The Not So “Short” Short Sale
In real estate, the term "short sale" might sound like a quick path to scoring your dream home at a bargain price. But hold your horses, prospective homebuyers, because embarking on a short sale journey is a bit like dating a tortoise – slow and steady wins the race.
For those navigating the real estate market, the term "short sale" might conjure up images of a quick and easy transaction. After all, it's called a "short" sale, right? Unfortunately, that's not always the case. In reality, short sales can be a prolonged, complex, and often frustrating process.
I recently had the pleasure of helping an out of state buyer purchase a newer construction townhouse via short sale. The buyer’s offer got accepted, he got a good deal, and at closing he ended up with the keys to his new place. Smiles all around, right? At closing, yes. But let’s be clear- getting to closing was anything but short…and easy…and stress-free. Let’s take a closer look at what to expect during a short sale transaction.
What Is a Short Sale?
A short sale is a real estate transaction in which a homeowner sells their property for less than the outstanding mortgage balance. This occurs when the current market value of the home is lower than the amount owed on the mortgage, and the homeowner is unable to cover the difference. Short sales are typically initiated by homeowners who are facing financial hardship and can no longer afford their mortgage payments.
How Does buying a Short Sale Work?
As a buyer, buying a short sale property begins just like buying any other property. With mortgage pre-approval in hand, the buyer and agent view properties online and in person that are within budget and match the majority of buyer’s search criteria. The buyer makes an offer on the property which is presented to the seller (homeowner). The buyer and seller, and their agents, negotiate the terms and once accepted, there is a contract. Let’s explore some of the short sale steps that occur after contract that contribute to the short sale’s potentially lengthy timeline.
Mortgage Lender Involvement
Once the buyer and seller have a contract, the seller (homeowner) submits the buyer's offer to their lender, along with a short sale package that includes financial documents, a hardship letter, and other required paperwork. The lender reviews the package and decides whether to approve the short sale. One of the key factors that can extend the duration of a short sale is this involvement with existing homeowner's mortgage lender. Since the seller owes more on their mortgage than the property is worth, the seller’s lender must approve the transaction and accept a lower payoff amount than what is owed. This means that the offer to purchase has to get accepted twice - first by the homeowner and second by the homeowner’s lender. This approval process can be time-consuming, involving multiple layers of bureaucracy, negotiations, and a thorough review of the homeowner's financial situation. Patience is crucial in this phase, as this can take weeks or even months.
Due diligence / inspections
On a traditional purchase transaction, the buyer begins their inspection period right away. On a short sale transaction, the due diligence period does not start until after the lender accepts the offer, which contributes to the overall purchase timeframe. A professional inspection is essential to uncover any potential issues. Keep in mind that short sale properties are typically sold in their current condition, so the buyer must be prepared to handle necessary repairs.
Secure Financing
As with the inspection period, the buyer typically will not start their formal loan approval period until after the lender accepts the offer. Since mortgage rates move daily, this can be a risk to the buyer on a short sale purchase. If rates move significantly higher than when pre-approval was first obtained, the overall financial picture of the purchase may change. It is essential to work with a skilled and communicative lender during this process.
property valuation
Determining the property's current market value is an important step in a short sale. Appraisals or broker price opinions (BPOs) may be needed to assess the property's worth. This step can introduce delays if there are discrepancies in the valuations or disputes about the property's condition. If an appraisal comes in lower than the contract price, who will make up the shortfall? If the buyer requests the bank approve a lower than previously agreed upon price, this will require additional negotiations and layers of approval.
Bureaucratic Red Tape
The short sale process involves various entities, including lenders, mortgage insurers, government programs, and title companies. Each of these entities has its own requirements and procedures, contributing to the potential for delays.
While short sales can be a viable option for buyers looking for good deals, they often turn out to be lengthier processes than initially expected. The involvement of multiple parties, extensive paperwork, and the need for lender approval all contribute to these delays. Patience, perseverance, and effective communication are essential for all parties involved in a short sale to navigate this challenging but potentially rewarding real estate transaction. It's important to be prepared for the possibility of a lengthy process and to work with experienced real estate professionals who can help guide you through the complexities of a short sale.
Carrie Rowland is an Accredited Buyer’s Representative,® Certified Probate Real Estate Specialist,® Military Relocation Professional,® Graduate of the Realtor Institute® and a Realtor-Associate at RE/MAX Alliance Group in South Tampa
