In the greater Sacramento
area, short sales
are becoming more common. For those of you who are not familiar with this terminology, a short sale
is the sale of a house for less than the amount that is owed to the bank/mortgage company. Occasionally, homeowners find themselves in positions in which they must to sell their home, but the reality is that their property is worth less than what they owe the bank...perhaps they did a "cash-out" refinance?...perhaps they bought at the peak of the market with 100% Financing? Many banks will agree to accept the proceeds of a short sale
and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale
, the lender can avoid a costly foreclosure
, and the owner is able to pay off the loan for less than what he owes.
A few myths about short sales:
1) "The seller must stop making payments on their loan." Not necessarily. I have negotiated short sales
where the seller has not missed any payments, and were not in default. In those instances, we were able to prove that future default was imminent and that the seller was trying to be proactive with the short sale.
2) "The seller is in foreclosure." Not necessarily. It is possible to have missed payments and not be in full-blown foreclosure. Generally most lenders will not file a formal "Notice of Default" until the seller is 90 days or more late.
3) "Buyers will not want to make offers on short sale property." Not true. Occasionally buyer's agents are reluctant to represent offers on short sale property. Often times, listing agents will take on short sale listings when in reality they have no knowledge base or skill set to successfully negotiate the lower payoff. A shrewd buyer's agent will call the listing agent and make sure they are competent to complete the process, and then submit an offer.
4) "Financial hardship is the only reason a lender will accept a lower payoff." Not true. There are many potential reasons a lender will allow a lower payoff. One such example is that the seller must relocate for some reason, such as to care for a sick relative, or due to employment requirements. Other examples include divorce or legal separation
, illness or injury, the birth of a child, death of a family member, etc. Of course the short sale lender will want some sort of proof of these circumstances.
5) "A short sale where there is a first mortgage and a second mortgage will not be approved." Not true. While this scenario requires diligent negotiation and tends to add complication to the transaction, many 2nd mortgage holders will accept as little as $1,000.00 in lieu of a full payoff. I have even successfully negotiated and closed short sales with three separate mortgage loans.
6) "A short sale means that the escrow period will be short." Generally no. Depending on how much negotiation can be completed in advance, a typical timeline for lender approval can be 2 weeks - 2 months. Once the lender approves the lower payoff, escrow is opened and the transaction timelines proceed from that date.
7) "Short sales are a bargain!" Banks do not give property away. They base approval on recent sales comparables, and actually retain the services of a local agent to perform a BPO (aka, Broker Price Opinion). While I do believe it is possible to get a lender approval for a property a few percent under its market value, purchasing at "wholesale" is just not reality.
8) "The seller of the property can make money from the short sale." Not true. The lender will REQUIRE that the seller nets $0 from the sale.
9) "The mortgage lender is the seller in a short sale transaction." Nope, the homeowner is still the seller! While the mortgage lender(s) must ratify the transaction and agree to lower the payoff so that the seller can sell, the lender is not a party or principal to the actual transaction. The purchase agreement is between the buyer and the seller.
10) "Once I get an offer on my short sale and submit it to the bank, I can stop showing the home to other buyers." This is not something I would advise a seller to do. Buyer offers on short sales are frequently withdrawn for one reason or another. Occasionally the short sale will take so long to negotiate that the buyer's circumstances may change (change in income, family, etc.) and they may decide not purchase the home. Many buyers will continue to look at other homes even after an offer has been accepted on a short sale listing. I do not personally condone this practice, but other agents encourage their buyer clients to do so. In light of this, it is a good idea to continue to show the home so all the seller's eggs are not in one basket.
These are just some of the common questions and assumptions I get from both buyers and sellers regarding short sales
. In reality, most people (buyers
, and even some real estate industry professionals) do not have a clear understanding of what they are and how they work. I have successfully negotiated short sales in the past for seller clients. If you are facing the reality that you have to sell your home, and you owe more than its current market value, I may be able to assist you with this transaction. I welcome your call at 916-342-1372 so we can discuss your options.