Short Sales – Foreclosures

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Short sales work quite different than other types of sales and require detailed explanation. It is NOT the same thing as a bank owned property (which is also known as REO or Corporate owned property).


A short sale is an imminent foreclosure situation in which the bank is owed more money that the home is worth. Because they know that the homeowner has no possible way to come up with the shortfall, they allow the home to be sold at a loss (a shortage to the bank, consequently, the term short sale). Here's an example: Home was purchased for $ 700,000 in 2005. Today it is worth $ 300,000, but $ 650,000 is owed on the mortgage). The bank does NOT own the property yet, but suspects they'll end up with it via a foreclosure. A buyer agreements to buy it via short sale for $ 300,000 and a deal is stuck with both the seller and the bank. This is a short sale.

Taking a home back via foreclosure is an expensive proposition for the bank. They will incur significant attorney and court fees, it could drag on for a year, the interest payments on the mortgage are not coming in anymore, and the home could end up sitting vacant-subject to vandalism and deterioration.
This is why they will consider selling it prior to the foreclosure sale.

Here's the big catch to short sales though: THE PRICES YOU SEE LISTED USUALLY MEAN ABSOLUTELY NOTHING. I know that goes against all conventional reasoning. Any other type of sale you could certainly buy at the listed price, but not necessarily on a short sale.


Here's why: while the banks agree to allow for the short sale, rarely they will ever tell the listing agent what they will accept for the property. The agent simply has to guess. And some do a lot better job than others (I've seen one listed for a dollar before. The bank will not of course accept anything remotely close to that figure). So, as you can probably guess, the quality of the lists will vary greatly. The moral of the story here is if you see an absolutely incredible deal but it says it's a short sale, do not get overly excited! They lead to a lot of disappointed buyers!

The good news is that an occasional transaction can be had buy buying a short sale. Because the banks do not want to foreclose if they do not have to, they will accept a discount on the properties -it seems to be at 90% of what they deem to be market value. Foreclosures already owned by the bank are often better priced though. Banks hate to have property in their portfolio. They are NOT in the business of owning Real Estate, so once it's been foreclosed they need to get rid of it, on short sales it's not their property yet, so the speed motivation is not a factor at all.

Making offers on short sales is a bit different too. They are often very slow. If you are an
investor or a vacation home buyer with a lot of patience, no problem. They could have a great consideration for trying to get at below market prices. If on the other hand you are buying a primary residence and need to move in, say, 30 days, forget it! You will want to drop them from all consideration.

The time constraints are due to the way banks are set up. Because they have numerous levels of management, they all have to sign off on the transaction (or asset managers overseeing the transaction are flooded with them). Expect a couple months before you here ANY response from them on an offer- in many cases 3+ months, though some have broken the 1/2 a year mark. Buyer's often think the Real Estate Agents are kidding when we say not to bother asking for updates for at least 2 months. But unfortunately it takes a long time!

Now that you likely want nothing to do with short sales, let me tell you about one very important and lucrative exception: approved short sale prices. Every so often a short sale will actually have a price that the bank has agreed to. This is usually because a prior offer was received, the bank's review process began, the buyer got tired of waiting for months, but the bank still determined a yes or no answer regarding that offer. Based on that output, the listing agent now has an actual number to list!

Watch that a listing does not just say "short sale approved" as listing agents get a little tricky with the language. That does not mean a price has been approved, that just means the bank is agreeable to a short sale. You want "Short sale approved at $ 300,000" or equivalent. Note that the closing may still be a little slower than usual even on these, but these properties are very worth considering.

In fact, it will be the rare exception that short sales are usually a waste of time. But if you want to pursue them, they can make for opportunities. Call me at: (305) 613-9902 if there is one you wish to place an offer on.

Please note: There are a fair number of buyers where time is NOT important, so short sales can be of interest to them. A couple thoughts on this: You are still dealing with the same banks that list foreclosed properties. They often price their foreclosures more aggressively (and sell fast) because at that point the clock is ticking. So you may be doing yourself a disservice tying up your time on a short sale.

Two, I have to emphasize the list price means nothing. Nothing! It was dreamed up by a listing agent trying to get interest in a listing! The agent could put most any figure he / she wanted! Because buyers still think along the conventional lines "Well if the list price is $ 275,000 they'll probably take $ 260,000 … make my offer $ 260k" that makes no sense at all on a short sale. The list price is irrelevant. Maybe you should be at $ 295k. Maybe the bank will say not a penny under $ 375k. It's anyone's guess, so do not just figure numbers using conventional logic!

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Source by Roberto Leon

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