What is a Short Sale?
A short sale happens when a lender agrees to accept less than the amount owed against a home because there is not enough equity to sell and pay for all costs of the sale. Not all lenders will negotiate a short sale and those that do tend to have their “own” set of rules. That is why short sales are unpredictable and are certainly not for the faint of heart.
What does it mean when you see a short sale on the market?
Short sale listings are popping up on the market a lot these days. Unfortunately, just because it is listed for sale doesn’t mean it is obtainable. When a listing agent first meets with his or her seller they carefully discuss comparable sales to determine the homes current market value. Since agents and their clients understand most buyers are not willing to risk the time invested on a short sale, the seller will typically agree to a sales price 25-30% below market just to attract buyers. Unfortunately, this low price can be deceiving and does not mean that is what the home is really worth or what the lender will agree to sell it for.
With conventional listings once a seller and buyer agree to a purchase offer the listing agent is required to change the sale in the MLS (Multiple Listing Service) from “active” to “pending”. This alerts all agents and their buyers the property is now in escrow and no longer available on the open market. Unfortunately, this same rule does not apply with the Short Sale. Even if a fully executed contract has been submitted to the lender and an escrow has been opened, the listing will still show active on the MLS. Not until the short sale contract is completely approved by all parties will the property show pending.
Why do short sales take so long?
Most lenders will not even consider a short sale until (1) the seller is 2-3 months behind in their loan payments and (2) presents the lender with a fully executed contract from a qualified buyer. In some cases the lender will consider more then one contract to purchase the property but that usually depends on the lender and the agent handling the sale. In most cases it is not until these two requirements have been met that the lender will even start the short sale process which consists of the seller completing a lengthy application. Upon reviewing the application which can take several weeks, the seller must prove their hardship by showing the bank they cannot afford the home. If the seller does not prove a true hardship the short sale is usually denied.
Even if the application is approved there can still be roadblocks. The most common is the second trust deed holder. During the last housing boom a large percentage of buyers obtained 100% financing which unfortunately contributed to the current housing crisis. Since sellers must work directly with their primary lender (the first trust deed holder) they tend to forget that even with short sale approval from the primary the second trust deed holder must also approve the sale and agree on a discounted payoff. Sometimes this along with any outstanding balance owed to the homeowner’s association can mean the difference between a short sale closing escrow or cancelling it out and forcing the home into foreclosure.
What happens to the buyer waiting for a short sale to be approved?
A large percentage of buyers waiting on the approval of a short sale offer will cancel the contract before the lender makes their final decision in the matter. Sometimes it’s because they just get tired of waiting for a response and decide to start looking at other for sale properties. Other reasons for cancellation may include:
  1. 1. The lender does not approve the seller’s application of hardship
  2. 2. The primary and secondary lenders cannot agree on a discounted payoff
  3. 3. The lender responds to each buyer with a price higher price then agreed upon between the buyer and seller
  4. 4. The lender accepts another pending offer
  5. 5. The property goes to auction before the transaction can be finalized

Note: A buyer does not usually proceed with any of the contract contingency items (inspection, appraisal, review of seller, title and/or HOA documents) until final lender short sale approval.

Should you look at short sale listings or get involved with buying a short sale?
As you can see buying a short sale property is not an easy process. Everything has to line up just perfectly for the short sale to be approved, for your offer to be accepted, and for the property to close escrow. And once again you have to remember that even if the property is still shown as an active listing the bank may already have a contract in escrow and one or more back up offers/contracts. Plus you have to keep in mind that it can take 6-12 months for a lender to approve the actual short sale so although really knowing where the seller stands in the approval process can be difficult it can basically mean the difference between the home actually selling or not.

So you can look at Short Sale listings and you can even make an offer but as you can see it is VERY IMPORTANT to understand first where the home is in the short sale process (how long it’s been on the market, does it have a pending offer and/or offers already and second, the delays and possible risks of this type of transaction.