Short Sale – Not As Easy As It Sounds

August 8, 2008

Courtesy ABC News“Short sales” of homes are great deals, right? Well, not always.

A “short sale” is a desperate act by a seller that also requires a bank to accept some misery. The seller paid more for the home and the bank lent more than what the property is now worth. The seller is desperately trying to avoid foreclosure and hopes the bank will agree to cut its losses and accept less than what is owed on its mortgage. The buyer hopes to grab the property at a bargain.  That might be wishful thinking. It sometimes happens, but not without patience and not at the bargain basement price the buyer typically expects.

According to Tampa Realtor® B.G. Holmberg “It’s a mess, and will take 8 to 12 weeks to close. Many buyers are lost along the way. But if the buyer can be patient it is worth the effort.”

The snag is that the bank has to agree to the short sale (loss), and before that takes place the bank will insist on several steps. The bank will want the seller to sign a promissory note for the loss. Most sellers refuse, because they can’t afford the payments in the first place which is why they are selling short. Banks move slowly, especially if they are losing money. An appraisal is required so the bank is confident the property is actually worth less than the mortgage.  And the seller has to prove hardship in order for the bank to agree to the short sale. This all takes time.

The buyer must be prepared to purchase the home “as is.” Mortgage companies typically will not pay for repairs, roof inspections or “home protection plans.” Obviously, the seller is in no position to take on these obligations.

Before making an offer on a short sale, the buyer should do considerable homework. Ask the seller if the bank has been approached and is willing to consider a short sale. Determine if there is more than one mortgage on the property, and if there are any other liens or encumbrances on the property. If so, the chances of closing are slim to none. Know the value of the property. The bank or mortgage company will require an appraisal and will only consent to the short sale at or near Fair Market Value.

The bottom line is that “short sales” sound like much better deals than they are. The reality is the seller paid too much for the property. For example, consider a home originally purchased for $500,000 and financed for $450,000 is now worth $370,000 and on a short sale you can buy it for $360,000. Sounds great — $500,000 home for $360,000. NO, it is a $370,000 home for $360,000. It’s a good deal for the seller because of the new tax treatment on the forgiveness of debt, and for the mortgage company because it avoids the expense of foreclosure. However, for the buyer it is a very long road for a small reward.

If this sounds like a lot of work to purchase property at or near appraised value you are right. But if you have the time and know the property it can be worth the effort. One word of advise, if you are considering a short sale, retain a Realtor® who is experienced in short sales to guide you through the process.