Some properties are subject to a short sale. A short sale is used when the proceeds from a sale will not cover the loan on the property. In order to close the deal, the lender agrees to “short” their loan, ie. take less than the full amount.
Fundamentally, lenders don’t like to do short sales. And, they are under no obligation to allow one. The lender must voluntarily agree. Currently, only an estimated 15-20% of all short sale requests are approved.
Typically, the seller participates in a short sale to avoid being foreclosed upon by the lender. Sellers take a big credit hit when they go through either a short sale or a foreclosure. But, a short sale allows the seller to get a future home loan quicker.
Buyers do short sales to get a property they want at a great price. The hope is that they can get the property below market price. But, short sales are neither quick nor easy.
The following are key questions to consider before pursing a short sale:
Who makes the decision on a short sale?
The lender has a loss mitigation department which deals with short sale requests. Each staffer has 200-300 files at any one time. To approve a deal the staffer must have a short sale file that is complete, a legitimate hardship by the seller, and an initial determination that the deal makes financial sense for the lender. Once the file meets those requirements, a senior person makes the final decision.
What is the first step to pursue a short sale?
First, you must write an offer and come to an agreement with the seller. Then, the seller submits your offer and asks for the lender to approve the deal.
Can we get the lender to agree to a short sale before writing an offer?
Lenders will often tell a seller that they will consider a short sale. But, the process doesn’t even begin until a written offer is submitted.
What requirements must the seller meet to get a short sale accepted?
Some think that a lender will agree simply because the seller is “upside down” on the value of their home. That’s not generally valid. Lenders typically require a hardship to approve a short sale — something like death, divorce, job loss, disability, etc.
Can I make a really low offer on a short sale property and get it accepted?
The lender will engage an appraiser or real estate professionals to estimate the property’s value. If the proposed short sale is substantially less than the value, the lender will likely refuse it. Buyers can usually get a good price but the lender won’t deviate too far from market value.
But, aren’t banks desperate to avoid a foreclosure? Banks don’t want to take back properties. But, they won’t give away the store. If they think they will net more money in foreclosure or from mortgage insurance, they will likely decline to cooperate.
If I offer the asking price, do I get the house?
Not always with a short sale. The seller sets an asking price to draw an offer. But, the final decision is really up to the lender and they are under no obligation to agree.
How long does it take to get a short sale through?
Short sales are not for buyers who need to be in a home in 30-45 days. Lenders often take a couple months to approve or decline the short sale. In some cases, it can take up to six months for an answer. Short sales should not be pursued if you need to be in a home by a specific date.
We’ve submitted an offer for a short sale and haven’t heard back from the lender.
How can we make them communicate? You can’t. Lender rarely notify anyone of where an offer stands until it is accepted or rejected. And, they can get annoyed if harassed. Remember, the lender is under no obligation to approve the short sale.
If the lender doesn’t like our offer, will they give us a counter-offer?
Typically no. The lender generally either takes the offer or rejects it.
What if there are multiple loans or other claims on the property?
The process gets far more complicated if the property has loans made by multiple lenders or other debts such as a court, child support or tax claim. Each individual party must agree to give up all or part of their claim. One holdout will kill the deal.
Will the lender postpone a foreclosure because we’ve submitted a short sale?
If the lender has not approved your short sale request yet, they will probably not hold off a foreclosure. If your deal is approved, they may cooperate but don’t count on that. Of note, in Idaho, you must close on short sale at least five days before a foreclosure is scheduled. Idaho law provides that an owner in foreclosure can rescind a transaction five days after closing. Idaho title companies won’t record until that period has run.
Reasons to Consider a Short Sale
U Get a great deal probably a bit below market price
U Don’t need to be in a home by a specific date and can wait 60-180 days
U Are patient & don’t need to have news for weeks at a time
Reasons to Avoid a Short Sale
U Need a house in the next 30-45 days
U Can’t risk not getting the house
U Can’t handle not hearing anything from the lender for weeks at a time
U Want to provide a lowball offer way below market price