Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a house or apartment. Additional questions welcomed to firstname.lastname@example.org. Today, real estate expert Christian Nossum helps to understand the misnomer that is a short sale and how to get involved.
Many people think that they can get a great deal buying a short sale, but what exactly is a short sale? A short sale is where a homeowner sells their property for less than what they owe on the mortgage. It's called a short sale because the bank that owns the mortgage is going to be "shorted" on the amount of money they're owed. Before I go any further, I've gotta say that in general, there is nothing short about a short sale. I know of one transaction in particular that has been under contract for 15 months.
Typically, short sales involve a seller that's facing a financial hardship that's preventing them from being able to make their mortgage payments. To salvage their credit, the homeowner attempts to sell their property as a short sale rather than lose it to foreclosure.
Short Sale Example
Bob has a $400,000 mortgage on a house that's only worth $300,000 in today's market. Bob lists his house for $300,000. If Bob gets an offer, it's not Bob, but rather the bank that decides whether to accept the offer since the bank is the one taking the $100,000 loss.
How Do I Go About Buying a Short Sale?
Making an offer on a short sale isn't any different than buying any other property, except one little thing - there's no guarantee that the bank will accept your offer, even if its at "full price." There is also no guarantee that the bank will respond to your offer in any reasonable amount of time. It could take the bank any where from a month to a year or more respond, and in some cases their response may be a counteroffer requiring you to pay more than asking price. Typically in Seattle, banks are taking 3-6 months to respond. From experience, I can tell you that the banks don't employ much common sense when deciding whether to approve a short sale or not. First, the bank looks to see if the seller is facing a financial hardship like a divorce, job loss, bankruptcy, reduced income, medical emergency, death, or job transfer. Then the bank assess the loan balance and the current value of the property to determine if they'd make more money by approving the short sale or taking the home back through the foreclosure process. One would think this is a pretty straight forward equation, but for some reason it takes months and months for banks to figure this out. Why? Each bank has their own excuse, but at the end of the day the big take away is this - there are no set answers and no guarantees.
Needless to say for some buyers it can be pretty frustrating living in this limbo for months on end. However, if you are a patient person and you aren't on any sort of timeline, a short sale can be a good option for you.
There Are Other Ways To Get A Deal
The reason most people look at short sales is because they want to get a good deal. Luckily, there are other ways to get a deal than going through the stress and waiting involved with a short sale. I recommend my clients take a close look at any properties that are bank owned foreclosures that fit their criteria. Since the bank already owns these properties, there is no need to wait months for a response to your offer. The bank usually responds within a matter of days and these are generally just as good of a deal as a short sale. Over the last 6 months in Seattle, about 12% of the market consisted of shorts sales, while 6% consisted of bank owned foreclosures. If you spend all your time looking at short sales or bank owned properties then you are ignoring a whopping 82% of the Seattle real estate market. Although many properties are getting multiple offers in Seattle, there are still deals to be had. Wanna know how I spot deals? There is another open thread this Friday. Ask away.