Understanding the Short-Sale

If you're thinking about buying a short-sale, you should first understand how one works. A Short-Sale is a process required when the house isn't worth, to the prospective buyers, the amount that is outstanding to the bank(s), AND the owners of the home can not pay the difference. If there are $400,000 in outstanding mortgages, and the house is only worth $350,000, and the seller's can't pay the $50,000, then the house will have to be "sold short", meaning that the lender will have to "Settle" the debt for less than it's full amount.


Understanding the Short-Sale Process

Understanding the Short Sale

Process Saves you Time and Money

Now, if I owed YOU money, and I said I can't pay it back, well, you'd probably be a little miffed. You'd be downright upset if it was $50,000. And most short-sales in this area are short by 35,000-250,000, depending on when they bought the house, and how much they bought it for. And the banks, by and large, aren't really happy when asked to do a short-sale. This is not a "Win/Win" for everyone - the banks take a big hit. Once you understand that the banks really don't WANT to do these sales, the process starts to make more sense.


First off, an owner of a home generally can't call up his bank, and say, "I'm going to sell my house and not pay you the full amount of loan back, so make me an offer!"


That's not going to work. Most banks won't even discuss a short-sale beyond the basics until the seller has an offer in hand. Since that's the case, for most buyers, you'll be testing the bank's appetite for a short sale only AFTER you've written an offer, had it accepted, and been through most of the basic contingencies (Home Inspection, P & S, Etc.). That means, that it may very well turn out that the bank says, "no deal", and you won't be buying this house.


For a buyer, a short sale process goes through the following steps:

A) Offer is accepted by Seller

B) Offer is submitted to Bank/Lender

C) Bank decides if the Short Sale is the best option for the bank. Analysis takes a long time!

D) Bank will do BPO (Broker Price Opinions). Most banks do more than one. BPO's are a signal that the bank is thinking about approving the deal, and they are close to a decision.

E) If Yes, Deal is approved, sometimes with conditions, and Closing is scheduled quickly

F) Buyer Closes on Property.


Why A Bank Would Refuse to Do a Short-Sale

There are many reasons a bank would refuse to do a short-sale.

A) The price of the short-sale property agreed to is too low. If the bank can get more for the property, it will try to get it.

B) The seller can pay the shortage. As noted above, if the bank feels the seller can pay the full mortgage, they will encourage him to do so - by not letting the owner sell his house. Typically, you need to be in fairly tough straights financially to get a short-sale done. (There are exceptions, but most people need a HARDSHIP LETTER)

C) The bank feels foreclosure is a better option. Although I often feel the banks are too quick to go down the foreclosure path, (more on that in this short sale article), the fact is that the banks often feel the best way to "minimize their loss" is foreclose on the property, and that means no short-sale will be accepted.


How to Prepare to Buy a Short Sale House

When buying a home that will have to be sold short, you should be prepared! Here are the best ways to be prepared.

A) First, understand that you DON'T KNOW when the closing will be. Until the bank approves the deal, expect deadlines and timelines to be basically meaningless. The Lender works on his schedule, not yours.

B) If you're selling your house first, make sure you have somewhere to live if your closing date can't be moved. Yes, you may have to sell - and be unable to buy - so you need a back-up plan.

C) If you are renting, make sure you are going month-to-month. Again, that's a safe back-up plan. Even if it's more expensive, at least you won't be out on the street.

D) Watch your rate-locks. Be aware that in all likelihood, a 60 day rate lock will be long gone by the time you close your deal. Extending attractive rate locks is typically very expensive - and you'll be on the hook for it. You're likely better off waiting until the bank gives the OK before doing a rate lock.

E) Watch for the end of the quarter, end of the year. I often feel the banks wait until the end of the quarter or the year to make their final decisions. While this seems arbitrary, to them it makes sense. Pay extra attention when these milestones appear.

F) Have movers ready, but don't actually schedule them. When it happens, you'll have to move fast, most closings are in less than three weeks from Bank Approval. Don't get hit with cancellation charges, because it didn't close on time. It probably won't.


Do Good Things Today!

Matt Heisler

*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.