The Long and Short of Short Sales

You’re probably hearing more and more about short sales recently.  Short sales are nothing new, just more prevalent in today’s market.  What are they?  How do they work?  I get that question a lot so the following are excerpts from an article I wrote recently in our local community paper…

A short sale is when a property is sold for less than what is currently owed to the bank.  The sale requires the bank’s approval since the bank will be taking a financial loss.  The pros of a short sale is that it allows an upside down seller to get out of a property and avoid foreclosure.  While a short sale definitely leaves a bad mark on a seller’s credit, it is not as bad as a foreclosure.  Further, the bank is able to unload the liability of the bad loan sooner and typically at less of a loss.  Finally, the buyer is hopefully (but not always!) getting a great deal on their purchase.

From the buyer’s perspective,  a short sale can be a long drawn out process and often take months to complete.  For some buyers this is okay, but not others.

The biggest challenge for many sellers of a short sale is simply coming to grips with the fact that they don’t control their own destiny.  A seller that is upside down on their house often has to spend some amount of time coming to grips with their different, albeit limited options, before the realization that a short sale may in fact be their best case scenario.

Once the seller has swallowed the short sale pill,  our first step is to contact the loss mitigation department at the bank and inform them that the seller has retained our brokerage to assist in getting it sold as a short sale.   The loss mitigation department is charged with minimizing the bank’s losses on bad real estate loans.  The bank is losing money on these deals, and a large part of what takes place during  a short sale is simply the bank trying to make sure they’re not getting ripped off.  Here’s how it typically unfolds…

     Before the bank will cooperate with us, they will require a written authorization from the seller along with full financial records, and a letter from the seller explaining the reason they are unable to make their payments.  Keep in mind – the bank is tasking the seller with proving they are financially incapable of hanging on to the property .  If the bank thinks the seller is able to maintain their commitment, the bank will not agree to the short sale.

     As this information is being organized and delivered to the bank, we have begun marketing the home.  The bank will want to see that we have made a real effort to sell the home at a price that will allow full payoff of existing loans and transaction costs before agreeing to let the home go at a loss.  Periodic price reductions are often necessary to ultimately reach a tipping point at which buyers will begin to submit offers on the property.

     Once we begin to receive and submit offers to the bank, they will then require we submit a BPO, or broker’s price opinion (similar to an appraisal) that uses other recent solds in the area to justify the price that we are asking the bank to accept.  If the bank finds the BPO acceptable, they will then hire their own appraiser to give them a full-fledged appraisal on the property before proceeding.

     The bank then either accepts or rejects the offer, or sometime counters.  In almost all cases, the banks will not disclose to any party the minimum amount they will accept for the property.  This can be extremely frustrating for buyer and seller alike, but keep in mind – the bank is trying to minimize their losses as well.

     Once we have bank acceptance, and assuming the buyer has stuck around through it all, the transaction starts to proceed in a fairly typical manner.  How much time has passed?  Well it often takes a buyer a good three months, sometimes longer, to get an answer on a short sale offer.

     Is there a bright spot in all this?  Yes.  As short sales become more common, more realtors are becoming familiar with how the process works and this in itself can make a huge difference as to how smoothly a short sale proceeds.  Another area of improvement has been the procedures and work flows of many of the loss mitigation departments.  Most have been overwhelmed to this point but the larger banks are responding with more stream-lined procedures and less red tape.  Ultimately, short sales are going to help clear inventory.  The sooner that happens, the sooner we can anticipate a return to a more typical market. 

     For more information regarding short sales, please visit our dedicated short sale site at: shortsalerealitycheck.com