There’s a phrase in real estate, “Short sale, Long wait” that has become a beloved cliché among agents, frequently accompanied by groaning and commiserating. What is a short sale, exactly, and why are they so drawn out and difficult? That, my friends, is a very good question and one you may not have learned much about in real estate school.
A short sale happens when a homeowner needs to sell the home for less than they owe. Many things can prompt a short sale, but most frequently it is because of drops in property value that put a home “underwater.” Other contributing factors could also be second mortgages, economic declines, and the homeowner’s financial situation making them unable to keep up mortgage payments. Sellers must meet certain bank standards to be approved for a short sale, and typically have to prove” economic or financial hardship” – the reason they can’t pay the full debt and have to sell short.
The crucial difference between a short sale and a foreclosure is that the homeowner is involved: in a foreclosure the bank strips the homeowner of the property, while a short sale is a deal struck between the homeowner and bank. The bank agrees to accept the loss by letting the homeowner sell “short” of what they owe, allowing the homeowner to unload the property before the debt can worsen. A short sale may include debt forgiveness, but it may not. Homeowners can still be obligated to pay the difference between what they owe and the home’s sale price, but the sale of the home can stop the accumulation of debt through continued missed payments while decreasing the total debt, the interest on that debt, and the amount the homeowner’s monthly payments. Short sales can also be better for underwater homeowners by being slightly less damaging to their credit than a full foreclosure.
Banks benefit by saving money on the process; foreclosures are costly to process and manage. However, short sales have to be approved by all lien holders, so second (and third!) mortgages can vastly complicate the approval process. Got mortgage insurance? The insurer can also be a factor in negotiations. Everyone who owes or is owed money based on the property must approve the short sale for it to go forward.
It’s easy for buyers to become frustrated: short sales can take months to go to contract before taking months to close. It’s a numbers game: short sales are typically priced at an appraised market value or BOV (Broker’s Opinion of Value) – what the bank thinks it can or should sell for – but that doesn’t stop them from wanting and negotiating for more. Some short sales might even be priced lower than market value in the attempt to draw buyers’ interest and start a bidding war. Also, BOVs have an expiration date, causing frequent re-assessments to alter the banks’ perspectives on what sale price might be acceptable.
Even with the cleanest, uncontested offer at list price, short sales can still be a pain. While one might think the math would be simple, each approving party must decide what will cost them more, selling at the offered price, or holding out longer for more, and when it’s all about dollars, some decisions don’t always make sense. Further complicating the matter are the case managers themselves. If the manager is a bank employee, chances are she has a load of them on her desk and might not get to the file as quickly as the buyer and seller might wish. With the amount of overload and hassle involved, many banks hire third-party managers to handle their short sales, presenting a middleman into the process and potentially slowing the short sale further.
The paperwork process for a short sale is more complicated than a typical sale (which is quite complicated enough!) because of the debt and loss in question and any other parties involved, so even after a contract is made, short sales can take much longer than 30 days to get to closing. If the inspection or buyer’s lender comes back with a problem, the whole deal could be thrown back to square one. The bottom line is this: a short sale is rarely very fast. Buyers and sellers attempting a short sale should prepare themselves for a very long wait.
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