What is a Short Sale?

In certain qualified cases, where a homeowner owes more on their home than what it is worth today, a lender may allow the homeowner to sell the property for less than the mortgage balance and accept a short sale.  A short sale allows the homeowner to sell their home to a buyer thereby avoiding a lengthy foreclosure process that can be damaging to credit and future ability to purchase real estate.  To qualify for a short sale as a homeowner you must meet three simple requirements: 1) you must have a financial hardship or a verifiable reason why you’re unable to pay your mortgage payment 2) you must insolvency, or in the eyes of the bank you must not have the cash or assets to pay off your mortgage balance and 3) you must have a monthly shortfall or verifiable financials that show that each month you can’t afford all of your monthly payment obligations including your mortgage.  If you meet these three requirements it is very possible that with the right Realtor you will be able to negotiate a short sale.

I often get questions about the timelines of short sales.  From start to finish how long does the process take?  That’s unfortunately hard to say.  It depends on many different factors.  Let’s take a hypothetical example to help illustrate this:

Let’s say John buys a house in 2005 for $500,000.  When he buys it in 2005, he does an interest only loan with a 1st trust deed (loan) with Wells Fargo for $400,000 and a 2nd trust deed with Chase for $100,000.  He does this because by staying under the $417,000 loan limits at the time he buys he allows himself to get the best interest rate at the time.

Then, the market tanks.

Today, John’s house is worth $200,000 and he just lost his job with the recession.  John needs to short sale his house.  In a normal transaction, if John were to sell his house at $200,000 today he would owe $200,000 to Wells Fargo (1st Trust Deed) and $100,000 to Chase (2nd Trust Deed).  NOTE: Obviously, John has been making payments since 2005 in this example so those numbers will be slightly less depending on the type of loans he got in 2005, how much he pays monthly and if he pays over his mortgage payment towards prinipal, etc etc, but for ease of numbers let’s leave those numbers as they are.  In a short sale, John needs to prove a hardship and prove that something bad happened (i.e. his job loss) which makes it impossible to continue making the payment.  A market change isn’t an acceptable answer.  Now, he calls up his favorite Realtor (read: steveploetzhomes.com) and begins the process of short selling his house.

A few important things to know:

1) The short sale process doesn’t begin until there is a qualified, ready-willing-and-able buyer who has submitted an offer.  Only then will the bank begin the process.  From there, they will start by going getting a “short sale package” from the listing agent complete with John’s financials, job history, etc in order to prove that there is a hardship and that he isn’t able to afford the payment.

2) Because the process doesn’t start until there is an offer, many listing agents will under price the house in order to get it going.  For example, John’s Realtor may list the house for $170,000 in order to get offers submitted.  Once these offers are submitted the property is held in “Contingent” status.  Short sales from start to finish can take anywhere from 3-12 months and therefore most Realtors don’t count on the original buyer to stick around.  (Usually after several months, that buyer finds another house and buys it)  But, the Realtor doesn’t let the bank know the buyer is gone.  The bank looks at the offer and counters the buyer (3-12 months later) with an offer of $205,000.  Now, the buyer is gone but the listing agent puts the house back on the market (from “Contingent” back to “Active”) and increases the price to $205,000 in the MLS with “APPROVED Short Sale” in the remarks.

3) Short sales are similar to bank owned foreclosures (or REOs) in that usually the bank will not pay for repairs (including any and all termite damage repairs) and sell it “As Is”.  The advantage is that you can get property at a discount (sometimes), the disadvantage is that you can go in blind sometimes.

Short sales are complex and there are many moving parts.  I recommend you contact me with any questions and I can help you through the buying and selling side.