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"Short
sales", and "pre-foreclosures" are terms often incorrectly used interchangeably.
Although a short sale can be a pre-foreclosure, it is not always. On the
average, 60% of short sales are in pre-foreclosure.
WHAT IS A SHORT SALE?
A
Short
Sale is when the seller is trying to sell their home for less than what is
owed on it. If the seller will be unable to pay the difference at the time of
closing then they will need to obtain the bank/lenders approval (“3rd
party approval”) to “sell short” of what they owe before the home can be sold to
another party. A home isn’t necessarily in pre-foreclosure for it to be a short
sale; they may have been able to keep up with the payments avoiding the
pre-foreclosure process.
WHAT IS PRE-FORECLOSURE?
Pre-Foreclosure If a
homeowner doesn’t make timely payments and falls too far behind, the homeowner
will eventually receive a notice of pre-foreclosure. Once a homeowner is made
aware that their home is in pre-foreclosure, they either make arrangements to
get caught up, decide to sell (which may or may not equate to a short sale) or
the home eventually is foreclosed upon.
RealtyTrac.com and other similar sites:
When a
homeowner is notified that his home is in pre-foreclosure, that information
becomes public record. Many websites such as realtytrac.com have systemized a
way of profiting from the information by making the property’s information as
well as the homeowner’s information, available to those willing to purchase a
membership to their site. In most cases the homeowner is unaware and even
shocked to hear that their situation has become public.
THE CONS TO CONSIDER WHEN MAKING AN OFFER
ON A SHORT SALE
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Offers are subject to 3rd party approval
(banks/lenders). Even if the seller accepts the offer, the offer is not
legally accepted until it is accepted by the 3rd party.
Currently it is averaging between 2-3 months before getting an initial
response from the 3rd party to the offer. Patience is important.
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Banks aren’t bound by the same rules as agents and due
to the amount of short sales and number of them accumulating on their desks;
they frequently make decisions that are unfair or unpredictable to both the
buyer and the seller.
For instance, you can make an
offer on a short sale and it may have been in line for review on the bank desk
for over a month, because an agent is required to keep the home listed as active
until the bank has accepted an offer, other offers can continue to accumulate
and compete with the first one submitted. Cash offers are going to compare
better than those with lending and requests such as closing costs and/or
contingencies are considered a burden frequently turned away or even ignored.
The Lender/bank can collect and review all offers at once and choose which to
accept vs. in a typical sale where the seller is bound to make a decision within
a reasonable amount of time.
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An offer on a short sale is frequently competing with
investors paying cash. Investors will make offers on several short sale
homes in the hopes of capturing a small percentage at a good price. They
don’t have an emotional attachment to the home.
-
If you do obtain 3rd party approval, transactions are
currently averaging 3-4 months to close and with little to no guarantee of
getting the home. If you are a first time home buyer and/or do not have a
solid loan, it’s possible that by the time you’re ready to close, your loan
program may no longer be available leaving you with no possible way to
purchase a home, the short sale or any other.
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You have the expense of paying for an inspection on a
home that chances are you may not end up purchasing. The other option is to
wait until you have 3rd party approval; however a bank is more
likely to accept an offer that agrees to purchase a home “as is” as they
prefer to not have to revisit the file. If you are fortunate you may be
looking at a home where someone else already paid for the inspection and has
given it to the owner to share with others but this is not the norm.
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The majority of homes in a short sale situation need
work, typically deferred maintenance and occasionally a lot more. Since many
of the short sales are also in pre-foreclosure you can expect that many have
likely had limited funds to keep up with the general maintenance of the
home.
-
In my experience, 95% of agents will not or do not want
to work with short sale transactions. Because of the time involved,
frustration of not being able to assist in the process, and often times the
reduction if not loss of commission by the end of the process, there is
little to no incentive to enter into a short sale transaction for most
agents.
WHAT IS A FORECLOSURE?
Foreclosures are still auctioned at the courthouse steps. There is no
opportunity for inspections and its cash only. If the bank can’t get what they
need at auction then it becomes bank owned, is passed to an agent and goes back
on the market usually at fair market value or slightly under for quick sale.
IN SUMMARY
There are
so many short sales that the banks can’t keep up and the time to process is
taking longer. Agents are frustrated because they have little to no control and
buyers & sellers are frustrated because they can’t get any timely answers. There
are few guidelines established where the banks are concerned and little
predictability. Those that have the advantage are investors/cash paying buyers
that have no particular attachment to the home and plenty of time to wait.
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