This weekend I’m going to look at a short sale. I’ve looked at several short sales, but most of them have been listed as approved short sales. This one appears to be unapproved. If you’re in the market, it’s very important that you understand the difference, because one could close within the regular time-frame, and the other could take months to close, if at all.
The Short Sale Process
- The short sale process generally works like this:
- The seller realizes they can’t afford their payments and want to avoid foreclosure.
- The seller contacts the listing agent.
- The listing agent and the seller contact the bank to receive permission to list the property (in most cases.) The lender won’t formally approve the short sale or determine an acceptable price until they have an offer to consider.
- When an offer is received, the listing agent submits it to the bank along with a thick packet detailing the seller’s hardship and comps for the home. The offer must include proof of funds, pre-approval, and proof of deposit (it doesn’t get cashed until you go into escrow).
- You wait, and wait, and wait. The lender orders a Broker Price Opinion to determine whether the offer is a fair market price.
- The lender approves, rejects, or counters the offer. In most cases, the lender must net 82% of the market value after commissions and closing costs.
- If approved, you go into escrow. Once that happens, you’ll need to do your inspection, appraisal, et al, fast. In most cases, you won’t be able to get anything fixed or have the seller pay for the standard inspections because both they and the bank are losing money. In this respect, it’s similar to buying a foreclosure.
Approved Short Sales
In an approved short sale, the lender has already agreed to the short sale in writing. In most cases, this means that an offer was submitted at some point and then the deal fell through, either because the offer was too low or the buyer withdrew it. In rare cases, the bank sets a price before it gets listed.
When the listing is “approved,” the bank has communicated the price it wants to the listing agent. Your agent will find out this number, then it’s up to you to decide if you think the house is worth that. We saw one where the bank wanted $600,000. Given the location and work it needed, we didn’t want to pay that. Honestly, we probably wouldn’t have paid any price because of the location, but banks don’t worry about location.
Unapproved Short Sales
In this case, the lender may not have any idea that the house is for sale, or if they do, they’re not paying attention. A BPO has not been ordered. The seller may not have compiled their hardship package. The home could be priced ridiculously low, or it could be priced appropriately.
If the seller isn’t suffering from a hardship and simply doesn’t want to own the home anymore, the deal will not be approved, no matter how good your offer. A short sale is intended to avoid the cost of foreclosure for the bank. If they don’t feel the original loan is at risk, they have no reason to accept a short sale. It’s very important that your agent make sure the seller is in financial trouble before you even bother making an offer.
Buying a Short Sale
If you want to buy a short sale, you need an agent who is experienced with them, which means he or she has actually closed one. In my case, my agent teaches courses on short sales to other agents. It’s not enough for the buyer’s agent to be an expert though, because the listing agent is the one doing the heavy lifting. Your agent must be sure that the listing agent is experienced with the process or you could be waiting forever. If the listing agent has never done a short sale, then it’s probably best to walk away from that deal.
If the lender counters or accepts your offer, you can still reject the counter or offer acceptance if you’ve decided you don’t like the house anymore. (In California. Other states may vary.)You should also include the standard contingencies for appraisal, inspection, loan funding, etc.
Continue Looking While You Wait
Since you never know when the bank will answer, an offer on a short sale is less binding than an offer on a traditional sale or a foreclosure. You’re completely within your rights to make an offer and then keep looking while you wait. If you find a house you like better, you can withdraw your offer on the first house.
Tips for Being a Good Buyer
When it comes to short sales, it pays to be a well-qualified buyer. If you have all cash, you’re in a strong position because the deal will close quickly once approved. If you have 20% down with a pre-approval letter and good FICO scores, then you’re also in a fairly strong position. If you’ve got 5-10% down and an FHA loan, good luck. These take a long time to close and the bank may not want to take the risk that you won’t get approved.
You can get good deals on decent homes with a short sale, but you need to be prepared with all of your documents and steel yourself for a long wait with a high potential for disappointment at the end of theoffer process.