It can be awfully tempting to get excited about “amazing,” “smokin'” or “crazy” deals. There are certainly enough people out there blabbering on and on about them, especially in the real estate world. In particular, the hype surrounding short-sales and foreclosed, bank-owned homes has reached a fever pitch over the past 18 months. It seems almost impossible these days to walk 10 feet or listen to the radio (for those of you who still do that) for 10 minutes without seeing or hearing somebody expounding on the fabulous virtues of investing in “troubled assets”.
What is a Short Sale?
A short sale is, essentially, an agreement between a bank and a distressed homeowner to sell their home for less than the amount of the loan, in lieu of a foreclosure. This is becoming more common as market prices are falling below the current mortgages held by these struggling owners. The bank, rather than dealing with the expense and hassle of actually throwing somebody out on the street, decides to be “nice” and let them off the hook for a reduced amount, assuming a buyer can be found who is willing to pay a price deemed acceptable by the bank. Hypothetically, this is a good deal for all parties:
- The Seller can get out from under the financial burden of a sinking ship and, hopefully, begin the road to economic recovery. The credit stain of a short-sale is far less severe than that of a foreclosure. I’ve heard of people qualifying for new home loans in as little as two years after a short sale, rather than the 7-10 years following a foreclosure.
- The Buyer can get themselves a new home with a discount of anywhere from 10%-50% off of what the Seller originally paid.
- The Bank can dispense with a troubled asset and put some much needed capital back into its coffers.
All of this can and does happen, though it is not nearly as simple as you would like to think. In fact, most of the time it is a ridiculous quagmire of pointless red tape, mixed signals, and limitless frustration. Here are a few fun facts that I thought should be shared.
1. Short sales are anything but short… The average short sale purchase takes anywhere from 60-120 days from the date of “mutual acceptance”. The Seller has to agree to the initial offer (mutual acceptance), but it is the Bank who really calls the shots, and they can be…difficult* to get answers from. They will commonly take weeks or months to even acknowledge the Buyer’s existence, much less respond to an offer. If they don’t like an offer, they’ll probably just ignore it. If they do like it, it may still take weeks to negotiate inspections, closing details, etc.
* F***ing impossible
2. There is no guarantee… It is entirely common for Buyers to wait for weeks and weeks with no response whatsoever, only to find out that the Bank either A) never saw their offer, or B) got a better one and took it. This puts buyers in the unfortunate and stressful position of simply hoping that their offer gets accepted…especially those buyers who are buying a place to live, rather than as an investment. I commonly find myself having to explain this reality to prospective clients…“If you need a place to actually live and have any kind of set timeline in place, you should really just forget about a short sale. There are other factors to consider besides the price…”
3. Banks aren’t as motivated as you think… Between tax write-offs for losses, Private Mortgage Insurance (PMI) covering those losses, and Government cash being delivered in vault-sized payments, the Banks aren’t in any particular hurry to change their behavior or do any favors. Sure, to the outsider it would make sense for the Banks to cut whatever deals they could with struggling homeowners. It seems like common sense…stop the bleeding, put some money back into circulation, slow the accelerating depreciation of home values, etc. Good for everybody, right? Unfortunately, many of the banks are being rewarded for their greed and failure, rather than common sense and good business practices.
4. You don’t really know what you’re getting… Though this one tends to apply more to foreclosed, Real Estate Owned (aka “REO” or “Bank Owned”) properties, it is pretty common with short sales. Unsurprisingly, people who are about to be kicked out of their homes tend to be a little disgruntled. They are not always inclined to leave the place looking clean and nice, the way it looked in the pictures the listing agent took 6 months earlier when they still thought they could cover their losses. (That one might be a little inside, but if you’ve ever looked at a short sale listing online, then in-person, you’ll know what I mean.) Generally speaking, the condition of the house will depend largely on whether or not it is still occupied. If the Sellers are still living there, it will probably be in pretty good condition, or, at the very least, in whatever condition they are accustomed to keeping it. If the home has already been vacated, watch out! It is quite common for the vacating Sellers to take whatever isn’t nailed down…and sometimes the nails themselves. If you’ve ever seen the History Channel show “Life After People” you’ll know that it doesn’t take long for a structure to deteriorate in the absence of maintenance. Plumbing and wiring problems, leaks, mold and pest issues are all very common. With an ordinary listing, the sellers will continue to maintain the property, even after vacating. Sellers of short sales usually have much bigger problems…
5. The sellers are real people…This is one that is very significant to me, personally, but is one of those things that buyers would prefer not to think about, like how many people have died in that cute 100-year old craftsman they’re so excited about. Oh, how ironic. I opened up a section on sympathy and sensitivity with a joke about dead people… Welcome to the complicated world of Rob LeRoy. But I digress… When considering the purchase of a short sale, it is important to be mindful of the fact that your “great deal” is someone else’s lost dream. Sellers of distressed properties are usually normal, kind and productive people who have fallen on hard times via job-loss, divorce, or illness…sometimes all three. Remember that these are commonly desperate people who just want to move on with their lives with what little remaining dignity they can salvage. Please don’t take advantage of that. If it’s a short sale, sure, you might be able to haggle down the price a little. At that point it is the bank’s money, after all. Often, though, a homeowner will try to sell before they are totally underwater. In these cases, they have little-to-no room to negotiate much of anything. I would urge prospective buyers to be as sympathetic as possible. Sure, I know…it’s just business. I guess…but that’s just not the way I want to live my life or treat the people in it. I guess that’s why I’m not a Republican.