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As seen in the March 13th edition of the Yucaipa News-Mirror

Short Sales: Don’t Get Caught on the Short End of the Stick

Special to the News-Mirror by Randy Fox

When conversations come up about the current real estate market, you’ve probably heard the phrase “short sale” mentioned. So the question arises: do you know just what a short sale is? Hmmmm, the seller is short in stature? Nope. The seller wants to sell the house in a short amount of time? Nope, guess again. Give up? A short sale is the offering of a property for sale being sold by an owner that is headed toward foreclosure.

There are many ways to lose a home, but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings; one of those options is called a short sale. What’s the cause for a short sale? Many short sales stem from the cool-down of the real estate market and the sub-prime mortgage crisis.

Short Sales Explained

The owners of a short sale property have come to the unfortunate conclusion that they can no longer afford their monthly payment; in many cases, they’ve fallen one or more months behind on their house payment. Struggling to catch up on payments but not making any headway, the decision is made to put the home up for sale; to try to sell it before defaulting on the loan and having their the lender initiate the foreclosure process.

The term "short sale" means that the amount the owner has listed the house sale at for is less than the amount owed on the loan; the listing price being a reflection of sales in recent months of other houses in the area, also called comparable properties or comps. But why would anyone want list their home for less than what they owe on it?

As an example, let's say someone purchased a home two years ago for $480,000, right in the middle of the red-hot real estate market. Not able to qualify for a mortgage that a “fixed” loan (interest rate is fixed) would provide, they do qualify for an Adjustable Rate Mortgage (ARM) that provides them with a lower monthly payment they can afford, so they go ahead and purchase the home.

Two years later, when their ARM resets, the interest rate on their loan skyrockets and their monthly payment increases $1,000 per month. During this same two-year time period, the real estate market cools down and prices of homes in the area drop. When the ARM resets, the owners are no longer able to afford their house payment and make the decision to put the home up for sale.

To set the selling price, the owners call an appraiser to give them a value on their home. The appraiser looks at the sale prices of comparable properties in the neighborhood in the past few months and subsequently values the home at $375,000.

The owners get the bad news that their home is now worth $105,000 less than what they paid for it and now find themselves “upside down” in the home. Owing more on the home than it's worth, they have to sell it at the lower value of $375,000; after all, there’s no way that someone will pay $480,000 for a home that’s only worth $375,000. In essence, the sale price of the house is listed “short”; short of the amount due on the loan.

The Selling Process

Someone looking to purchase a short sale property would think they’re getting a bargain. But while short sale properties may look like bargains on the surface, many factors contribute to why attempting to sale or purchase a short sale property can prove to be the most difficult type of real estate transaction to deal with.

When lenders agree to do a short sale, it means the lender is willing to accept less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. Moreover, not all sellers and/or all properties qualify for short sales.

The selling process of a short sale is similar to the "normal" purchase of a property, but there are differences. One major difference is that all offers are submitted directly to the lender and not to the owners of the house; all offers are subject to the approval of the lender. In essence, the fate of the owners as well as the prospective buyer submitting the offer lies directly in the hands of the lender.

Lenders may choose to do a number of things, including "sitting" on all submitted offers until they get one that's close to the price they're looking for; having their listing agent submit a counter offer to an offer that's been submitted; or to simply be unresponsive to an offer. This in turn means that the seller and prospective buyers can end up waiting days, weeks or even months for the lender to render a decision.

Be Cautious

One extremely important thing to keep in mind before selling or making an offer on a short sale property is to make sure the listed price of the property has been approved by the lender. Unfortunately, there are short sale properties listed with prices that have not been approved by the lender; list prices that are tens of thousands of dollars lower that what the lender would not even consider accepting. This is a tactic sometimes used by lenders and/or the lender’s listing agent as a way of inducing offers on the property.

This leaves both sellers and buyers wide open to not only having the lender sit on offers for weeks at a time, but it also allows the lender to counter any offer with an offer potentially many tens of thousands of dollars more than what the owner and potential buyer thought the property would sell for.

Can short sales be successful? Absolutely. Can short sales help out a home owner in distress? Absolutely. Are there short sale bargains to be had? Absolutely. Proceed with caution? Absolutely. We’ll take a more in-depth look inside both selling and buying short sale properties in future articles.