August 21, 2007

Short Sale Defined - A sale in which the proceeds from the sale are insufficient to pay off the loan secured by the property being sold. To be successful, the lender must agree to release it's lien against the property even though it's loan is not being paid in full.

What Buyers Should Know About Short Sales - Suppose that you make a reasonable offer to purchase a home. What will your reaction be if the sellers respond by saying they will accept your offer but for the first six weeks of the contract, they reserve the right to accept other offers and that you will have to match any higher offers or they will cancel your contract? As a typical buyer, your response to the seller will be quite simple, “Mr. Seller, you’re nuts! This is a buyer’s market and I’ll go find another property.”

As unimaginable as this scenario is, it’s essentially what happens every time a buyer makes an offer on a property that is offered as a short sale. The seller continues to accept other offers and submits them to the bank. It usually takes the bank six to eight weeks to respond. The only difference from my example is that it is the sellers' bank that won’t approve your offer if higher offers have been received.

Most knowledgeable, legitimate buyers who understand this process are not willing to spend their time with short sales. This leaves mostly bargain hunters to play the short sale game. The lenders, for their part, are trying to get as much as they can and are not interested in approving contracts at fire sale prices. This is why, in looking through the Sutter-Yuba MLS system today, I see that in the last 12 months there have been roughly 299 attempts to do shorts sales with only 28 (9%) of those actually resulting in a closed sale. The present system benefits neither legitimate buyers, sellers or their lenders.

There may be some language that you can include with your offer to improve your odds of success, but even then you are going to find yourself swimming upstream.

A much better option is to wait for the property to be foreclosed on. You will find that dealing with the lender as a seller is faster and less stressful than trying to deal with them in a short sale.

What Sellers Should Know About Short Sales - In addition to what is written above, sellers considering a short sale should understand that;

1. According to the lenders I have talked to, there is no difference on your credit score between a foreclosure, a short sale or a deed in lieu of foreclosure. According to these sources, the only difference between these three remedies in terms of it's impact on your credit is the number of late payments that show up on your credit report. So, the faster you can complete the transaction, the less your credit will suffer.

2. Short sales are not easy to get approved (as evidenced by only a 9% success ratio).

3. They are they also slow.

4. All of the three options discussed above will likely have tax consequences. Talk to your accountant before deciding how to proceed.

5. Talk to your lender to see if there is any way to restructure your loan to avoid a short sale, foreclosure or deed in lieu of foreclosure. History shows that when prices turn around, the median home price will likely double or triple from their low point in the housing recession.

6. If all else fails, a deed in lieu of foreclosure will probably be faster and less stressful than a short sale or foreclosure though they will not work in every situation.