10 Common Misconceptions about Buying Short Sales

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I have had a number of people ask me about short sales this week so thought it was only fitting to pair off my 10 Common Misconceptions about Buying Foreclosures from Monday with 10 Common Misconceptions about Buying Short Sales. (I had to add a bonus #11!)

Although they are both lender-mediated transactions they aren't the same thing. Banks own foreclosure listings (also called REO for Real Estate Owned)…'people' still own short sale listings.

1. A short sale has to close in a short period of time.

While a logical assumption, the 'short' in short sales refers not to time but to coming up short on funds. Short sales happen when sellers do not receive enough cash from selling their home to pay off their mortgage and sellers negotiate with the bank to accept 'short' funds as full payment.

If you find a 'pre-negotiated' short sale, however, they usually do have to close fairly quickly. This usually means another buyer's offer was negotiated with the bank but the buyer backed out for some reason. The bank's approval is good only for a specified amount of time, and only for the terms of the original negotiated offer. If you are willing to accept those terms as a new buyer and close in the specified time frame you could buy a short sale and close in a short period of time. I had one client write an offer and close on a pre-negotiated short sale in only 10 days!

2. If the mortgage payoff is more than a home is worth due to declining values, the sellers automatically qualify for a short sale.

It would be nice, but declining value isn't enough to qualify for a short sale. Negotiating a short sale with the bank is much like applying for a loan in reverse. Instead of proving that you qualify to make the payments as when buying a property, sellers have to show that they don't have the funds to pay off the mortgage in a short sale. Sellers must provide documentation including a hardship letter, financial and bank statements to substantiate their case, and sometimes the lender will require the sellers to contribute additional funds beyond the sale proceeds.

3. As a short sale buyer you negotiate your offer with the seller and the lender accepts any offer the seller accepts.

This is one of the big differences between buying foreclosure and short sale properties. In foreclosures you negotiate directly with the bank who owns the property. Once you negotiate the offer you proceed to closing. In a short sale you negotiate with the seller who still owns the property…but once signed it is subject to bank approval and there is no guarantee the lender will agree to accept either the terms of the offer or short funds as payment of the mortgage.

4. You can expect a response from the lender on a short sale offer within a week to 10 days.

It would be nice, but banks usually take a minimum of 30-60 days to respond to a short sale package. About a year ago I chronicled a short sale here on my blog where I was representing buyers that took about five months for a bank response! Also keep in mind that you may wait months for a response only to come to no agreement with the bank. Although a property can legally be under contract to only one buyer at a time, sometimes they continue to submit offers to the bank until the bank finally reviews them and hopefully accepts one…ask the listing agent how they plan to handle the process.

5. Short sales cost lenders more than foreclosures.

One of the reasons banks are willing to negotiate short sales is the cost savings. Foreclosures usually cost lenders more in both time and money…banks are in the business of lending money, not owning homes.

6. Agents who list short sales must be experienced representing sellers in the process.

This is not regulated at all, which means that some agents representing short sale sellers are very knowledgeable and experienced and others are not. When considering making an offer on a short sale property also take into account whether the seller's representative will be able to effectively negotiate the short sale. Because I don't specialize in listing short sales, I hire a professional short sale negotiator to handle bank negotiations for my short sale sellers…she has a 100% success rate and established bank relationships for more efficient processing.

7. Short sale sellers are highly motivated.

Some short sale sellers are motivated, a short sale doesn't affect your credit as long as a foreclosure and at least for now the sellers no longer have to pay tax on the forgiven debt. However, other sellers are in no hurry to sell and may be listing it for sale only at their lender's insistence. As banks typically won't consider short sales unless the sellers are no longer making their mortgage payments, the sellers may be living in their home basically 'rent free' and may want to stay as long as possible.

8. Short sale properties are in better condition than foreclosure properties.

While some short sale properties are in outstanding condition (I have one listed right now that is a 10+!) more often they are in poor condition. Because the sellers may still be living in the property and may be short on funds and not be motivated to sell don't be surprised to find a property to be junky, dirty and in disrepair. It can also sometimes be difficult to get the sellers to clean out the property and leave prior to closing.

9. In a short sale the seller is required to make any repairs required by the city prior to closing.

When you make a short sale purchase you are buying the property in 'AS IS' condition. If the city requires repairs, you as the buyer must assume responsibility for them at closing. There may be a time limit for completing the repairs, and some cities even require that some additional funds from you be held in escrow until they are completed.

10. If there is a first and second mortgage, the two lenders are obligated to cooperate in negotiating a short sale.

It would be nice, but sometimes a short sale is stopped because of dueling lenders. These are important questions to ask if you are considering making an offer on a short sale property…how many mortgages are involved? if more than one, are they with different lenders? if so, are they willing to cooperate with each other?

11. A request to a lender for a short sale automatically stops any foreclosure proceedings.

This is another important consideration. Just because there is a short sale offer on the table doesn't mean that the property can't be foreclosed while awaiting the bank's short sale decision. A good negotiator will try to stall foreclosure proceedings…an inexperienced one may not even be aware it could be an issue.

Sharlene Hensrud, RE/MAX Results - Email – HomesMSP.com