Tuesday, March 11, 2008

Short Sale Myths

Given the current state of the real estate market in many areas in greater Sacramento, there are many short sale listings. I myself have a handful of short sale listings currently, and as such I find myself educating buyers and sellers a lot lately about the process. Many people seem to think they know what short sales are...I find that about 2/3 of people I speak with really have no clue what a short sale is.

For those of you who are not familiar with this terminology, a short sale is the sale of a house for less than the amount that is owed to the bank/mortgage company. Occasionally, homeowners find themselves in positions in which they must to sell their home, but the reality is that their property is worth less than what they owe the bank...perhaps they did a "cash-out" refinance?...perhaps they bought at the peak of the market with 100% Financing? Many banks will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a costly foreclosure, and the owner is able to pay off the loan for less than what he owes.

I hear all kinds of crazy misperceptions about short sales. I have put together a short list of myths about short sales:

1) "The seller must stop making payments on their loan." Not necessarily. I have negotiated short sales where the seller has not missed any payments, and were not in default.
2) "The seller is in foreclosure." Not necessarily. It is possible to have missed payments and not be in full-blown foreclosure.
3) "Buyers will not want to make offers on short sale property." Not true. Occasionally buyer's agents are reluctant to represent offers on short sale property. Often times, listing agents will take on short sale listings when in reality they have no knowledge base or skill set to successfully negotiate the lower payoff. A shrewd buyer's agent will call the listing agent and make sure they are competent to complete the process, and then submit an offer.
4) "Financial hardship is the only reason a lender will accept a lower payoff." Not true. There are many potential reasons a lender will allow a lower payoff. One such example is that the seller must relocate for some reason, such as to care for a sick relative, or due to employment requirements.
5) "A short sale where there is a first mortgage and a second mortgage will not be approved." Not true. While this scenario requires diligent negotiation, many 2nd mortgage holders will accept as little as $1,000.00 in lieu of a full payoff.
6) "A short sale means that the escrow period will be short." Generally no. Depending on how much negotiation can be completed in advance, a typical timeline for lender approval can be 2 weeks - 2 months. Once the lender approves the lower payoff, escrow is opened and the transaction timelines proceed from that date.
7) "Short sales are a bargain!" Banks do not give property away. They base approval on recent sales comparables, and actually retain the services of a local agent to perform a BPO (aka, Broker Price Opinion). While I do believe it is possible to get a lender approval for a property a few percent under its market value, purchasing at "wholesale" is just not reality.
8) "The seller of the property can make money from the short sale." Not true. The lender will REQUIRE that the seller nets $0 from the sale.

These are just some of the common questions I get from both buyers and sellers regarding short sales. In reality, most people (buyers, sellers, and even some real estate industry professionals) do not have a clear understanding of what they are and how they work. I have successfully negotiated short sales for seller clients. If you are facing the reality that you have to sell your home, and you owe more than its current market value, I may be able to assist you. I welcome your call at 916-342-1372 so we can discuss your options.

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