I recently wrote about the process of buying a foreclosure, in this article I will cover my least favorite transaction, a Short Sale. These real estate transactions are called short sales because the bank that has the loan on the house for sale will get shorted on the amount owed them. It works something like this; the seller, who maybe lost their job and can’t make the payments, owes $800,000 on the home and the most they can sell it for is $600,000. In this case the Short Sale bank might agree to accept the $600,000 and let the owner sell the house.
The only consistency in Short Sales is the rules change all the time, as a matter of fact, there really are no rules, we are talking the Wild West. In the above example the bank might agree to let the owner sell and loose $200,000 (actually much more after selling cost; commission etc.) but they could just as easily agree only to do so it they seller signs a promissory note agreeing to pay back the money at some future date. This is less common because most owners would then just tell the bank to go ahead and foreclose. When that happens the bank usually cannot go after the seller for lost money. The main reason people Short Sale rather than foreclose is the hopes of it not affecting credit scores as much and the opportunity to buy another home in just a few years vs. almost 10 years.
Now that some of the basics are out of the way what is this process like for someone buying one of these homes? First, my advice to my clients is this is the last type of property you want to buy. Sure, if you just love a house and it is just right for you, go ahead and make an offer even if it is a Short Sale, just don’t get too attached because chances are the deal may fall apart. Second, if you really want the house just hang in there, it may take months, many months, maybe over a year.
Why do you have to wait so long? The transaction starts normal enough, you write an offer, the seller accepts it but the offer is contingent on the Short Sale bank accepting the offer. That is what takes so long, waiting on the Short Sale bank.
Why do so many of these escrows fall apart (this list is long)? The buyers may get tired of waiting and find another home thus cancelling the Short Sale escrow. After waiting several months for the Short Sale bank to approve the deal you get out-bid by another buyer. The seller might change their mind and decide to let the bank foreclose on them so they get a few extra months free rent. The Short Sale bank might decide the offer price is way too low and counter at something much higher than the buyer can afford (this is not necessarily unreasonable as sometimes listing agents price short sale too low in the hopes of getting an offer before the foreclosure). Your inspection period usually does not start until the Short Sale bank has accepted the offer and if you find something bad at that point you may have just spent several months waiting for nothing.
Like I said, if the house you love is a short sale make an offer just don’t get your hopes up.