5 Myths About Short Sales

With the increase in short sales comes an increase in misconceptions. Most people think a short sale means a fast sale; in fact, short sales often take much longer than a traditional sale. The “short” in short sale only refers to the sales price, in that it’s short or less than the amount that is owed on the loan.

Over on Trulia they have compiled a list of five myths about short sales, and the real facts you need to know if you are going to get involved in buying a short sale:

Myth #1: That there is anything typical, standard or normal when it comes to getting a short sale approved.
Fact: There’s no such thing as “normal” in a short sale. Despite the recent goverment “streamlining” efforts that promised to impose a set of standards most banks would follow in processing short sales, it’s still a black box experience for most buyers and sellers.  Buyers submit their offers, sellers sign them and hand over all their financials to their listing agent who submits it all to the bank – and then often no one hears anything back for a few months, if ever.  Other times, the whole thing is approved in a matter of weeks (though this is much less rare).

The bank is in the power position, and can respond to your offer however they want. They may counter at a much higher price and demand a cash payment from the seller.  Or not.  They may take weeks, or they make take six months.  They may approve a way-below asking offer, or require a hundred thousand over the asking price.  Forget the idea of standard, when it comes to a short sale.

Hint: short sale listing agents who have done a lot of recent, successful short sales with the same bank do often have insider knowledge that is the closest thing to a rule of thumb over what any individual bank’s practices are. If you’re a buyer, prioritize short sales that are listed by short sale masters – your agent will know who they are.  If you’re a seller, ask prospective listing agents for a list of short sales they recently closed, including which bank(s) were involved.

Myth #2: It’s smarter for homeowners to walk away than to short sell their homes.
Fact: Increasingly, I’m hearing those who own upside down homes ask why they would bother with a short sale, when they could just walk away with much less effort and drama.  The reality is that walking away and letting your home go to foreclosure is an extremely serious, personal decision – the wisdom of which varies dramatically owner to owner and state-to-state.  Some states allow lenders to sue homeowners who default on their mortgages, and impose state taxes on the mortgage debt cancelled out in a foreclosure, sometimes totalling tens of thousands of dollars.

Other homeowners’ family and financial plans would be impaired much less by a short sale than by a foreclosure.  For still others, it’s pretty much a wash.  For everyone, though, it is faster to recover your credit and ability to take out another mortgage on a new home after a short sale than after a foreclosure.

Given that a short sale costs a seller little or nothing except some time and effort, in many instances it is smarter to make the effort to short sale than it is to walk away.

Myth #3: A short sale is the same as a pre-foreclosure.
Fact: A short sale is a home being sold for less than what is owed on it. A pre-foreclosure is a home that is in some stage of the foreclosure process because the owners are behind on the mortgage payments.  Many short sales are pre-foreclosures, because the owners stopped making payments when they put the home on the market, either because they can’t afford them, they are simply done with the property and don’t see a need to continue paying on it, or because they feel the bank is more likely to approve their short sale application if they are in default on their loan (a position many experienced short sale agents argue is true).

But not all.  Remember, nothing is standard when it comes to short sales. Short sales are closed every day on which the seller is still in good standing on their loan – these are mostly the short sales of owners who elect this strategy out of a desire to maintain their credit as much as possible, but have to move for work or family reasons.

Buyers should not assume that every short sale will come on the market later as a foreclosure; they should inquire as to any foreclosure notices against the property, and keep track of those time frames.  Many a buyer has been surprised when the bank auctions a property they are in contract to buy.

Myth #4: The the buyer’s broker – or even the buyer’s offer – has much to do with getting a short sale approved.
Fact: Writing a clean, well-qualified offer is important to getting a short sale seller to believe that a buyer will hang into the short sale for the duration so they will sign the contract. However, the buyer’s offer and agent have little, if anything, to do with whether the seller’s bank green lights the deal, as needed to close it.

While the bank obviously cares about the price you offer, even that’s not as important as several other factors, including:

• the bank’s perception of the home’s fair market value (as usually indicated by a third-party broker’s opinion, or an automated computer model),
• the seller’s financials (if they have a bunch of cash stashed, the lenders is unlikely to let them sell the place with no contribution from them)
• the completion of the seller’s workout application package and follow-up (squeaky wheel gets the grease and all that, and it’s the listing agent that needs to be that, often, for these transactions to get closed).

Myth #5: That the bank “can’t” do X or “has to” do Y.
Fact: The seller’s bank in a short sale is being asked to waive debt that they are legally owed. They have the absolute right to simply refuse entirely to accomodate this debt forgiveness request. However, if they do choose to waive some or all of the shortfall, they also have the right to place whatever conditions on that waiver. They can ask for more money from the seller – or the buyer (and often do). They can ask the agents to reduce their commissions (and often do that, too).  They can refuse to pay various closing costs, if they want.  And the buyer or seller can counter, accept or refuse any or all of the bank’s demands, too, but know that the banks do have the right to place whatever conditions on the short sale they want.  After all – he, she or it who has the cash (or the mortgage, in this case!) makes the rules!

Martha Hendrick is a real estate expert in Bend, Oregon, specializing in the neighborhoods of Northwest Crossing, Awbrey Butte, Awbrey Glen, the Parks, and Broken Top. For property listings and information about Bend visit hendrick.com.