When is a Short Sale Short?

Real estate has a language all its own, including the terms used by realtors, mortgage lenders, inspectors and appraisers. One term that has had a lot of use since the real estate market crashed around 2008 is short sale. Short sales are sought after by bargain hunters and investors alike due to the attractive prices. However, it became apparent as banks were inundated with sellers of these types of properties, that the process of buying one was anything but short.

A short sale is when a homeowner owes the bank more money than what their home will sell for in the current market. If the owner sells the home and gives the bank 100% of the money from the sale, they are still “short” paying back the balance that is due on their original mortgage.

Unfortunately, buyers that purchased when the house prices were high in 2006 and 2007 were caught in this position after the crash occurred – the mortgages owed were larger than the new market values. In a short sale, the bank will settle for less money than they are owed, give the owner a mortgage satisfaction letter (even though they can’t pay the whole mortgage) and sell the home at a discounted price to a new buyer. For these reasons, the bank has the final say so about the final sales price and adheres to a strict, multi-level review process, often taking months and months to give a final approval.

Buyers looking at short sales must consider several things:

1. No matter what the advertised asking price of the house is, the bank can still say no to the sale and ask for more money.

2. The bank will not consider an offer unless the buyer and seller have gone into a fully executed contract (both buyer and seller have signed).

3. The buyer has an offer accepted by the seller, has paid for an inspection fee, signed contracts and put deposit money down. Yes, if the bank doesn't approve the offer, you do get your deposit money back. Just know that it can take 3 - 6 months to get an answer and your money is tied up for all that time.

4. Since your deposit money is being held in escrow, the buyer is, in effect, suspending their home search until the bank responds.

5. Typically short sale homes are sold in “as is” condition – so there could be a lot of deferred maintenance or repair and may even require a renovation loan.

There is one exception to the long-term nature of processing a short sale. Some real estate listings will advertise a home as an Approved Short Sale. This happens when a previous buyer has paved the way by going into contract with the seller, gets a response from the bank and then never actually closes on the property. Since the bank responded to the first buyer, we now know what price the bank will accept. If a buyer agrees with that price, then the sale has the closing time of a traditional sale since the bank is ready to go forward at that specific price.

My advice on short sales is the old adage “Buyer Beware,” only I would change it to “Buyer Be Aware.” Know that short sales can be a very economical way to get the home you really want at an affordable price (taking into account condition and repairs of course). Have flexible arrangements where you are currently living since you know not the day or the hour that you will hear from the bank. And add an extra dose of patience!

Please feel free to contact me with all your questions, concerns and topics you would like to see covered in future columns in The Pawling Record.

Judy Albert is a Licensed Real Estate Salesperson for Berkshire Hathaway HomeServices

Hudson Valley Properties in Pawling. Licensed in NY & CT, SRES, Relocation Certified. Email your questions to jalbert@bhhshudsonvalley.com, call 845-855-8500 Ext. 301 or 845-283-7865

Visit her website at judy.albert.bhhshudsonvalley.com