Short Sales (aka Pre-foreclosures)

What is the definition of a short sale?

A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan(s). It occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a loss is better than pressing the current debtor and perhaps ending up with the property through foreclosure and ultimately receiving even less that through the short sale. Both parties consent (borrower and lender) to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower.

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is "doing the other a favor;" a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than foreclosure or continued non-payment would entail. Borrowers are able to mitigate damage to their credit history, and partially control the debt. .

Additional parties mean multiple levels of approvals and conditions are very common with short sales. Junior lien-holders - such as second mortgages if present will also need to approve the short sale. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Unsurprisingly, short sale deals have a fairly high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. (Courtesy of Wikipedia)

Possible Benefits of buying a short sale -Property may be in better condition at closing than a foreclosure -Price may be lower than that of a “normal sale,” though higher than a “Bank Owned or Foreclosure”

Challenges- -Length of time involved 3-4 months are not unusual, sometimes even more -Even though the bank had no input in pricing the property they will have to approve the sale price -Uncertainties involved, possibility that the sale may not close- even up to the last moment if the seller changes their mind due to debt settlement issues with their lender -Seller normally will only sell the house “as is”, no repairs will be made

How does the Short Sale process work for me as a buyer?

First, once you make an offer on a Short Sale property your offer including a “Short Sale” addendum (sample attached) will be submitted to the seller’s broker who will present the offer to the seller for their consideration and possible acceptance. In many cases there may be multiple offers on the same property in which case the seller can accept one offer or may instruct his broker that he prefers to submit all offers to his lender(s). I do not recommend being in the “multiple offer” scenario unless you are the only offer submitted to the lender, your offer needs to be in a first position if you have any reasonable possibility of being a successful buyer.

Second, the offer is sent to the seller’s lender(s) for review and hopefully agreement. The lender has the option to accept, counter or reject the offer. This process requires patience, many lenders are slow to act due to lack of qualified staff and having to also have the offer reviewed by the investor and possibly the mortgage insurance company.

Third- If and when the lender(s) agree to the terms of the sale a “Letter of Agreement” will be issued. At this point all time frames in the contract will start. Typically we will have 10 days in which to have all inspections completed and per the “Short Sale” addendum typically 30 days to close from the receipt of the “Letter of Agreement”

In summary- Short Sales are very involved and complex and as such not all are created equal. It is difficult (if not impossible) to gauge the likelihood of buying and actually closing on any particular short sale. Certainly we have found that multiple lenders in general greatly diminish the likelihood of success as compared with single lender scenarios.

When we have all the details on any particular property we are better able to make an assessment as to the possibilities of the short sale being successful.

Note- A few times we have been asked to make offers on several “Short Sale” properties when the buyer’s intention is to only purchase one property. Generally, our policy is not to do so unless there is a compelling reason. Doing so can be unfair to a seller if you later cancel the offer leaving them in a bad position and possibly forcing them into a foreclosure. There are usually other options for buyers that we can suggest.

The Arizona Pros