Short Sales Are Only Short for The Borrower

Probably the most misunderstood and mysterious type of real estate transaction is the short sale.

Short describes the borrower’s situation, not the time frame.

Let’s start with the basics. A home is sold in short sale when the home is worth less that what the borrower owes the bank(s). So the borrower, after the sale and closing costs associated with the sale, will not be able to satisfy the original loan and any subsequent loans. An example of a subsequent loan would be a home equity line of credit.

So is a short sale short?  No, a short sale may take anywhere from four to 12-plus months depending on the skill of the real estate professional, short sale negotiator, cooperation of the borrower, the amount of the shortfall of the loans, the banks involved and how many loans are on the property.

A short sale creates consequences for the bank(s) and borrower, as well as incredible frustration for buyers.

From the bank’s perspective: The bank has to decide if the seller actually faces hardship and whether or not they want to agree to a short sale. In addition, the bank has to determine whether a short sale will be better for their bottom line than proceeding to foreclosure. 

According to The Joint Economic Committee for Congress, the average cost of a foreclosure is $77,835 – approximately $50,000 is real loss for the bank. So while the bank is staffing the short sale departments, paying for appraisals, broker price opinions, they are also proceeding on the foreclosure in another completely unrelated department. 

Yes, while they are moving forward to determine whether they will agree on the short sale – they are also foreclosing on the property at the same time. Some banks slow or stall the process if a short sale is being negotiated. From the borrower’s perspective: A borrower that decides to request a short sale has to prove hardship. A hardship letter explains why the borrower can’t or won’t be able to pay the mortgage plus a large amount of supporting financial documentation. This documentation must be updated regularly, and keeping on top of the file is practically a full-time job.

Hours to scan and upload documents and wait-time on the phone for a short sale department processor or negotiator is exhausting for borrowers. Also during this time the borrower will be subjected to constant collection calls at all hours on the delinquent loan(s), which has taken its emotional toll on many a borrower.

The benefit is to get out from under an oppressive loan in extreme circumstances like loss of a job, forced job relocation and/or medical or financial hardship. But it may not mean the borrower walks away scot-free; it could mean you owe the difference between the sale price minus closing costs and the loan, a promissory note and damaged credit.

From the buyer’s perspective: Are short sales really a good deal? And more importantly, is the stress associated with the wait worth the savings down the road?

This is a difficult number to pin down based on different geographic areas, plus it is diminished by other variables in the process for the buyer.  The amount the bank decides to accept is a combination of many factors, but banks do rely on appraisals and real estate opinions of value.

Are the homes in good shape? Maybe. Some homes are lived in or left with dignity. Others are in tremendous distress due to anger about having to abandon the home or a lack of funds to maintain it. If the home has been abandoned and doesn’t have utilities, a buyer faces challenges for doing their due diligence for inspections. Often the buyer has to pay to turn on the utilities to test major systems in the home, which could entail utility liens and/or past due amounts. 

Another issue for buyers waiting on a short sale is the security of the home. Many vacant homes are vandalized or victims of theft and/or trespass. So you’ve contracted on a short sale, waited for months and you may or may not get the home at an attractive price. In the meantime, you’ve continued to spend money on rent, delayed another related sale or postponed a relocation.

Choosing to pursue a short sale requires patience, a flexible time frame, no attachment to the home, interest rate risk and an experienced real estate professional to guide you through the process.

Short sales are intricate transactions with many nuances, many of which have not been discussed here. There are also illegal and immoral practices that have popped up around short sale transactions that include, but are not limited to, assignments and large negotiation fees passed onto buyers.