Short sales are increasingly becoming a significant part of our local market. No, I am not talking about selling a pair of shorts, but the graphic does seem to fit with the title :)
A short sale, in basic terms means to sell below value. More specifically, in real estate, it is when the bank (or lienhlder) will allow the sale of a property and accept a payoff for less than what is owed on it.
Short sales are great when they are needed. They offer a homeowner the chance to get out from under a house that they may be "upside down" in. Many times, short sales are used when a negative market fluctuation hits an area. Like what is developing right now.
Imagine that an area that has had high appreciation for several years in a row. Yes, imagine it. Usually, out of state investors will fuel a high appreciation period, however, once an equlibrium is found, it may start to fluctuate the other way therefore creating problems for people that may have bought at the end of an upward appreciation. Sound like it could be a set-up for our local market area? I am seeing an increasing incidence of this type of situation, and have recently been involved in a short sale on behalf of one of my clients.
There are other conditions that may lead to short sales, but are not often found in our area, such as a lack of regular maintenance. The easiest way to put this is that the neighboring homeowners let their houses go to hell. Another would be a trailer park may have moved in across the entrance from a nice subdivision (doesn't happen often) , or a declining commercial area may have been rezoned industrial, therefore plummeting the value of local housing within the immediate area. Again, while these factors could possibly happen but usually don't in our local market area, the most common factor is an overall decline in market values.
The point is - there are many factors that may play a part in depreciating properties. To list them all could take all night, but the basic point of the matter is that property can and does depreciate from time-to-time and when it happens in California, 'shift happens'.
When your property is worth significantly less than what you owe on it, and you find that you need to move if you have a significant financial reversal or have a job transfer, you may need to ask the bank for assistance to be able to sell it. This is the basic of a short sale. Don't you wish it were that easy? Well, in truth, it can be.
The dark side of short sales is that sometimes people take advantage of this practice and are commonly referred to as equity thieves. They may use a short sale to devalue your home for the sole purpose of purchasing at a reduced rate and selling for a significant profit. If you are a consumer reading this - I highly suggest talking with a competent real estate professional (me!), attorney, and/or accountant if you are approached before signing anything to do with a short sale.
A short sale consists of only a few steps and a lot of paperwork. While there is no such thing as "standard commission splits" because of The Sherman Anti-Trust Act, you can expect agents specializing in short sales to charge commissions that are higher than what you may be quoted for listing a property because of the added paperwork and liability. I do have the experience to help you handle your short sale situation.
The steps of a short sale:
1. Initiation - In order to start a short-sale, you have to initiate it with the bank. If you wait until you have an offer on the table, you could be too late unless the purchaser is willing to wait at least 3-4 weeks (and often longer) for an answer on their offer. A good real estate agent should be able to calculate fair market value on a piece of property after first seeing the property. If you see that your market analysis and estimated seller's net proceeds is significantly lower than what you owe (I generally look around a $10k difference), we need to discuss the possibility of a short sale.
2. Motivation. The seller's motivation for sale is a significant part of the package. If you have a significant unanticipated problem such as loss of job, forced job transfer, divorce, death in the family, or other financial reversal, the odds of getting a short sale approved by the bank improve dramatically. If you see that the market has declined for your home and you do an analysis of your home and find that you owe more than it is worth and you think it is a bad thing and you want the bank to just eat it, and otherwise you are not in any financial distress... you just want to be cagey about it after working out some numbers and there is no real financial distress or serious need to sell, your mortgage holder will most likely not approve your request for a short sale. Live your life and be happy.
3. Calling the bank - The bank will undoubtedly route you through several different departments before you get in contact with the person you need to speak with. Tell whoever answers the phone that you would like to talk to someone about the company's policy on short sales - don't give up. Or save yourself some trouble and go direct. Ask for 'The Work Out Desk'. Yes, this term is actually used in our area and asking for it will immediately get you to the right person. When you finally get in contact with the person you need to speak with - BE PREPARED. You need to have the full names of everyone on title, social security numbers, dates of birth, and loan number(s). While in some areas of the country an intermediary such as a Realtor or your attorney can do this if you have given them written authorization to do it, in Southern California the principles need to contact the mortgage holder directly.
4. Getting Estimates - When speaking to the bank, you may need to give professional estimates. A Competitive Market Analysis (CMA) will give you an idea of market value - make sure you have comparables that are very similar and less than ½ mile from subject property. If there are repairs needed on the property it would help to have a contractors bid (two similar bids are helpful). The bank will most likely want these figures if you can provide them.
5. Preliminary Confirmation - A bank will never give you a "guarantee" but you may be able to give you a preliminary confirmation. This generally will consist of you asking if they think they can work it out and the banks asset department saying , we may be able to get it down in the $$ range and to check back later. If they say they cannot comment leave it alone - at least they know what you are doing and are now working off the same page. If you have cash assets be prepared to bring some money in to close escrow. You might get $1,000-$2,000 for moving expenses, but that is about all. The bank might even send you a check for a small amount just to get you out of the house.
6. Reality Bites - Chances are that the mortgage holder will not do anything on your request for a short sale approval until you have a bona-fide offer to purchase your property. Yes, that involves putting the home on the market at a competitive price and hoping that a patient buyer writes a somewhat realistic offer. Given that the listing agent will need to write the listing as 'subject to short sale approval by the mortgage holder', this in reality proves to be a significant deterrant to any prospective buyer. With a lot of homes to choose from, what buyer will willingly get involved in a short sale situation because lenders are notoriously slow in approving short sale requests. Realistically, the first buyer on a short sale property bails out, but the second buyer gets the benefit from having the process started. If you need to sell (and only those who need to sell should be involved in this process anyway), the process goes on as long as it needs to. Besides, if a short sale process were real convenient, everyone would be doing it. Thus, Reality Bites.
7. Getting an Offer - In your disclosure documents, you will need to disclose that the sale price of the home is contingent on successfully negotiating a short sale with the lienholder and that all offers should allow for a lengthy acceptance period. You as the seller will know that I am letting agents know this - I have had very little problems with people low-balling just because of this and when they do I explain to them the negative sides of a short sale to the seller which would prohibit them from taking anything less than fair market value (explained later).
8. Submitting offer to bank - Much like a foreclosure, a short sale must be negotiated through the bank. You will send them a copy of the offer with a proof of funds or loan approval letter with conditions, if any- this highly improves your chances of an acceptance if they know the buyer is qualified. We will submit the offer and ask for an answer as soon as possible so we don't lose the buyer.
9. Wait for answer from bank.
10. Call bank 3-4 days later - inquire about offer.
11. Wait for answer from bank.
12. Call 3-4 days later (we are now at day 6-7) Wait. Repeat. And repeat.
13. Call bank and let them know offer will expire soon.
14. Call bank the day before expiration of offer and let them know you may lose the buyer if they do not respond.
15. Lose the buyer.
16. Get phone call from bank - This will generally happen a day or two after the original contract period has passed (law of averages). If you get an accepted contract by bank, you must have the purchaser sign an addendum stating that they are willing to complete the transaction (since the bank took so long and their offer expired). Sometimes, you will get it before the time expired but the banks never do anything quickly :) . That is just the way it is.
17. Go to close as normal - You will be in contact with escrow and your Realtor (me!) and will close as normal. OK, it may not be really normal, but your Realtor (me!) will guide you through it.
Keep in mind that the bank may say no. Unfortunately there is not much you can do about it if this is the case. Remember 'The Golden Rule'? Not the 'do unto others...' version.
Most banks will say yes and this is why: If a bank has to foreclose, it costs them thousands of dollars and then they have to sell it for market value, often at a LOWER value than what you are offering because it is a foreclosure and often the owners tore the place up on their way out. If they sell it as a short sale, they skip foreclosure and generally net more.
Most banks will 1099 the sellers for the difference between the owed amount and the sale price. It is considered income which means it is taxable - make sure you as the seller with a short sale talk with a tax attorney or CPA. Remember Realtors are not attorneys or accountants and should not represent ourselves as such. Some banks may get a voluntary jugement signed by the sellers in order to do the short sale - again, have them talk to attorney or CPA about what this means to them.
I hope this answers most of your questions about "what is a short sale" or "how does one work". I know this was a long post but I tried to condense it as much as possible. This should at least give you a grasp of what it means and the basic process.
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