Josh Sanders, Founder of Shiloh Street
‘Short Sale’ is the buzz word in real estate these days and we haven’t had any shortage of homebuyers coming to us at Shiloh Street asking, “What is a short sale?”
I’m going to answer ‘what is a short sale’ and explain the pros and cons to both home buyers and sellers. With all the myths floating around out there, the truth behind short sales may seriously shock you.
A short sale in real estate begins when a homeowner owes more on their mortgage than what their home is worth. It’s a very common situation in most local real estate markets these days, unfortunately.
If a homeowner can’t make their mortgage payment, they can sell their home, right? Sure. But what if the home is worth $50,000 or $100,000 less than what they owe to their mortgage lender? Well, they can try to work out a ‘short sale’ with their lender.
The homeowner will try to get their bank to accept less than the full amount they owe as ‘payment in full’. Not an easy task! If you were the bank, would you want to take a $50,000 or even $250,000 loss? I don’t think so. 
For a homeowner in trouble, asking their Realtor, “What is a short sale?” may be their only hope to keep from filing bankruptcy.
But for home buyers, short sales can spell ‘o-p-p-o-r-t-u-n-i-t-y’ if they can figure out how to deal with the seller and their bank in order to get a killer deal. That’s the hurdle you have to overcome.
One of the shocking things about short sales is that 99% of the time, the listing price you see when the home is up for sale has NOT been approved by the seller’s bank yet. The listing prices on these short sale homes are deceptively low so that home buyers will make offers. It almost smells like a scam to some real estate buyers.
Most of the time, the seller hasn’t even told their mortgage lender that they’re trying to do a short sale. The seller will just find a real estate agent, get them to list it at a super low price and hope to get a bunch of offers to send to the bank.
NOTE: in most cases, the homeowner doesn’t have the power to accept offers. Their bank has to make the final approval!
The idea is that if the seller gives their bank multiple offers to purchase from multiple home buyers, the bank will have to accept one (although they’re not required to) and take the financial loss on that piece of real estate instead of the seller. Fine and dandy if you’re the seller, right?
But what if you’re one of those home buyers making an offer?
You could be waiting 6-12 months to close escrow on that short sale home! Banks are so backed up with these short sale transactions that they may take 3-6 months just to respond to your offer. Insane, isn’t it?
The banks are being blindsided because they have no idea that the owner of that piece of real estate is trying to sell it. The first word the bank hears of it is when they get an offer faxed to them from the seller’s real estate agent. Kind of a nasty surprise if you’re the bank.
The banks also don’t want to take that financial loss so they may try to prolong the selling process as long as possible in hopes of getting other offers with a higher purchase price. That’s why home buyers may not get a response for 3-6 months once they’ve made an offer.
If there are 2 mortgages on the home by 2 different banks, the short sale process could take even longer because both lenders have to agree to the offer price. Many times, the bank who holds the mortgage in first position may agree to the offer but the bank with the mortgage in 2nd position won’t agree because the offer is so low that they will literally get $0 when the home is sold.
In rare cases, the homeowner will talk with their bank before they list the home for sale. They’ll get the listing price approved and get their bank ready to start reviewing offers. In these RARE cases, you may be able to close escrow quicker but like I said, this is probably only 1-5% of short sale homes out there.
TIP for homeowners trying to do a short sale: talk to your bank and real estate agent BEFORE you list your home for sale. Getting everything approved first and having everyone ready to go will get your short sale home sold much faster. Plus, be aware that your bank may send you a 1099-C tax form for the financial loss they’re taking. Many homeowners don’t realize they may have to pay taxes on that amount so consult with a tax accountant.
So if by some miracle you have 6-12 months to wait and buy a home, you should feel like you hit the lottery if you actually end up purchasing a short sale property because those just might be your actual odds.
So do you want my real response to ‘what is a short sale’?
Honestly, don’t worry about what is. Instead, find out about buying a foreclosed home (bank owned homes)! If a killer real estate deal is what you’re after, you’re better off pursuing bank owned homes.
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