What is a Short Sale?
Dec 2011
The term "Short Sale" means that the home owner is “upside-down” on the property - the amount of principal remaining to be paid on the mortgage exceeds the property's current market value.
In other words, were the property to sell - at current market value - the proceeds would not be sufficient for the property owner to pay-off the mortgage. If the owner has other funds available - i.e. his own savings - he can make up the difference. This is termed, "bringing money to the table" because the owner must pay some of his own money in order to sell his own home and pay off the mortgage. Of course, not every seller has the funds available to do this, especially during a time of personal economic distress.
One option that is in the news a lot lately is for the home owner to "walk away". That is, stop making mortgage payments knowing that the lender will then foreclose on the property due to the owner's default. The soon-to-be-former-owner abandons the property by moving out. The lender forecloses due to lack of payment and the property may then be sold at a trustee's sale auction. If not sold at the trustee's sale, the property "reverts" back to the lender and it becomes what's known as a lender-owned property (also termed "Bank-Owned" or "REO" for Real Estate-Owned). Actually, the above scenario is about as simple as the process gets: it can be even more complicated by bankruptcy or the owner's attempt to renegotiate the mortgage terms with the lender. In any case, it's a very sad state of affairs for the owner.
A Short Sale is a process that might be attempted by a home owner who is having trouble making mortgage payments, who is "upside-down", and who cannot sell the property for its market price because he does not have the money to bring to the table. After finding a buyer for the property and signing a sales contract, the owner/seller appeals to his Lender to allow the sale of the home at this contract price and asks that the Lender agree to accept this reduced amount as payment-in-full to satisfy the loan. These cases are only reluctantly agreed-to by Lenders - as you might imagine - since it means the Lender is accepting a loss. The homeowner must prove real financial hardship and jump through many procedural hoops that take lots of time - six months for a Lender to answer is not unheard-of. Sometimes while waiting for the answer, the homeowner misses a payment and the property goes into foreclosure before the lender answers the Short Sale request. Many times, a Lender will not even know that a homeowner is attempting a Short Sale and indeed, there is no requirement that the homeowner inform the lender. However, the seller attempting the Short Sale most definitely must inform the buyer, and it must be disclosed in the MLS listing. However, Short Sale status is not shown on free real state websites - just on the MLS itself.
To summarize: In an MLS listing, “Short Sale” or “Lender Approval Required” mean a short sale. However, there is no requirement that Short Sale listings mention this in the Public Remarks (where you the buyer can see it) of a publically-accessible real estate website. Indeed, most sellers and listing realtors choose NOT to put the information there because it will reduce the likelihood of buyers wanting to see the property. So you must ask a realtor about a property to which the reply might be, "It's a Short Sale".
The takeaway for you - the buyer - is that the asking price in a Short Sale listing on the MLS may be totally unrealistic and have no chance of receiving the necessary Lender approval. You the buyer could make a full-price offer - or even an offer above full-price - that is accepted by the home owner/seller. But that price might not be sufficient to purchase the Short Sale property - unless the lender approves and is willing to accept the loss. This process is very frustrating and time-consuming for a buyer, especially a buyer who really likes a home and wants a successful purchase.
For all of these reasons, we recommend that Short Sales be left to investor-buyers - not buyers looking a residence for themselves. Investors can put out dozens of offers at a time on Short Sales to see which ones “bite” with a response from the Lender. But that’s not what you’d want to go through when buying a home of your own.
An exception might be if the MLS listing says “Lender Pre-Approved Short Sale”. That would indicate that the negotiations between home owner and Lender have been completed, and they have agreed on terms and price. In this case, only a full-price offer would be likely be accepted, so that’s what you should be prepared for. Even in this case the outcome is less than certain, because although the seller’s realtor might think they have Lender pre-approval, the Lender might not be fully on-board with the deal.
On the other hand, listings termed, “Bank-Owned”, “Lender-Owned”, or "REO" are not Short Sales - they're a different thing entirely. These properties have been through the foreclosure process, are now owned by the Lender, and are for sale on the MLS.
Please note the following regarding Bank-Owned properties:
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They are always sold "As-Is". The Lender/Seller will make no repairs to the property prior to the sale.
They are always sold "As-Is". The Lender/Seller will make no repairs to the property prior to the sale.•There will be no Sellers Property Disclosure Statement (SPDS) containing information about the history of property.
There will be no Sellers Property Disclosure Statement (SPDS) containing information about the history of property.•There will be no Insurance Claims History (called a CLUE report) provided. You must research the property's insurability as part of your due diligence.
There will be no Insurance Claims History (called a CLUE report) provided. You must research the property's insurability as part of your due diligence.The above caveats are factored-in to what the lender believes to be a fair asking price for the property. Purchasing a Lender-Owned property is much more similar to a normal sale. Although there are plenty of good deals on Bank-Owneds out there, banks can over-price a property just like an individual owner/seller. And although there are anecdotal stories out there to the contrary, banks can be quite inflexible regarding price. But you can usually count on 5% discount for an all-cash offer.
As always, call or email with any questions.
