If you are a buyer that’s been looking at homes for sale in the bay area, and a low priced short sale grabs your attention, it’s important to do a little research before jumping in.
Unlike regular sales or even foreclosures, things are not quite as they appear with short sales. 

Here are the 8 things you have to know about short sales before you submit an offer:

1. What is a short sale?

When a home owner can’t afford to pay their mortgage and the market value of their home is less than what they paid for it,  they don’t have a lot of options. 

  • Option 1 is to just let the bank foreclose (or take back) their home, which could ruin their credit history for up to 7 years (usually about 5). 
  • Option 2 is to try to sell the home for market price, give all proceeds to the lender, and ask for forgiveness for the rest of the loan amount.  The lender will not necessarily agree to this, but when they do, this is a short sale.

2. What is the benefit of short sale?

  • To the seller, the benefit is a smaller hit to their credit history.  A short sale will generally ruin your credit for 2-3 years – much less than a foreclosure. The other benefit is usually living in the home mortgage free for the duration of the short sale.
  • To the bank, the benefit is not having to go through the expensive foreclosure process, only to end up selling for even less (or risk owning the home for an extended period of time).  The bank is not in the real estate business, nor do they want to be, so if the short sale makes any sense at all, they will go for it.  They will however attempt to get maximum price for the home.

3. What is the process of buying a short sale?

  • First, the buyer should be prepared not to see any inspections or too many disclosures for the home they are going to be submitting an offer for because the seller is going to do the bare minimum to sell this home.  The seller is not going to spend any money on any inspections or repairs because they are in financial distress and have no money to spend.
  • Once the buyer sees the property and does their research they would submit an offer just like any other transaction, the only difference being the short sale addendum which contains various short sale disclosures and explanations.
  • At this point, 95% of the time the seller will accept their offer as either the first offer, or as a back-up offer if they already have an offer accepted.  This acceptance does not mean ANYTHING, so you would not want to schedule any inspections or commit any funds to the home at this point.
  • The offer is then submitted to the bank for their approval.  This process could take anywhere from 1 month to a typical 2-3 months, but I’ve heard of horror stories with short sales taking as long as 2 years for approval.
  • The bank will either accept your offer, counter your offer with what they would like for the home, or ignore your offer.
    • If your offer is accepted, you proceed like any other transaction.
    • If your offer is ignored its up to your agent to keep following up to get a reply.
    • If your offer is countered, it’s up to you to either accept the counter price, or to counter back with a new price, causing the process to re-start – though typically much faster than the first waiting period, you can expect to wait another month or two for a reply.

 

Aside from all that, here is what’s important to know and keep in mind before proceeding with a short sale:

  1. Short sales are always accepting other offers (and the one  you’re looking at is no different). 
    • This is because the sellers never know if the original buyer will still be there by the time bank approval comes in. 
    • The only time a short sale listing is not accepting other offers is if there is something illegal going on with either the listing agent, or sellers – Either both or one of them is trying to defraud the bank. 
  2.  The bank has the right to toss out the current offer and accept any of the back up offers, if they so choose. 
    • This can work in your favor, or against you depending on how strong your offer is.
  3. The goal of a short sale listing agent is to submit an offer to the bank ASAP, because it might take months for the bank to reply back with any kind of answer, so the standard operating procedure is to price a short sale below market value to get a quick offer and submit it to the bank right away.  Once the bank comes back with an approved price, a short sale is MUCH MUCH easier to sell for the listing agent because a new buyer can come in, offer that price, and not have to wait for months for the bank to reply.
    • If you do see that the home you’re interested in is an “Approved Short Sale”, you need to find out what the approved price is, because it is often not the listing price.  If this price is acceptable to you, this is a great opportunity to buy a short sale without going through the painfully long wait.
  4. So the big thing to keep in mind with a short sale is that the price they are asking for does not mean anything.  (Even less than a regular seller).  
    • For example: the list price for the home you’re looking at is $575K, and you offered asking price .  Two months from now the bank might come back and say “we’ll approve it at $675K”  as a counter offer.  Why such a big difference?  Because the listing agent priced the home low to get a quick offer, and you didn’t do your research, so you if you can’t afford a home for $675K, you just wasted 2 months waiting for nothing.
    • You or your Realtor need to do your research, find the right comparables, and really understand what the market value of the home is, not just look at the listing price.
    • If the main thing you like about this home is the low price … it’s not going to happen. 
  5. Generally speaking, submitting a back-up offer on a regular sale is a bad idea because it does nothing but motivate the current offer not to back out since the home is so desirable that someone else has submitted a back-up offer.   With a short sale, a back up offer is a good idea because the original buyer is likely to find another home by the time approval comes in. Even if they don’t,  if you submit a stronger offer than the first offer, there is a good chance that the bank might pick yours even if it’s not in first place. 

 

The key things to be aware of before submitting an offer on a short sale are: 

  • The most likely selling price of the home
  • Understand the lengthy waiting period before approval.
  • Understand that you must continue your search for more homes since getting into one particular short sale has a fairly low probability.

 

If you are curious about the short sale prices in your area, or would like to speak to a Realtor regarding possibly buying or selling a home, CONTACT US today!

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