Should You Consider a Short Sale?

Over the years, I have successfully negotiated and closed on hundreds of very profitable short sales properties for my clients. There are still many short sale opportunities still available. Short sales are a completely different animal than a foreclosure and investors need to make sure that they understand the pros and cons of each. Since I focused on foreclosures/bank owned properties in my last issue, I wanted to take the opportunity here to explain the ins and outs of the short sale process. I hope the information below helps you to determine if dealing with short sales is something you wish to include in your future investment mix.

Why Bother With a Short Sale?

Short sales can be an excellent opportunity to find your new home or investment property at a very competitive price. A short sale can also be a major headache that lasts for months. It is important to have a good understanding of the factors that lead to a successful and profitable short sale experience.

What is a Short Sale?

When searching listings for sale it is fairly common to come across one or more properties listed as a short sale. A short sale is an attempt by the current owner to avoid the foreclosure process by selling a home at a loss in the hope that the bank will take the loss now, approve the sale, and eliminate the costly process of foreclosing, clearing, and reselling a home. Before entering into a short sale contract the homebuyer needs to be aware of how the process works and the potential pitfalls of buying a short sale.


10 Things You Need to Know Before Buying a Short Sale

  1. The price is usually set by the agent & seller, not the bank: The agent and seller may create a very low asking price in order to attract buyers. The bank is normally unaware of the asking price. All short sales will need a third party approval. The bank is the third party and will have the final say in what an acceptable offer will be. Since the bank has the power to ultimately accept or deny offers, their lack of price awareness can lead to delays in negotiating a contract they will accept. The bottom line is that the buyer needs to remain positive and patient throughout the entire process as negotiations can take several months.
  2. A loan owned by 1 bank is usually better than 2: If the seller has loans owned by two different banks the approval process is much more difficult. This is something the agent or the buyer cannot control. The approval process will depend on the willingness of all Banks involved. When the seller only has one loan with one bank, the short sale often becomes more buyer-friendly. To see the entire list click here (Sean put this on the back end of our site)
  3. Low offers can get slow or no response: The bank is typically unaware of the pricing during short sale. When low offers stream into the bank they are often scoffed at and rejected, giving the prospected buyers little or no feedback. Surprisingly, it may also take painstakingly long to hear back even on good offers due to the high volume of transactions lenders are inundated with these days. Many times I am able to find out what offers have been rejected in the past—helping us to identify a good entry point.
  4. I always check market comparables before submitting an offer: It is crucial to perform a market analysis of past sales and current listings in the area before submitting any offer.  This allows me as your agent to recommend an asking price that will be more likely to be approved by the bank.
  5. Do not hang your hat on the property: A short sale does not mean that the process is short. It can be a short process; however, it can sometimes be a very long and tedious process. Don’t get your hopes up for just one property, keep your options open and continue to actively look at multiple properties. Buyers must remain optimistic; the right property will come along. In most areas it is completely legal and risk-free to have multiple offers out at any given time with the proper contingencies.
  6. Sellers with multiple properties and/or strong financially may not qualify for a short sale and/or may be asked to pay the difference: Sellers that own more than a handful of properties or have an extremely large net worth will probably not be eligible for short sale. In some cases the seller will be asked to pay the difference of the sale. The seller might even need to sign a promissory note stating that they will pay back all or most of the debt. This has virtually no effect on the buyer as long as the seller cooperates.
  7. “Approved Short Sales” are usually the quickest: Making an offer on an “approved short sale can speed up the process considerably. An “approved short sale” has a price that has already been given the green light by the bank. This could be due to the fact that another interested buyer made an offer that was approved, but didn’t end up buying the property. These types of short sales are highly desirable.
  8. Some banks may look at strongest buyers and offers: The bank has all the power in approving short sales. The bank may choose the most appealing buyer, which may mean different things to different banks. Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment. Many buyers want to know if they will get a deeper discount for an all cash offer. This is very hard to predict and we will not know until they make an offer.
  9. Repairs are unlikely and seldom done; a credit at closing is more frequent: If there are improvements that need to be made on a home, even if they are necessary to get a loan, it is often unlikely that they will be done. Typically there is some sort of credit issued and the buyer must take the responsibility of fixing anything that is broken.
  10. You must close on time when you get approved: There is no leniency with the closing escrow date as there often is in a traditional sale. Exceptions are rarely made and the buyer must close on time. Because of this, it is important to take care of all loan paperwork immediately after opening escrow. I advise buyers to be extra prepared and try to have the loan finalized a few days in advance of the closing date. If there is going to be an issue that will prevent closing on time, a request for an extension will need to be made immediately. If the request is made early enough, many banks will grant an extension but don’t just assume it will happen.