What is a short sale?

I am hearing that question a lot…short sales have become such a part of my vocabulary in this market, that I forget that they may be a new concept to some people.  When a property is listed as a short sale, it means that the owner owes more to the bank than the house is worth—and that the owner doesn’t have the money to make up the difference after the sale.  The owner is asking the bank to “forgive” part of the loan.

Banks don’t want to own real estate, so the bank may agree to this in order to avoid the expensive foreclosure process.  However, sellers should be very careful, and consult with an attorney and/or a CPA about the tax ramifications and potential for a deficiency judgment.

A seller in this situation will write a hardship letter to the bank explaining the situation: lost job, death in the family, whatever the cause for the misfortune that resulted in the inability to pay the mortgage.  If the bank agrees to “work with the seller,” this puts a hold on the foreclosure process.

However, the bank will not say at this point what offer they will accept, so the seller puts the house on the market hoping to get offers.  Once there is an offer, the bank will evaluate the offer, examine the hardship letter and evidence, inspect the seller’s financial situation, and make a decision.  This can take months: the Short Sale is a Long Process. 

For an investor hoping to get a good deal, this process may be worthwhile.  For a buyer looking for a home to live in, this process is generally unbearable.  I have had short sale experience from both sides: clients of mine interested in moving to Danville fell in love with a home that was a short sale.  I explained how unpleasant the process was likely to be, but they were in love and wanted the home.  So we submitted an offer.  Weeks went by with no response from the bank.  My clients wanted to time their move with the sale of their home in another city, and had no way of knowing when it would be the right time to put their house on the market. 

After six long agonizing weeks, another offer was submitted to the bank that topped ours, and the house was sold to the other party.  My clients said “never again” would they look at short sale homes.

On the selling side, I had a listing that went short as values declined.  We received an offer and submitted it to the bank in January.  There were two banks (common enough) because there was a first and a second.  The second was ready to deal after two months, but the first was far behind; we were “in line” and the queue for short sales was filling at a rate of 100 a day.  When the bank with the First finally responded (in JULY) with a counter offer and an offer to the Second, the Second said, “it’s been more than 6 months, we will no longer work with this file.”  Not a logical reply from a holder of a second mortgage who is going to get nothing if this ends up in a foreclosure.  So after nearly EIGHT months, nothing came together and the property is currently in foreclosure.

Once a property is bank-owned, the process for a buyer is simple.  Not particularly friendly and always “as-is,” but a straightforward transaction that will be quick and relatively painless.  The bank will require signatures on their own paperwork, sometimes require their preferred title company to be used, and will be understandably nervous about loan qualifications, but the process will move swiftly through the bank’s assembly-line process.

I wrote an offer this week for clients on an REO (which stands for Real Estate Owned, it’s the way banks refer to the properties on their books).  This was a house in Walnut Creek that was listed as a short sale for $720,000.  As a short sale, it received an offer and the home went pending “subject to lender approval”.  For whatever reason, the bank did not approve the sale, and the home went to foreclosure.  Now on the market as a bank-owned property for $552,000 (with outstanding loans totaling over $830,000), the bank has received five other offers.

Indeed, multiple offers are not unusual with the bank-owned homes.  I like to track the market in Antioch, where it crashed first and seems to be recovering, and where you can pick up a cute house for $100,000.  I was recently involved in helping an investor make an offer on an Antioch REO: they wrote at full price: $104,000, and received a counter asking for “best and highest” bid.   Not wanting to write an offer over-asking, this home sold to another buyer.

All short sales are not created equal…on tour this week (see previous article), I saw one in Alamo (on Kell) that is “approved” for that price according to the agent, although the bank will be losing about $500,000.  Another property in Alamo (in Stonegate) is a short sale that had an approved offer but the buyer couldn’t qualify for the loan, so it came back on the market.  In that situation, the process will be swift (swifter anyway): the bank has already done the time-consuming work.

If you decide to go after a short sale, find out how many banks are involved and how short the sale will be.  The fewer banks and the smaller the loss, the more likely it will be to happen.  Then, have patience…the quickest short sale is still a long process!