Sam on short sales
Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series. Short sales are going to be with us for a long time. What should a buyer know if he/she wants to buy one?
A “short sale” is typically the sale of a property by a seller that cannot continue to pay his monthly mortgage(s) and cannot sell the property for enough money to pay off his mortgage balance(s) in full. In a “short sale” the seller must ask his/her lender(s) to take a loss on the mortgage(s) in order to allow the seller to sell the house and move on. The seller’s lender(s) will accept a discounted mortgage payoff and usually forgive the seller’s debt. Buyers, sellers and their agents need to know that lenders have the last word in accepting an offer and final purchase price even after the seller “accepts” an offer.Lenders might agree to short sales when it’s obvious that they will probably never be able to get paid the full amount of the mortgage balance and it is cheaper and faster to agree to a short sale. (Maybe the seller lost his job or had serious illness that prevents continuing mortgage payments. Maybe the value has declined substantially.) If the seller can’t pay off the mortgage from sale proceeds, the choices are: foreclosure or short sale of the property.
Most people think that short sales are automatically granted but that is not true. In order to grant short sale permission, lenders typically consider two things: the seller’s financial situation and the property’s market value.
1. The seller’s financial situation must be such that they do not have other assets that could be used to payoff some or all of the mortgage balance that would not be covered by a sale. For example, I coached a medical resident that owned a condo and was renting it for less than his mortgage payments. He wanted to see if he could get short sale approval because he overpaid for the property a few years ago and the value had declined substantially. His lender declined a short sale because he had money in the bank and was likely to see a significant rise in income when his residency ended. The bank figured that if they waited a few years, they’d get paid because he would not want a foreclosure on his record. (They were wrong. He went to foreclosure, which was a bad move because his lender can still go after him for the money they lose when they resell.) On the other hand, someone that has become permanently disabled, has high medical bills and cannot work any longer may be granted short sale permission.
2. Lenders verify the true market value of the property and that it is actually lower than the mortgage balance. They like to see that the seller has made realistic efforts to sell the property on the open market with a broker in MLS (as opposed to a friend or relative who will buy at a discounted price). Lenders will usually have property appraised by their appraiser to verify that the offer is at or near current market value. If it not, they will not accept the price offered.
PERSPECTIVE:
As you can see from the details above, short sales are time intensive and may not always close. Once the lender is contacted about a short sale, it usually takes at least six to ten weeks to get a decision or denial. Most buyers can not tie themselves up that long on a transaction that might not close. That makes short sales a long shot for most buyers.
Unless a lender is willing to allow a discounted sale price below market value (not usually the case), just because it is a short sale does not mean it is a good deal.
Any of you in the middle of this? Have you learned the hard way that "short sale" does not mean you buy in a short time?
