One of the most popular catchphrases in the media regarding the current housing market is the short sale. A few years ago a short sale was a concept that was nearly non-existent. It was a process that few knew about and fewer actually experienced. Since the decline of the market, the short sale has been touted as the great alternative to foreclosure. The reality, though, is that the short sale process is difficult, painful, slow, and unpredictable. Before the intricacies of a short sale can be discussed, it’s important to understand how the process works.

 

A short sale is when a lender agrees to accept a discounted payoff and release a mortgage on a property without receiving full payment from the home owner. A home owner need not be in default on their mortgage in order to conduct a short sale, although there is some debate as to the likelihood of success if the owner is current on their payments. In theory, banks are able to reduce their losses that would be realized if foreclosure is carried out. Therefore, the banks have an incentive to sell before taking possession of the property. A deficiency judgment may or may not be held over the seller of the home and this is largely dependent upon the bank, the financial status of the owner, and the amount of loss. A home owner who goes through a short sale suffers damage to their credit but it’s not as bad as going through a foreclosure.

 

The typical process of a short sale starts when a home owner, who is upside down on their mortgage, contacts a real estate professional in order to help them sell their home. After advising the home owner on the value of their home, the home owner and the real estate agent would decide that the only option for the home owner would be to get the bank to agree to a short sale. In order to get the bank to agree to a short sale, a letter of hardship must be sent to bank that explains why the difference between the values cannot be paid by the seller. Examples of hardship include:

Unemployment

Divorce

Medical emergency / sudden illness

Bankruptcy

Death

The Seller Has No Assets (money)

 

If the conditions are right, the initial short sale authorization from the bank is fairly easy. However, the danger lies in the steps that follow.

 

The listing price of the home for sale isn’t determined by the bank. It is picked by the real estate agent who bases it off their best guess of what price the home should sell. After a buyer and the seller agree to a purchase price, the contract and full financial details on the seller are sent over to the bank for authorization. The bank then orders an appraisal or Broker Price Opinion (BPO) from which they base their decision on what value is a reasonable selling price. The quality of BPOs is largely dependent upon the agent’s expertise in that area and their perspective on the value of the home. The short sale process gets bottlenecked in this stage of the process and the time from contract submittal to BPO completion currently ranges in the 60-180 day range. It is not uncommon for buyers to have to wait several months to get word back from larger banks who tend to be overwhelmed with request. After reviewing the BPO and financial information on the seller, the bank gives their response.

 

There appears to be no correlation between a listing price and a fair market value as far a bank is concerned. An offer at or near listing price does not determine what price the property should sell for or what price a bank will accept. Where typical home owners will counteroffer, an offer that is deemed to be outside the fair market value may or may not be counteroffered. In the Charlotte market, short sales are uncommon as banks often unwilling to negotiate or see more value in foreclosing than a short sale.  

 

The important thing to know about short sales is that banks are not looking to sell below market value. They are looking to minimize their losses and that means a fair market value sale. Taking a loss on a property for a bank has financial reporting ramifications whereas the rules around delinquent loans require less unappealing. It is also important to note that a list price or contract that is below the most recent sales may not be acceptable to a lender and the process to determine what is acceptable can be slow and painful. For buyers who are ready to move into a new home, pursuing a short sale probably isn’t the right move for you under the process that is operating currently.

 
The key to success in a short sale is to have a real estate professional who is experienced with short sales and has successfully negotiated with the banks to get a deal closed. The listing agent is the most important person in a transaction and will be the single most important person to make a deal come together. A good listing agent can get authorization to deal directly with the lender and to then stay on top of the individual assigned to the case representing the lender. The likelihood of an inexperienced or lackluster agent is slim to none. Therefore, you need a good real estate agent to help determine not only is the property and price right, but is the other agent capable of making a deal happen.