Short Sales – The Long Explanation

Short Sales account for 16% of all homes for sale in King County.  Depending on the neighborhood and the price point, that number can be as high as 50%.  Buyers are often drawn to the short sale properties since they can typically sell for three to ten percent less than comparable properties that are not distressed.  Lured in by the potential price savings, buyers often fall in love with short sale properties.  Only to have their heart later broken by the endless waiting and confusion.

What is a short sale?  As defined by Wikipedia, it is a real estate transaction where the proceeds from the sale are less than are owed to the debtor(s).  In more understandable terms, a short sale is the sale of a home where the sale price is less than the amount of money owed to the mortgage company or companies.  An example would be:  Mark and Sarah can no longer afford the monthly mortgage payments on their home since Mark lost his job last year.  They bought the home in 2007 for $400,000, and took out a mortgage for $370,000  Since the housing market is not as robust as it was when they bought their home in 2007, the house is now only worth $325,000.  They owe $45,000 more than the home is currently worth.

Since Mark and Sarah want to do the right thing and avoid foreclosure, they decide to attempt a short sale.   Mark and Sarah put the house on the market with the help of their favorite real estate agent.  In just one short week, Mark and Sarah accept an offer on their house for $320,000.  Now the “Short Sale” madness begins.  IF this was a traditional, non-distressed sale, Mark and Sarah would be handing over the keys to the new owners in thirty to forty-five days.   But this is no traditional sale.  What happens after the sellers accept the offer is that the bank now gets involved.  The sellers must submit the purchase and sale agreement, all of their financial information and often are required to write a hardship letter.  The bank requires all of this documentation to help prove that the sellers are indeed distressed.

Once the banks have all the requested documentation, then the seemingly endless process of waiting begins.  Depending on the bank, the skill level of the listing agent, and the cooperative nature of the sellers, the waiting process can take forever.  And by forever, I mean best case scenario of three months, worse case scenario a year.  Or never.  Every time one of my sweet buyers asks me about short sales, I try to prepare them for an eternal wait.  And it is more than just waiting.  The banks are not easy to contact and they do not do a whole lot of communicating.  Months can go by without a peep from the bank, even if the listing agent were to call twice a week to ask for an update.  Imagine how heartbreaking it is to fall in love with a home and wait for months on end to hear news if and when you will be able to buy your dream home.

Another scary thing about short sales?  After waiting three or four or twelve months, the bank can just reject your offer.  Or they can go back with a price that is higher than the price that you and the sellers agreed on.  Or they could accept the offer.  It’s a gamble anyway you swing it.  In the case of Mark and Sarah, the sale went fairly smoothly.  After all the documents were submitted to the bank, the bank came back with an approval (after 118 days of waiting) for the sale price of $330,000 .  The original offer was for $320,000, but luckily the buyers had enough money and loved the house enough to pay the additional $10,000 over their offer price.  From that moment of “lender consent”, the buyers had 30 days to do the traditional inspection and loan approval process.  Luckily, everything went smoothly and they closed in 30 days.  To put that in perspective, if the today was the day that the buyers had submitted the original offer to the sellers, they wouldn’t be getting the keys to their new home until March 10th, 2013.  And that is a best case scenario situation.

I am in no way opposed to Short Sales.  They help the sellers avoid total financial devastation and they allow buyers to get a house at a more affordable price.  As long as the buyers understand the implication of waiting, and that all that waiting does not guarantee the bank will agree to sell the home, or will agree to the amount in the original contract, then Short Sales can be the right choice for some people.  A good rule of thumb to remember is that it will likely be at least six months from offer to keys.  Six.  Months.  If you can swallow that pill, than a short sale just might be right for you.

 

 

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