In today’s real estate market, there are a variety of opportunities for home buyers, including homes that are being sold by financially-distressed sellers. One such opportunity is to buy a “short sale”. A short sale is a home being sold for less than the bank is owed. Banks are willing to sell for less than they are owed because they are not in the business of owning property and would rather get the loan and property off of their books. Because the bank isn’t receiving 100% of their loan repayment, there is a special approval process which can make the process of buying a short sale highly uncertain and bumpy.
Generally the short sale process begins just like any other purchase, with the buyer and seller negotiating a written offer. However, the contract contains this one magic phrase: “Subject to lienholder approval.” The lienholder is the bank that owns the mortgage on the home. They are being asked to lose money, so they need to approve the price for that transaction. Without approval from the bank, the transaction will go nowhere.
The process of getting lienholder approval can be time-consuming and bureaucratic. There is also a risk that your offer is rejected. For many homebuyers, the uncertainties of the purchase process may not be worth the risk. If you are pursuing a short sale, I encourage you to work with a real estate agent who is familiar with the process. You also need to be comfortable with the following risks.
- Closing dates may be delayed – This is almost inevitable in a short sale. Some banks may respond in a week or two, while others may take 4-6 weeks to respond. A normal closing takes 30-45 days. A short sale could take anywhere from 1-6 months to close, and it is difficult to gauge accurately. Make sure that your life circumstances allow for this sort of uncertainty.
- Your offer is rejected – Because of the extended review timeframe, it is not unusual for a bank to receive multiple offers. If they have two or more offers, they will likely pick the best one. There won’t be negotiation and it may take you six weeks after your offer to figure out that it has been rejected. Now you need to find another house.
- Multiple lien holders – Many homes have a two mortgages. If the mortgage holder is the same bank for both, you are lucky and still have a single decision maker. However, if there are two banks involved, then they both need to agree on a payoff amount. Oftentimes the first mortgage holder is being paid back in full, while the second mortgage holder is taking most of the loss. Guess what, the losing bank will then negotiate with the first mortgage holder to try and get them to accept some of the loss. If one bank doesn’t approve, the transaction goes nowhere. These are some of the riskiest transactions to get closed. We generally try to avoid these transactions, unless we have a very solid knowledge that the two banks are willing to cooperate.
- There is nothing you can do to speed things up – The process is bureaucratic, and often your agent is powerless to make things move faster. I worked with a buyer on a short sale offer last year. We submitted an offer and waited six weeks for a response. I called the listing agent and lender multiple times each week, and nothing I did made their decision move any faster. In fact, they never actually allowed me to speak with the decision maker. After all of that, they rejected our offer after a six week wait. My buyer didn’t have a home and was frustrated because it took so long to receive the rejection.
- Is it really a good deal? – Just because a bank is willing to lose money on their mortgage does not make the home a “great deal”. I have seen just as many great deals on homes that are not in distress. The only way to know if a house is a great deal is to research the local market. An experienced agent can help with this process.
- Other fees and costs – There may be unplanned expenses for buyers. Sellers are likely not willing to pay for utilities to be reconnected and are not likely to take care of required repairs. In addition, your buyer’s agent commissions may get reduced by the bank, which may alter the fees or rebates from your real estate agent.
Clearly there are opportunities out there to get a deal on a short sale. However, you need to understand the timelines and risk involved with the process before committing to your purchase.