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Home-Buying 101: Short Sales explained
Friday, August 1, 2008
Searching the MLS for a home in the Sacramento area lately? If so, you've probably noticed a large number of homes listed as short sales (they may be referred to as active short sale or short sale contingency or even just "AS" or "ASC")—and they're often some of the lowest priced homes in any given neighborhood. Here are some of the most common questions I get:
Q. What is a short sale?
A. The term "short sale" is used to refer to a property being sold for which the seller owes more than it will sell for in the current market. This is more common in neighborhoods that have seen significant price declines since the peak of the market in 2005, but any seller can end up in a short sale situation if they've borrowed more money against the home than it's currently worth (such as when a home owner has borrowed money and "overimproved" a home for the neighborhood it's in).
Q. How do short sales work?
A. Short sales work like this: a seller has a financial hardship (death of a spouse, loss of a job, job transfer, hospitalization, or sudden change in monthly mortgage payment) and needs to sell a home. Because they owe more than the home is worth, the seller is requesting that the bank(s) that they have a mortgage through accept less than they're owed. Most banks won't even entertain the notion of a short sale if there aren't any buyers ready to purchase the home for the current market price so, as part of the process, the seller puts the home on the market and begins accepting offers. The seller will typically accept the best offer and submit it to the bank for approval.
Q. Are these deals too good to be true?
A. The short answer is: Yes, in many cases these deals are too good to be true. Many home sellers who are in a short sale situation are selling because they're falling behind on payments or are in preforeclosure. For this reason, they're feeling a lot of time pressure to get the home sold before a bank forecloses, so they price the home lower than anything else in a neighborhood to just try to get offers to submit to the bank(s). This leads to multiple offers but doesn't guarantee that the bank will accept whatever sales price the seller accepts. The seller doesn't usually care what the home sells for because he or she won't be making any money on the sale.
Q. Do banks really go for this?
A. Sometimes. No bank is ever eager to accept less than they're owed because they're losing money in the process, and banks aren't in the business of losing money. Of course in many cases the alternative is foreclosing on a home, and that can be a lengthy, expensive process that results in the bank owning a property—and banks are often even less eager to own the home so may be willing to negotiate if they see that it's in their best interest.
But there are some big challenges when buying a short sale. For instance, unlike a foreclosure where the bank owns the property free and clear and can sell it for whatever price they want, in a short sale situation there may be other parties with a financial interest in the property. If a seller has experienced a financial hardship, there may be unpaid taxes, utilities, or contractors who've done work and are seeking payment—and any of these can result in liens against the property. In a short sale, the seller MUST prove to the bank that there is a financial hardship that requires the home be sold and all parties must agree to accept little or no payment and sign off on the sale of the property. Add to this the fact that there may be a second mortgage that will likely be completely wiped out and it becomes challenging getting everyone with a financial interest to authorize the sale. This is often a grueling, months-long process that can ultimately be for nothing if one or more parties deny the short sale request, and this is a major reason why a lot of homes that are listed as short sales eventually come off the market and reappear later as bank-owned REO properties.
Q. What do the terms active short sale and short sale contingent etc. mean?
A. An active short sale is just another way of saying that the home is active on the market as a short sale. A home listed as short sale contingent means that the seller has accepted an offer and submitted it to the bank. Until the bank responds (and this can take months), the listing agent is obligated to continue to market the home as "for sale". Once the bank has accepted an offer, then the property will be marked as "pending" and the normal escrow period begins.
Q. I've called several times about a home that's for sale online and the agent keeps telling me it's already sold. Why is it still showing up online?
A. In the Sacramento area, if a property is being sold as a short sale, until the bank accepts one of the offers that has been submitted the listing agent is required (by the rules of the local MLS) to identify it as short sale cont and it will continue to appear online on searches because the home isn't yet technically in escrow. While this may seem confusing, your Sacramento REALTOR® can help you figure out the status of properties you're interested in.
To summarize, when you see a property for sale that's listed as a short sale this means you should expect a much longer than average escrow period (so don't plan on buying a short sale if you're on a tight timeline), a counter offer on price from the bank (even if the seller has accepted your price), and the possibility that the bank will reject the short sale entirely. If you can find a great home that's either a traditional sale or a foreclosure (also called an REO), consider going with these options first. Good luck and happy house-hunting!
More questions about short sales or other homes? Give us a call at (916) 444-7577 today!
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posted by Rob McQuade @ 1:50 PM,
1 Comments:
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At August 4, 2008 12:59 PM,
Paige said...
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This is a great article. There are so many questions about short slaes, it's nice ot see some answers in one place.
