1st Time Homebuyers, Blog

Short Sales: Walk, Run, or Run Away?

A short sale is a sale in which the lender(s) agree to take less than the amount owed upon the sale of the property. The problem in a nutshell: because so few short sales have historically resulted in closed deals they can amount to a colossal waste of everyone’s time. The Washington Post has written about the problem: “Why Short Sales Stumble.” There are a number of reasons for problems with short sales, some of which can be blamed directly on the financial institutions involved (which, in their defense, are typically overwhelmed these days), but others can be blamed on good old-fashioned PPP (poor prior preparation). In the words of the Washington Post, “Too often, sellers and their agents are calling a listing a ‘short sale’ or saying that ‘offers are subject to third-party review’ without even having talked with the lender. They plan to get a live fish on the hook before they try to tempt the lender. Do you want to be that fish?” While banks were formerly very reluctant to approve short sales, the word on the street is that they have found religion, and are now more willing than ever to short sell than ever, to avoid adding to bloated REO inventories and the costs of the foreclosure process.

How can the buyer – or, more likely your agent – separate the wheat from the chaff? Frank Llosa, a Virginia-based real estate broker (and blogger) has created an excellent and very comprehensive screening list of screening questions for the listing agent of a short sale, (assuming, of course, you can get them to answer). Mr. Llosa’s suggested email questions include:

1. Have you closed a Short Sale before?

2. Have you requested and received the short sale package from the bank, including the hardship letter?

3. Have you sent the package AND have you confirmed receipt?

4. What communications, if any, have you had with the bank?

5. Has the bank approved the list price?

6. Have you received any other offers that you are waiting to hear back from the bank on?

7. Does the loan have PMI on it? (Private mortgage insurance)

8. [Are] there one or two trusts? Any other liens?

9. What are the names of the banks? Are these FHA or VA loans?

10. How long do you estimate that the lender will take to provide an answer to an offer?

11. Has your seller completely stopped making payments on their loan.

Unfortunately, as even Mr. Llosa concedes, the chances of getting a response to all of these questions is not great, particularly via email. I prefer to just cut to the chase and see if the property is worth further evaluation with a “quick and dirty” list. Here’s the minimum questions I ask before conducting any further investigation or even thinking about showing a short sale to a client – most likely over the phone:

1. Have ALL the lenders involved approved the short sale price? If not, why do you think they will?

2. Are there any other offers on the property?

3. Do you know how long the lender typically takes to respond to an offer?

If the answers to these questions are satisfactory, and everything else pans out, I may well advise my client to put in an appropriate offer. My next advice is to move along, and continue the house-hunt as if the first offer does not exist. The reason for this is that it can easily take three months or longer to even get a response on a short sale offer, and I don’t want my clients to miss any deals that come along in the meantime. If they find something else, we simply withdraw the original offer. (As you can tell, the short-sale game is particularly suited for investors: I’m not expecting my investor clients to fall in love with a property: if it makes sense, they buy, if not, they should move on. As someone once said, “real estate deals are like buses – if you miss one, there will be another coming along any minute.”)