Buyers and sellers face difficult and unique problems when dealing with a , the sale of a home for a price less than what the owner owes on the mortgage with the lender agreeing to a “short” payoff on the seller's home loan.
Unfortunately, there are no set guidelines that fit every transaction. Everyone should be prepared for roadblocks, delays and consequences. Understanding the process is critical.
Sellers face the prospect of being burdened with the responsibility of paying the difference between the sales price and the mortgage amount, credit implications and paying tax on any “forgiven” amount. But, buyers experience problems also.
There have been attempts to make the short sale process more efficient. Despite all good intentions, lenders can still inflict pain into the process.
It is not unusual for below market priced short sale properties to sell quickly, but it is also common for many of them to come back on the market after several months.
Buyers should be aware of the many problems that could deter a successful close—starting with the listing process.
Many buyers believe that lenders will automatically accept a full price offer. Most often, a lender will not discuss price until after an offer is submitted. A listing agent may set the asking price lower than market value, but the lender may have different ideas on what they will actually accept.
So, when a buyer enters into an agreement with a seller, there still is a good chance that the lender may require a higher price or set more conditions on the purchase. If the short sale buyer is drawn to the property only by the price and has no intention of paying close to fair market value, then the only thing the buyer has accomplished is to delay the sale for the seller.
When the economy first started to decline and the number of short sales were just beginning to rise, lenders were more willing to accept lower offers. With the large increase, lenders are looking at prices closer to market value.
Being prepared to walk away from the property is important. Having your broker check on the number of lien holders on title could determine if you want to pursue the property. Having to negotiate with several lenders could not only cause delays, but actually indicate that the “sale” would never close.
There are several things that buyers could do to make the offer more attractive to a lender. Most importantly, lenders do not like contingencies, so remove as many as possible. If it is the right property, invest in an inspection and submit an offer with all necessary lender improvements.
Remember, a “short sale” is never short. So, working with a broker who understands the process or a company that specializes in short sales can greatly improve the possibility of a successful close as well as eliminating some of the frustration.
If you understand the process and are able to wait for an indeterminate length of time, buying a short sale that is priced below present market value is still a great way to gain instant equity. That is definitely unusual in today’s real estate market.
Joan Probala is the managing broker for Issaquah Windermere (Windermere Real Estate/East Inc.). She has 30 years of experience in real estate, construction and sales and is president-elect (2012) of the Seattle King County Association of Realtors.