A Buyer's Guide to Short Sales
What is a "short sale"?
A "short sale" is a situation where a property owner/seller is trying to sell a property where the sales proceeds does not pay off the existing mortgage(s). The owner/seller has no equity. The term "short sale" or "short pay" refers to a process whereby the mortgage company must agree to a reduced payoff (short the payoff, thus the term short sale) for the sale to take place. All the costs of the sale, the escrow/title fees, transfer taxes, commissions, property tax prorations, etc. must be covered and the seller receives nothing (except debt relief).
Why Would a Mortgage Company Allow This?
A mortgage company/lender may agree to a "short sale" to prevent a foreclosure. Most short sale properties are in "default". The owner may be behind on their mortgage payments and/or the property taxes and the expenses are adding up. The property is the security for the mortgage and if the lender takes the property back in a foreclosure, the lender will then own the property and will have to sell it on the open market. The lender will incur all the foreclosure costs as well as the selling costs. If the market value of the property is less than the loan on the property, the lender may cut their losses by agreeing to a "short sale." Also, too many foreclosure properties limit a Mortgage Company's lending ability.
Why Would the Seller Want This?
The The sellers have either moved to another city, lost a job, gotten a divorce, changed financial status or have had health issues, for whatever the problem, they no longer want or can pay for the home. If they are allowed the short sale, they (usually) will not owe the bank money after the closing. On a foreclosure, the lender has the right to go back to court and sue for the difference between what they sell the home for, and their out of pocket costs on the home from the foreclosure process as well as the loan shortage. The Seller's credit scores may drop about 250 points with a short sale and 350 with a foreclosure.
If it is so Easy, Why Don't they ALL do this?
The problem is that a mortgage company/lender does not own the property, only the mortgage; they do, however, have to agree to the "short sale" for the sale to go through. If they do not agree to forgive the loan shortage, and if the seller is unwilling or unable to make up the shortages to complete the sale, there is no sale! If you're the buyer in such a transaction, you've just lost out and wasted valuable time. The seller can't sell if the mortgage company disallows the "short pay" and the deal dies.
If there is no equity, why would the mortgage company disallow the sale?
Here's where logic disappears. Many times the department that handles the "short pay" negotiations, sometimes called the "workout" department in loan servicing, is not interested in saving the bank money. They are only interested in recovering the debt. Even if it would cost the bank more to foreclose, they'll sometimes hold out if they think the owner has assets. Even if it means losing you as a buyer and the sale falls through. They will want to see the owner's financial statements. If there are any assets available (savings, 401K, IRAs) they want the owner/seller to deplete those assets before the bank agrees to a "short pay". And they sometimes want the real estate agents that are trying to make the deal happen, reduce their commissions. If there are any "junior liens" or second mortgages, they'll be wiped out, and sometimes these second mortgage holders want to go after the seller to recover money. The bank's decision process takes time, and meanwhile, if you're trying to buy the property, you wait, And wait. And wait some more, until the bank has made a decision which can be days, weeks or months. The odds are about 60/40 that the sale will be allowed. Just because the seller agrees to your price does not compel the bank to agree to a "short pay".
But I really want that Home!
How can you increase your chance of success? Let's consider a strategy to maximize your odds of acquiring a "short sale" property. You'll still have to be patient since every situation is different. Understand that many "short sales" are not successful. The first step is to work with a broker/agent that understands the process. This is so very important. If the "listing agent" has little or no "short sale" experience, the odds are against you and your buyer's agent. The listing agent must do their homework ahead of time before your offer is written. The listing agent will have to build a compelling case for the lender to accept your offer. Unfortunately, the bank usually won't talk to the listing agent unless they HAVE a contract. Many lenders have an on-line place to get a short sale packet to make the process more conforming to what they the lender wants. The listing agent should have a list of the bank's required documents and should have collected everything in anticipation of your offer. The file will need the seller's financial information, tax returns, retirement fund statements, bank statements. They will also want a hardship letter describing why the Seller deserves a short sale. If the property needs repairs, there could be inspection reports, repair estimates and photos of the property that you include with your offer. The listing agent should provide the bank with a CMA (comparable market analysis) showing what the home is worth to help substantiate your offered price. The listing agent should also provide the bank with a marketing history of the property, newspaper ads, MLS (Mulitple Listing System) printouts, all to prove that the seller tried to sell at a price that would not have been a short sale. And to show they seller isn't just "dumping" the property. Here's another wrinkle. There is a high probably that even the seller's mortgage company may not have the final say. Most loans are insured, so the MI (mortgage insurance) company will have its own set of guidelines and requirements since they'll have to reimburse the mortgage company for all or a portion of any loss. They may have the final authority to approve a "short pay." There are barriers to your purchase that are beyond the control of the agents, the seller and even the seller's mortgage company. "Short Sales" can happen! But it may take patience!!
How To Protect Yourself During the Process?
Your offer should include an escape clause if the bank and/or MI (Mortgage Insurance) company does not give a favorable response within a reasonable time period. If the sale is not approved by the bank and the MI company within a certain time frame, you can terminate the transaction and get your deposit back and look for another property. In Kansas City, our board has a certain Short Sale Addendum that accompanies properties. Make sure any contingency time periods start after the bank and MI give approval of your offer. Don't spend money for appraisals and inspections before obtaining bank andMI approval. If you're getting a loan, you MUST get approved before making an offer. You also cannot write an offer with a contingencies on the sale of your own home. Keep in mind, this is on bank time where nothing happens on the evenings and weekends. While you're waiting for an answer from the bank and MI company, the property typically remains actively listed. The listing agent must present all offers to the seller. Your offer could be rejected at any time. Make sure your buyer agent and the listing agent have done their homework and know the processes for short sales and know what to expect when dealing with the bank and mortage insurance companies.
