In the post-crash real estate market, the term ‘short sale’ has become a familiar phrase. Despite this, the actuality of short sales both in selling and buying may not be common knowledge.
Simply put, short sales begin when a homeowner cannot sell their house for enough to cover the mortgage. “Prior to the crash, the banks simply pulled the foreclosure trigger,” says Elizabeth Kayser of Kayser & Associates. Because foreclosures lose the bank money—from the legal expenses to the home maintenance—it wasn’t economically sound. “[Investors] had to figure out, in uncharted waters, how to minimize their losses,” Kayser says, adding “shorts sales have been around forever, but nobody knew what a short sale was because they were very infrequent—and banks only would approve a pay-off less than the amount due in a rare situation.” She explains that the average lender loss on a foreclosed property is approximately 40 percent of the original mortgage—a figure that is cut in half by selling the home as a short sale.
“A foreclosure is when the bank actually takes title to the home,” Kayser explains. “In a short sale, the homeowner gets somebody to buy their home—but that somebody is not willing to pay the amount that is due to the bank.” For sellers in a short sale situation, Kayser advises legal representation. “You need an attorney, because there is no short sale transaction out there that doesn’t have a legal issue involved.”
Marcia Thudium of Coldwell Banker Gundaker explains that there are a few qualifiers other than being upside-down on a loan to sell your home as a short sale property: There must be a hardship, such as loss of job, death of a spouse, divorce or illness, and you must not have assets you could liquidate to pay off the loan. After the home is listed, she explains that contact with the bank (and the bank’s loss mitigation department) begins. “Once I’ve established contact with loss mitigation, they start sending me documents for the seller to sign. Then communication starts between the lien holder and the listing agent.”
This communication can be quite lengthy, explains Barry Feldman of First Bank Mortgage, as a multitude of parties can be involved. The money borrowed from the bank often is borrowed from an investor, meaning multiple parties must agree to the loss. “All parties involved are going to want to see tax returns, order transcripts from the IRS, see the person’s assets…The fact that the seller agreed to a short sale doesn’t mean a whole lot,” Feldman says.
This long process also affects buyers, who must wait for a bank or investor response to the offer. “Short sales take so much effort, time and frustration, it’s simply not worth it,” says Kevin Hurley of Janet McAfee Real Estate. Hurley, who previously represented a short sale property, notes short sales are a better option than a foreclosure, but that he would never work on one again. To a possible buyer, Hurley says “They might very well get a better deal, but be willing to be extremely patient and work with an agent who knows the process and is good with that situation.”
While each situation can vary, Kayser notes that the average short sale approval time is between two and four months. “There is a new normal,” Kayser says. “Banks will never be pulling the foreclosure trigger as quickly as they did.”