencing a hardship. It could be the loss of a job, death of a family member, etc. and the level of stress & distress can be overwhelming. Putting together the documents needed for the short sale can be too much to deal with for some and their response times are slow.
  • Finally, the banks are overwhelmed. If you consider the rise in short sale requests along with record numbers of foreclosures and you can understand why the response time from the bank can be weeks.

Now given all of the above facts, you still want to purchase the home of your dreams which is a ‘short sale’. What happens now and how long will you have to wait?  Stay tuned for my next post where I give you the timelines from three (3) of the major lenders.

Making a ‘Short Sale’ Really Short

In the last couple weeks, additional proposed legislation has gone before Congress to get banks to do what should only be common sense and common decency. U.S Representative Robert Andrews (D-NJ) and Tom Rooney (R-FL) submitted H.R. 6133, “Prompt Decision for Qualification of Short Sale Act of 2010.”

The bill is at least some kind of effort from Congress—albeit rather belated—to help keep potential buyers of short sale properties from walking away due to the slow or complete lack of response by lenders. They are essentially hoping to put the “short” back in short sale.

In a short sale situation where the clock is ticking, the time factor can be just as big an issue as the financial issue. The National Association of Realtors has backed the bipartisan bill. The 2010 NAR President, Vicki Cox Golder, had this to say about banks’ failure to respond, “Unfortunately, homeowners who need to execute a short sale are severely hampered because lenders (loan servicers) are unable to decide whether to approve a short sale within a reasonable amount of time. Potential homebuyers are walking away from purchasing short sale property because the lender has taken many months and still not responded to their request for an approval of a proposed short sale price.”

Potential short sale buyers are seeing response delays in excess of 90 days and, in some cases, no response at all.

The H.R. 6133 currently has in its language that the banks have 45 days to respond on the offer or to approve with any changes. Failure to respond in that time would mean the offer has been approved. Wouldn’t it be great to see such language remain in the bill from these early stages to final passage? Or will we see bank lobbyists work their magic on various members of Congress to get this language taken out or weakened? Something to watch in the coming months.

This article was posted courtesy of ShortSaleDailyNews.com

Follow

Get every new post delivered to your Inbox.

Join 357 other followers