Real Estate Information

Short Sale - What Buyers Should Know

In my last post, I gave homeowners a quick explanation of short sales.  This time, my post is for potential short sale buyers.

What’s a short sale?

A lender agrees to accept a sale of a property for less than the mortgage owed plus the expenses for having a short sale (realtor, appraisal & attorney fees, e.g.).   The homeowner owns the property and is selling it, but before the sale can occur, the bank needs to approve.

How do I know it’s a short sale?

If you’re looking at properties that have descriptions such as “subject to bank approval,” “subject to lien-holder approval,” or “as is,” these may be short sales.  Some listings will say, “short sale,” but not all.

How is a short sale different?

In a traditional real estate transaction, there are two parties - the buyer and seller.  With a short sale, add one more -the bank. Like any other real estate purchase, a buyer sees a property they like and submits an offer to the seller.  If the seller likes the offer, they accept it, contingent upon the approval by the bank.

The buyer can still perform an inspection, but since the sale is “as is,” neither the seller nor the bank are likely to make any repairs.  In addition, most lenders will not permit closing cost credits for repairs.

The buyer still pays for their own appraisal via their bank but the seller’s lender also has an appraisal done and it is this appraisal that matters.  The bank will base its decision to accept or reject the short sale based on their appraisal - and they have been known to reject offers that are lower than the appraisal.  They may even come back to the buyer and ask for the buyer to increase their offer before approving the short sale.

The time to close in a short sale is also different.  A bank can take anywhere from 4-6 weeks (possibly longer) to approve the sale and once they approve, they generally want to close ASAP.  So, before the sale is even approved, the buyer will have already had an inspection and had their appraisal done.

What are the risks for buyers?

As with any property owned by someone who is having trouble making payments, there is the issue of deferred maintenance.  If homeowners are letting their mortgage payments slide, what about their leaky roof, old furnace or overgrown landscaping.  Since short sales are sold as-is, a buyer can pay for an inspection but it’s really for information only - not to get repairs made or repair credits at closing. 

Another risk is that the buyer pays for the inspection and the bank does not approve the sale, or asks the buyer to come up in their offer.  If the bank says no, the buyer is then out the inspection costs and any other fees their bank is charging them.

There is also an issue with some companies that do foreclosure rescue.  These companies approach homeowners in distress and contracts to take title in a trust in exchange for negotiating a discounted payoff with the lender.  Meanwhile, the company lists the home for sale to secure a third buyer. The issue with this scenario is that the lender only approved the sale to the rescue company, not the third buyer.  And since the lender has not yet issued a release of mortgage and is still the lien-holder, they must approve the sale to the third buyer.  Short Sale are not always a better deal for the buyer.

Short Sale

A Short Sale is typically requested and initiated by a homeowner who is unable to make their mortgage payments for 2 or more periods, and where a loan restructuring is not possible. A short sale is an "arrangement" between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. In many cases, the lender forgives the remaining debt and accepts a mortgage payoff that doesn't cover the outstanding loan. This option is in place to help homeowners and banks, when foreclosure or bankruptcy is the other alternative.

For a lender, a short sale can be appealing because the process can be shorter and less costly than foreclosing, especially in a declining market. Lenders can avoid the costs of property maintenance, utilities and homeowners' association fees. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There's also the chance that the property could be vandalized.

For borrowers, a short sale is the next worst thing on someone’s credit next to foreclosure or bankruptcy. It can be less of a black mark than a foreclosure on a borrower's credit record because it indicates that the borrower was working with the lender and once settled it’s listed on your credit record as SETTLED DEBT.

So if you are behind on your payments and only as a last resort a short sale is better than a deed in lieu, and certainly better than a bankruptcy or foreclosure.

Why should a seller consider a short sale?

A short sale is an option when foreclosure or bankruptcies are the other alternatives.  A short sale is still a negative mark on a sellers’ credit but not as bad as either foreclosure or bankruptcy. 

What are the downsides of a short sale?

If the lender absorbs the loss and allows the homeowner to walk away, the IRS looks at the value of that as taxable income.  And as mentioned above, a short sale will affect the sellers’ credit.  There is also the fact that the seller will not be able to stay in the home - it is a sale.  And, a seller may still owe the lender money after the short sale.

How does a short sale occur?

A homeowner would contact their lender and if no other options are available (negotiating a different payment plan, e.g.), the lender may agree to a short sale instead of foreclosing.  A lender may still choose to foreclose if foreclosure would result in a better outcome for the bank.  However if they agree, the lender would then require the homeowner to sell the house.  The homeowner hires an agent, who agrees to sell the house for a lower commission generally. 

If a buyer can be found for the property, the buyer submits an offer to the seller who, if accepts the offer, then forwards the offer to the bank.  The bank then either accepts the offer or does not depending on what the offer amount is and what the appraised value is determined to be, taking 4-6 weeks.   If the lender accepts the offer, a closing usually takes place very quickly. 

The City Council is scheduled to vote later this month on the first affordable dwelling unit ordinance in Hampton Roads later this month.   The plan centers around incentivizing developers into voluntarily including lower cost housing units in their developments through density bonuses and other factors.  This strategy, called inclusionary zoning, has been used in many other localities in the country. 

Team Maxx Real Estate

The Hampton Roads Transportation Authority has delayed implementation of the increased taxes and fees intended to fund transportation improvements until April 2008.  This allows the General Assembly to make changes to the law and the fees prior to implementation.  This also means the grantor tax increase will not take effect until April 2008.

Team Maxx Real Estate

Here's a look at what's new in real-estate markets across the U.S. from around the Web. (Some links may require registration or subscriptions.)
Housing bubble deflates
Across the U.S., home prices are falling, with many metropolitan areas expected to see large reductions, according to a report on CNNMoney.com. The city that may see the biggest drop is Las Vegas, where prices are predicted to decrease by 8.2% this year, the Web site says. What's in the cards for your local market? Check out CNNMoney.com's forecast for 379 cities across the U.S. While the outlook is grim for many of the housing boom's best performers -- places like New York, Los Angeles and Washington, D.C. -- the future looks bright for several cities that missed out on the action, the Web site says. Among the markets the article reports are on the way up: Houston, Memphis, and Rochester, N.Y.
More luxury-home sales in Seattle
One of the buzz-words in residential real estate today is affordability, specifically, the lack of it (at least in some areas) in the housing market. Yet, in Snohomish County, Wash., high-end buyers apparently don't have difficulty affording luxury houses. In the Puget Sound region, which includes the county, the number of home sales above $1 million jumped from 23 in 2004 to 83 in 2005, according to an article published by The Herald. Many of the residences sold were either new or had impressive views, the paper says. Skyrocketing prices in nearby Seattle and a lack of buildable land also worked to drive buyers to the area, the article says.
High-end not lagging in Charlottesville
Buyers are starting to call the shots in Charlottesville, Va., but not when it comes to the luxury segment of the market, says The Daily Progress. Although sales are generally starting to slow in the area and buyers are getting "picky" as inventory builds, the paper says, houses priced at $1 million and up continue to sell well. In the million-plus price range, there have been no signs of an increase in the number of homes up for sale, the article says. This is in sharp contrast to the general housing situation there, where the number of properties on the market in early April was double the amount of residences available a year earlier, the paper says.
To rent or to buy? That is the question
In San Francisco, Honolulu and New York, the cost of renting a home for some people is now less expensive than owning one, challenging conventional wisdom that paying rent is akin to throwing money away, says the Washington Post. The housing markets in Los Angeles, Seattle and Washington, D.C. are moving toward the point where renting a home may soon be more affordable than owning one, the paper says. The calculations are based on how much it would cost to buy or rent a home that is valued at the area's median selling price. The cost of owning a home was computed using the assumptions that a homeowner had a 30-year fixed-rate mortgage, put 20% down, paid 1% of the home's total value in annual property taxes and claims a mortgage-interest tax deduction equal to a quarter of the tax amount. However, the article says, the decision whether to rent or buy is not a purely financial one, and can vary depending on personal and lifestyle preferences.
List home in Chicago, sell months later
In Chicago, sellers anxious to find a buyer for their properties might have to wait months -- even up to a year -- to successfully get their homes off the market, says an article published by the Chicago Tribune. Thanks to a rising inventory of homes for sale (Chicagoland's single-family inventory is up 30% from last year), sellers have to be prepared to sit back and wait for an offer, or reduce asking prices, the article says. In this more "normal" market atmosphere, the paper says, some buyers are asking for price cuts and getting them. A real-estate agent quoted in the article says to expect price appreciation to drop from last year's 8% to 3% this year.

By Lauren Baier Kim

Team Maxx Real Estate