Wednesday, February 18, 2009
by Andy Gotto
We've had a lot of questions about short sales and how they work so we here at the LFREG thought we might try to shed some light on the subject for the buyers who are contemplating buying a property in short sale status.
A short sale happens when a home must be sold and the seller owes the bank more than the home is worth. The bank does not want to foreclose (take back) the property, so the bank agrees to take a lesser amount for the sale of the home than what they are owed on the property. This is a type of what the banks call "loss mitigation." If the property goes into foreclosure the bank incurs cost associated with possession of the property, and often the value of a home decreases after it sets vacant and without utilities and someone to properly love and care for the home. =) So the bank cuts it's losses. The "short" part of the sale is the money that the seller is short in paying off the loan.
The timeframes on a short sale are usually anything but short.
There are several reasons for the long time that it can take to purchase a home via short sale. Let's go through a quick scenario of why it can take so long. Say a seller borrowed $200,000 to purchase a home one year ago. For whatever reason, (taxes, disrepair, an ill thought out home equity loan, market changes) let's assume the home is now only worth $170,000. The sellers still owe $200,000. So a buyer comes along and offers $170,000 and the seller, knowing that the home will not sell for more, accepts the offer with a contingency of a short sale. The seller with the guidance of the listing agent contacts the bank to inform them of the offer, and the ball begins to roll...
The bank must decide what the home is actually worth before they accept or reject the offer. Generally this involves hiring a third party to do a mini appraisal or two on the home. Sometimes these mini appraisals don't quite match, and the bank will solicit a third, or perhaps a full appraisal, basically they will do what it takes to determine the value of the home. This can take some time.
Once the value is determined,the bank must then decide whether or not it is in their best interest to accept the offer. When we say the bank, we mean the representatives of the bank, and banks have lots of representatives! Sometimes we are even dealing with two banks depending on the type of financing. It would be nice if every bank followed the same procedures for the process, but of course there are thousands of banks, and they all do things differently. The bank reps make these decisions from desk hundreds of miles away, and the contract must cross numerous desks and departments before a final decision is made.
To complicate matters further, the number of these short sales have more than doubled over the last year. While we do see more than we used to here at the Linda Frierdich Real Estate Group, we know that they are a very small percentage of our sales. But to the people at the banks who handle these situations, the increase must seem exponential. The banks are trying to expand their loss mitigation and short sale departments, but they aren't doing it as quickly as we'd like!
All in all, if you are going to buy a home in short sale status, you will need a couple of things. You'll need a good, experienced buyers agent. We've got you covered there! Next, you will need patience. A short sale is not a good idea if you have to move in a certain time frame. These things are typically done on the banks time frame, and there isn't much anyone can do to speed things along. Believe me, we have tried! =)
Feel free to get a hold of us here at the Linda Frierdich Real Estate Group if you have any questions!