SHORT SALE OR NOT TO SHORT SALE, THAT IS THE QUESTION....
By Julian Munoz, Realtor, SRES

I am sure you have heard that there are foreclosed properties in the market that are great buys, if you are looking to get in on a home on the cheap. A short sale property is the infamous pre-foreclosure properties that you might have also read about in the press as well, these are heavily discounted properties that are about to go into foreclosure or are in the beginning stages(owner beginning to miss payments). The short sale offering is not short in time lenght by any stretch of the imagination and there are some inherent risks to the buyer that you should be made aware before getting involved. Hopefully, after reading this article you will have a better understanding what a short sale is, the process that is necessary to close this type of transaction, and the risk involved as a buyer. 

The short sale is named after what the lien holder(bank or mortgage company) will have to discount the debt so the transaction can close successfully; they are being shorted on the debt of money. Yes, that means the bank or mortgage company is giving away to the seller money that is owed on the property. There  are only certain circumstances that a lien holder will accept this type of transaction, that is where the owner has had a significant economic hardship, the mortgage will more than likely go to forsclosure due to this hardship, and that the property has never been refinanced since it was originally purchased. This last one is not always true, especially if the hardship is severe enough, and each lender has a slight different twist  to the requirements. The motivation for the lender to move forward with this is if there is a financial benefit in selling the property today rather than to wait 6 to 8 months before the property goes into a foreclosure sale. In the current market there is that opportunity since values are declining and each successive month brings on additional foreclosed home in the market, continuing to delude value and lenders hate taking a property back due to the additional cost of maintenance and management. A short sale can actually lesson the losses to the lender if they can sell it today if prices are on track on falling another 10% in the next 6 to 8 months. Also the lender with the cash can start making profitable loans with the money that is recovered.

Risk for the buyer are many: 1.) The lender has to approve the short sale; lenders are very beurocratic and several sets of eyes have to review the file to get it approved. Approvals can take anywhere from 2 months to 12 months. 2.) The lender may accept another offer that comes in after yours if it is higher in value. 3.) The lender may not believe the seller that they are not going through a real hardship and they want to chase them for more money 4.) The lender may still foreclose on the property because they think they can do better on their own. 5.) You have to depend on the listing agents experience, if he doesn't know what he is doing he could be waisting everybodies time. So a buyer can get into escrow, wait for an extended period of time, and still not have a deal. Only 1 of 10 short sale transactions close successfully. 

The process is not too dissimilar than a regular sale except for the addition of beuacracy of the lenders loss mitigation department of the lein holder. So you start with an accepted offer, you open escrow, a short sale package is made by the seller that includes: list of assets, explanation of economic hardship, your offer to buy and a variety of other documentation. The lender then reviews the package and the your offer that has been accepted, they will send out their own independant broker to asses a value and at times they will get three seperate opinions. Compare the accepted offer and the Broker Price Opinions, and review any other offers that have happened to be submitted during this process. They just want to be sure they got the best offer. This means the acceptance of the seller of your offer does not mean your offer locks everyone else out, even  though you were the first one to step up. Now if the lender is satisfied with the hardship, value according to the independant borkers opinions and market conditions, then they will accept the offer to their choosing, give a specific deadline to close after approval. If you can not close on the deadline or prior to the deadline the bank can refuse  to close and still foreclose on the property. This is true even if it is not the buyers fault, i.e. ... buyer couldn't get their lender to fund the loan on time. 

This type of transacton is not for everyone. If you are the type of buyer that needs to know if the sale is going to happen or you need it to happen in a specific period of time, I don't recommend it for you. Short sale listings though are usually heavily discounted, usually from 5-20% below market, for an investor it can be very rewarding to go through the hassel. This was a quick explanation of what a short sale is and hopefully this helps in your understanding. Please feel free to contact me if you would like more information or criticism of this article.