What is a Short Sale?
A short sale is one among many strategies to avoid foreclosure. For many homeowners it is a last ditch effort to sell a house at market value before it goes to sheriff sale. It helps the seller stay out of foreclosure while the buyer gets a home that is priced by a motivated seller at a price point at or below market value.
Typically a short sale cannot be negotiated until there is a contract to purchase the home. However, this will depend on the type of loan the homeowner took out to finance their home. In the case of an FHA loan, the homeowner needs to wait to put their home on the market until they have jumped through the FHA hoops and obtained an ATP (an Approval to Participate).
Banks often will not negotiate a short sale unless the seller has missed a payment or two. This too is not always true either, since homeowners will often do everything they can to keep current on their mortgages while running up debt on their credit cards. What is important in a short sale is proving that you are in imminent danger of losing your home to foreclosure because there is more month at the end of the money.
A short sale is often seen
- in situations where the seller has not lived in the home long enough to have built up much equity
- in situations where the seller financed the home without a large down payment
- in situations where the seller has taken out a second mortgage and the “drive-by appraisal” may have been somewhat inflated
- (most recently) because a borrower has lost their income in one way or another because of the COVID-19 pandemic.
Whatever the cause, in a short sale the homeowner owes more on the house than he can hope to sell the house for, especially after paying closing costs. In lieu of a short sale, a seller can opt to take a check to closing or work out some kind of a payment plan with his lender in order to be able to sell the house and avoid foreclosure.
In a short sale situation the buyer shops for a home and gets loan approval just as when purchasing any other house. The seller negotiates the best deal possible. Usually the seller has already given up and doesn’t care how much the house is sold for, as long as it is enough for the bank to approve the deal. The buyer and seller both sign an addendum which amends the contract so that the bank will have a bit of time to approve the purchase contract. Then everybody waits and waits and waits.
There is great disparity between the spirit, philosophy, theory, and intent of a short sale on the one hand, and the reality and practice of short sales, on the other hand. The reality is that the banks can make more money if they let HUD, Fannie, and Freddie take the house back, and so the banks have been reluctant to help out the homeowners by negotiating with the realtors. It’s just too much trouble for the banks, and so they take their sweet time and frustrate everyone.
While the banks are dawdling, the buyers get squirrelly and start looking at other houses. In the end, 85% of buyers back out before the bank finally approves the deal.
Most realtors have been there and done that, but have refused to buy the tee shirt. Many have sworn never to get involved in another short sale again. Why? Short sales are a lot of work and provide little satisfaction or profit. Most of us doing short sales feel like we are throwing the proverbial star fish back into the sea. When we are successful in closing a short sale, all parties involved can feel joy at having helped a family avoid foreclosure and can truthfully say, “It made a difference for that one family.”
My recommendation to home buyers is that if you are considering the purchase of a short sale, please only make an offer on a house that you really like. It is unfair to the seller to keep the house off the market only to have the buyer back out two months down the road. For you see, the foreclosure clock keeps on ticking while the banks are sitting doing nothing or pretending that they are doing something.
Sometimes the reason a short sale fails is because of the presence of a third party lien. These seem to shut down all possibility of negotiation. These liens do not show up in the county court records, but are attached to the house in the property records in the county clerk’s office. Usually the homeowner is unaware that such a paper exists in their records at the county clerk’s office. An extra run to the court house to the clerk’s office can help everyone involved. A seller can get around these liens by consulting a good bankruptcy attorney and getting a stay of bankruptcy prior to the sheriff sale.
In short, a short sale is a good opportunity to get a great deal on a house and help a family stay out of foreclosure. I just beg you to be sure you love the house, because it is devastating for a family facing foreclosure to have a buyer back out. I barely stop short at saying that a buyer has a moral obligation to buy a house they have contracted for, but I really can get up on my soap box on this one.
Buyers: Shop carefully, deal carefully, and know that you want the house. Then go for it — and stay with it. Good luck and happy house hunting.
Sellers: Find someone who has some knowledge and experience in dealing with foreclosures who can help navigate you through the short sale process.
I hope this helps.
This post is a re-working of content I posted on Active Rain on February 17, 2009 in an article entitled, “What is a Short Sale? — A Definition and Some Reflections along with a bit of Sermonizing.” and then re-blogged again on my own website TulsaShortSaleAgents.com on March 3, 2012 (“What is a Short Sale?”).
Copyright © 2021 Deborah M. Durkee. ALL RIGHTS RESERVED — What is a Short Sale?