Short Sales and the Related Issues

      A short sale is a sale of real property in which the proceeds from selling the property are less than the balance of debts secured by liens against the property. This happens when the property owner experiences financial distress and cannot afford to make the current loan payments. In such a situation, the banks/lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.

      Short sales are complicated and time-consuming transactions. It is because they require that the seller negotiates at least two separate agreements. One is the purchase and sale agreement with the buyer and the other is the agreement with the bank(s) to accept less than the amount owed. When the seller gets an offer for a price less than what is owed, he or she will approach the bank and ask the bank to release the lien even though the loan will not be repaid in full. The bank will then review the buyer’s offer and the seller’s financial documents. In addition, the bank will analyze the market value of the house through a Broker Price Opinion (BPO). This process usually takes 2 – 3 months. Once the bank completes their own analysis, they will issue a short sale approval letter. However, it is important to note that the bank might turn down the buyer’s offer, even though the seller has accepted it. The average short sale transaction is approximately 6 months from offer to close and it could be as long as 18 months. Being patient is the key for this process.

      When a lender approves a short sale, that approval is often conditioned on certain requirements.  Some common conditions include the following:

1.      The seller connot receive any proceeds from the sale. The bank is allowing the loan to be paid off for less than what they are owed. If there is any extra money from the transaction, the bank requires that it be paid back to the bank.

2.      It is important to note that some short sales may be priced somewhat less than the comparable sales. Some agents purposely list them low to attract multiple offers. Therefore, the offer a bank accepts might be higher than the listing price because the lender often picks the highest priced offer. Buyers should also note that short sales may not be listed for far less than their fair market value to convince the lender that the property will not sell for a higher amount. The property must be marketed at a fair price.

3.      Short sale properties are usually sold “as-is” and no repairs will be made.

Any unpaid balance owed to the lenders is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties. Therefore, this may cause the short sale to fail.

      If you are buying a short sale property, be sure to ask your agent to find out all the lien holder(s) and how much is owed to the lender(s). This is important because the information will help you determine how much you need to offer in the purchase and sales agreement.