First, a definition: “A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.” For example, if the unpaid balance of mortgage is $100,000 and a property sells for $90,000, under a short sale the lender accepts $90,000 as payment in full.

Here is the questions on short sales: "Why are so many Realtors and buyers reluctant to deal with short sales?" Because of the time and uncertainty involved. Below are some recent personal experiences:

Example 1: Offer submitted on 1/15/2008. Counter offer from bank on 2/10/2006. My client basically accepts the bank’s counter offer and we receive a verbal response from the bank that they have accepted the offer and we have a deal. On 3/3/2008 the bank terminates the deal, deciding that they will foreclose on the home.

Example 2: Offer submitted on 1/27/2008. Response received 3/15/2008 rejecting the offer.

Example 3: Offer submitted 2/25/2008. Counter offer received from seller (not the bank) on 2/27/2008. My client accepts the counter offer on 3/3/2008 and signs all the bank waivers and many other such documents. As of this date we are still waiting for a response. [Update: it is now 8/202008 and still no response.]

Example 4: Offer submitted 2/9/2008. Seller’s agent comes back with a “best and final” and we respond on 2/19/2008 accepting all the bank’s terms with an increased offer price above what the home was listed for. In writing, we receive a response from the seller’s agent that we “have the deal.” As of this date we are still waiting for the bank to respond. [Update: it is now 8/20/2008 and still waiting for a response.]

Example 5: Offer submitted 2/8/2008. Received a response on 5/9/2008 for a "best and final" with a "minimum" price $25,000 higher than the listing price.

Example 6: I had a client who really liked a home. I called the seller’s agent (who has years of experience with short sales) and she estimates that the time to receive any response is 60 to 90 days. At that time they will then issue a request for a “best and final” bid from everyone who submitted an offer and, “once the two mortgage holders review all the offers and if they accept one” at that point she estimates we are “only 30 to 60 days away from going to contact.” My client wisely decided to pursue another property which is not a short sale.

Example 7: We submitted a full price offer on 5/13/2008. It's 9/1/2008 and still no response.

All totaled, I've submitted offers on over 40 properties (10/20/2008) and none have closed. Yet, if you search the MLS for sold properties that are marked as short sales, you will find quite a number. But, if you check these same properties you will also find that they did not sell during the time they were actually short sales (pre foreclosure), they sold after they were foreclosed. For example, in the last 90 days 7,870 single family homes were sold but only 78 of this number were marked as short sales; this is less than 1%! And, I suspect that some of these were actually in foreclosure by the time they were sold but the agent did not update the MLS.

The problem with short sales is that most times the home is not really available for sale. Let me explain.

The Short Sale Process From The Seller’s Side

1. In order for a home owner to gain bank approval to do a short sale they must provide a hugh amount of information. Part of the information the home owner must provide is sufficient financial information for the bank to be certain that the home owner is not hiding funds. Another part of the required documentation is an actual offer from a buyer for the property. To get this offer the home is placed on the market (usually with a very low teaser price) and when an offer is received they include it along with the rest of the documentation in the short sale submittal package. This is the stage at which a majority of the homes you see listed on the MLS are at; they are only soliciting an offer so that they can apply for short sale approval! In my opinion, most short sales are not really legitimate offers to sell since, without the bank's approval (which can be months away), they have no ability to sell the home at that price.
2. Once the package is submitted to the first and second mortgage holders, the response will generally require between 90 and 120 days. If both the first and second come to agreement on the discounted payoff they will accept (not always the case) then the home owner can actually proceed to sell the home at they determined price; which is usually significantly higher than the teaser price used to solicit offers for the submission package.
3. The seller’s agent then contacts all the people who originally submitted offers and asks for a “best and final” offer. However, since several months have expired expired during the submission process most or all of the original offerees are gone. So, the asking price is for the home is then changed to what the bank(s) approved which is usually significantly higher than the original teaser price.
4. When the seller does receive an offer at the approved price it is likely significantly less than the bank(s) approved price so the home owner must re-submit the offer to both the first and second mortgage holders for approval. Before the sale can progress, both mortgage companies must agree to a new discounted payoff. This can be a challenge when the offer is significantly less than the first mortgage. If the two lending institutions (for example, Country Wide and Wells Fargo) can come to agreement over who will get what, they will tell the seller to proceed with the sale. Since this can take 30 to 60 days, that seller is likely moved on to another property and the cycle starts once again.

Obviously the short sale process is broken. I think the problem is that the banks went from handling a few short sales per month to thousands a month and they don't have sufficient trained staff or the processes to handle the volumes they are facing. So, the banks generally have inexperienced people handling the cases and nothing really gets done unless the seller’s agent personally knows the individual bank representative (called a loss mitigator) handling the case and can schmoose them into shepherding the individual case through the long process.

This has been a long explanation about why short sales are generally not viable for buyers unless you happen to come in at the very end of the process and you have an experienced agent representing you. So, while short sales look like great deals, they are only great deals AFTER the final bank approval is complete and at that time, the price is usually higher than bank repos and owner sold properties.

Call me today to discuss your real estate needs. You will be glad you did.

Eric Fernwood
702-358-8884
Eric@ISellLVHomes.com