Taking the Short Sale Plunge
Short sales seems to have taken our local real estate market first by a drip, then a drizzle, and now by that proverbial storm! When they first appeared on the market, it rather seemed as though we'd see spatterings of them, but in reality, they were the occasional exception to the rule. Some would get contracts, but for a fairly long time anyway, the odds of getting them to close were very small. As a matter of fact, I've rather likened them to the "vaporware" we used to hear about so long ago. For those not familiar with the term, Wikipedia describes it as follows:
"Vaporware is a term used to describe a product, usually software, that has been announced by a developer during or before its development and, therefore, may never actually be released. The term is usually applied to products which fail to emerge after having well-exceeded the period of development time that was initially claimed or would normally be expected for the development cycle of a similar product."
The analogy to Short Sales in real estate is really pretty striking. A home goes on the market as a Short Sale with the owner having every honest intention of getting it sold. In fact, they have a very strong sense of URGENCY to get it sold since more than likely they are in financial distress...perhaps even on the brink of foreclosure. So, when they put the home on the market, in order to substantially increase the likelihood of getting a contract, they often price the home substantially below comparable homes in the area. After all, particularly when there is a glut of inventory on the market, price will drive the offers. That all sounds well and good...except for one thing: the owner of the home may not actually have the full authority to sell it! He can only sell it IF his mortgage holder/s permit it! What makes matters even worse is that those mortgage holders will not tell an owner whether they would accept a short sale before the owner gets a contract on their home ... and in fact are taking a minimum of weeks, but more generally months ... sometimes many months ... to tell the seller whether or not they will agree to the short sale. This leaves buyers and sellers alike dangling in mid-air wondering whether or not they really have a deal.
One of what I'm certain is an "untended consequences" of this short sale phenomenon is that it grossly distorts "perceptions of value" for lenders, agents, and appraisers...but mostly for buyers. Buyers see a pricetag for a phenomenal home that appears to be in their price range, and wonder why, then all the other homes in their price range don't measure up. The reason is simple: the short sale home's very low price is an appealing inducement to get a buyer to accept the substantially increased risk that the transaction will never close (that's the "vapor" part of the comparison!)
Now, in the summer of 2009, short sales still represent high risk, but the reality is there are more and more of them on the market, and more and more of them are actually reaching the closing table. That being the case, many agents around the country who had, while the numbers of "shorts" were still limited, avoided getting involved, are now in the process of jump-starting their understanding of the process. Admittedly, I'm one of those agents having just leaped, head first, into a well-orchestrated effort to help a long time client through the painful process of shorting her home.
Short sales are tricky, to be sure. But in embarking on this journey, I've learned a few things that I thought might be helpful to you....whether you're a homeowner who may also be facing this process, a buyer considering the purchase of a short, or even an agent who is also taking the plunge.
Before beginning this process, it's critical to remember that, despite the name, the only thing Short about the Short Sale process is amount available to pay off the mortgage/s. The process is, in fact, long...taking weeks, even months, to simply find out whether the seller's lender/s will agree to take less than the mortgage payoff/s
If there is more than one lender involved in the short sale, the risk of not closing will likely be amplified
Most sellers' lenders will NOT answer any questions as to whether or not they will agree to a short sale until there is an actual contract on the property
If a short sale is contemplated, call the seller's lender/s to find out EXACTLY WHAT DOCUMENTS they will require. Typical are:
Seller's Authorization to Release Information which will name any and all individuals who the Seller Authorizes to speak with their lender/s on their behalf (seller's agent, attorney, etc.)
Seller's "Hardship Letter" describing in detail why it is not possible for the seller to close on their sale and satisfy existing mortgages
Seller's monthly 'budget'
Seller's employment verification (if still employed)
Seller's tax returns for the last 2 or 3 years
Seller's bank statements for the last 3 months
Seller's pay stubs if still employed (number required varies)
Copy of Listing Ageement
Copy of MLS printout
Complete Comparative Market Analysis (CMA) on the property (though the seller's lender will likely also order Appraisals and/or Broker Price Opinion (BPO) in addition
Marketing history on the property
Detailed offer history
- Copy of Buyer's preapproval letter, commitment letter, proof of funds if cash transaction
Copy of Sales Contract with all riders, disclosures, and addendum
- Copy of Earnest Money deposit
Estimated HUD1 to give lender/s an idea as to how much they can expect to receive from the transaction
Communication is CRITICAL...that means communication between the seller's lender/s and whomever is "managing" this process (generally, the seller's agent); it means communication between the seller's agent and the buyer's agent; it means communication between the buyer's agent and the buyer.
Buyer contemplating a short sale must be PATIENT, PATIENT, PATIENT. Though there are occasions when a short sale can close in a reasonable (60-90 days from date of contract), those are HIGHLY UNLIKELY. Prepare to wait 2-4 months before knowing whether the seller's bank will permit the sale to go through!
While a short sale can be a "lesser of evils" for a seller who must sell, and can represent great savings for a buyer, both come at very high risk. And many agents simply don't want to "get involved" in short sales, either as listing agent or buyer's agent ... in great part because the risk of doing considerable work, expending considerable time and resources, with the prospect of not getting paid at all being so high (since only about 50% of the short sales actually close) than with a "normal" transaction, it's certainly understandable.
The short sale is part of our current market reality. The more we all, sellers, buyers, and agents alike, understand the process, the higher the likelihood everyone involved can make more prudent decisions and in fact become part of the solution. Hopefully, this information has been helpful!