Cygnus Real Estate • (303) 422-SWAN • www.CygnusRealEstate.com Home Buyer’s Guide To Short Sales
1. What is a short sale?
A short sale is the process by which homeowners can sell their home for less money (aka selling short) than what they actually owe on
the mortgage(s). This is accomplished by providing proper documentation to the lender(s) to convince them to reduce the mortgage balance to allow the sale. If the sale is approved, the mortgages lender(s) will actually take a loss on the mortgage.
If a bank approves the discount of a mortgage, the home can be sold for a price lower than the total debt on the property without the
seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.
2. Why would a bank or mortgage lender want to cooperate with a short sale?
A common saying is that banks are in the business of lending money and do not want to own real estate. While this is a little misleading, it is essentially true. When banks foreclose on a property it is a long
and expensive process and generally means holding the property in their inventory as a nonperforming asset. Banks have a limit to the amount of non-performing assets they want to hold. Once
this limit is exceeded, they have strong incentives to get rid of the properties at discount prices.
For a lender, agreeing to a short sale avoids many of the costs associated with the foreclosure process.
Attorney's fees, delays from borrower bankruptcies, damage to the property, costs associated with resale, property tax, insurance, etc., must all be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster and at a lower cost.
3. How does a bank determine the price it will accept on a short sale?
Every bank has a unique combination of methods of deciding how much they'll accept on a short sale. One of these methods, called a
Broker Price Opinion (BPO) plays an important role to determine the price. A BPO is similar to an appraisal but not as stringent. A broker
suggests a fair market value based on a number of variables.
4. Can I really get a deal on a short sale home?
Yes, you can, but not every short sale is a deal. You still have to do your research and estimate the current market value of the home. This is one of the areas where a knowledgeable
real estate agent's level of experience really pays off.
5. Who pays the real estate commissions on a short sale?
In a standard sale, commissions are subtracted from the seller's funds and paid out of escrow
to the brokers. In a short sale, the seller has no funds in escrow which means the commissions
end up being subtracted from the monies that would go to the lender. So, the lender ultimately is the one paying the entire sales commission.
6. Are short sales guaranteed to work?
No. All of the criteria must be met before a bank will even consider a short sale. Even then it isn't easy to convince a bank that the market
value of the home is lower than what they are owed.
Even if all the paperwork has been correctly completed it can take several weeks, or even months, only to be denied. If the lender does
not approve the short sale, no transaction occurs. The Purchase Agreement becomes void and the listing continues. There are, however, ways to put a time limit
on the lender's time to issue approval.
7. How long does a short sale take to complete?
Anywhere from a several weeks to several months.
8. What if the house I want needs repairs.
Remember, when an owner short sells their home it's because they are suffering a
financial hardship. This means there is no money for repairs and as a buyer you
can't reasonably expect the seller to do much in the way of repairs. The good
news is we have had some success convincing lenders to repair termite damage
and to make reasonable repairs relating to safety. But, this type of cooperation is dependent on the expense involved, the nature of the
repair and the purchase price being paid.
9. What if the house I want has liens on it?
Liens can complicate matters because the owner will not have the financial capability of removing them. Depending on a number of factors, including the real estate market and the purchase price, the lender might be persuaded to clear the liens. Or, sometimes the lien
holders themselves might be convinced to reduce their liens. A short sale in this circumstance will take substantially longer.
10. I'm an investor, can I buy a short sale?
Yes. In fact, investors have better odds with short sales because they normally use cash to buy.
11. Can I buy the short sale for the price stated in the listing?
An experienced Realtor can quickly tell you whether or not the property is priced unusually low. If
so, the home was probably intentionally priced that way to attract offers and to prompt the lender
into letting the Realtor know what price it will accept. In which case, the chances of buying the
property at the asking price may not be very good.
On the other hand , the property might be priced correctly and your chances of getting the property
at the asking price will be reasonably good.
12. How long will it take to get bank approval of my offer?
The answer to this question depends on the expertise of the listing agent, which banks are involved, and how many loans are on the property. Once approval is obtained, the property can go into escrow which takes no longer than a standard sale.
13. Can I do an inspection?
Yes. However the lender will not likely fix anything unless it presents a hazard such as a gas leak.
Your inspection provides you a way to terminate the contract if the property is not to your satisfactory. Short sale properties are almost always “sold as is” which means take it or leave it.
14. Will the banks negotiate on price?
Yes, especially if the BPO is below the expected value or asking price.
15. Do I get title to the property when I buy a short sale?
Yes, title is transferred to the buyer at the close of escrow, just like any standard sale.
16. Are my property taxes based on the amount of debt that was on the short sale property?
No. your property taxes are based on the purchase price of the home.
17. What are the disadvantages compared to other property types?
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Your rights as a buyer are very limited when dealing with a short sale property. Even if the seller accepts your offer and signs
the contract, only the lender provides the final approval for the transaction.
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You need to be flexible on when you close. The short sale transaction process is anything but short. This time lag can be especially detrimental in today's buying environment, where interest rates can change at any time. An increase in interest rate
during the escrow period can adversely affect your mortgage payment amount by several hundred dollars per month, which
can result in the property becoming unaffordable for you.
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Short sale sellers try to secure as many offers as possible--even after they have an accepted contract--which keeps buyers in
limbo. In regard to non-short sale transactions, when a seller accepts an offer, the status of the listing is normally changed
from "Active" to "Pending." The difference with short sales is that in most cases, the seller will keep the property marked as
"Active" after accepting an offer, with the intent of attracting more buyers so that they can get an offer that is higher than
the one they initially accepted from you. If they do receive an offer higher than yours, the bank is extremely likely to accept
that higher offer, and you would essentially be out of luck.
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Your closing must be completed quickly. Though approval from the lender can take several months to receive, once the
lender accepts your offer, you must close the transaction within 14-21 days. If closing does not occur in that time frame, the
lender can choose another buyer or close the short sale file. If the short sale file is closed then the whole short sale process starts
from scratch again.
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