The Challenge with Short Sales

I get a lot of questions about short sales and why short sales frequently seem to be the best buys. I hope to address this and other questions in this article.

First, a definition: "A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured against the property upon receipt of less money than is actually owed." For example, if the unpaid balance of mortgage is $100,000 and a property sells for $90,000, under a short sale the lender accepts $90,000 as payment. Note that the seller is still responsible for the difference between the sale price and the amount owed in most cases.

Some initial comments

  • Banks are under no obligation to agree to a short sale.
  • Banks lose a lot of money when a short sale occurs.
  • Banks will only agree to a short sale if they are convinced that you are going to default on the loan and they will have to foreclose.
  • Banks lose less money in a short sale than in a foreclosure.
  • Short sales take a long time to process. My experience is that on average they take about 6 months, although I have had a couple that exceed two years.
  • By law, the seller of a short sale gets nothing from the sale; they don't care if the house sells for $1.00 except for the amount they will continue to owe the bank and the tax implications.

You should know

  • The bank basically ignores the price and terms on the purchase contract. Yes, you read it right. You have a purchase contract for $150,000 with a 30 day close time and a 10 day due diligence period. The bank (this actually happened to one of my clients) could counter back at $200,000, 8 day close time and a 2 day due diligence. Yes, it is that stupid.
  • Banks do not have to agree to a short sale and frequently they do not. So, you have an accepted offer, waited 12 months only to learn that they denied the short sale.
  • Banks do not lose any more money than they have to. Banks will counter back at the higher of: the current market value or the contract price, whichever is greater.
  • You generally can not change buyers. If you wish to do this, the short sale will likely be terminated and resubmission starts all over again (with the new buyer).
  • The bank may choose to submit the property to auction (NationStar is an example) even though you have a contract on the property.
  • If you choose not to continue with the short sale and terminate the purchase within the terms of the contract, you will receive your earnest deposit back. However, your earnest deposit is held by the title company usually starting two business days after the purchase contract is accepted by the seller. So, your money can be held for months before you even know whether the short sale will be approved.
  • If the short sale is managed by a short sale company, it is likely that the buyer will have to pay them a fee. This is usually in the range of 1% to 2% of the purchase price.
  • If the loan was backed by Fannie Mae (or some other federal agencys) you will have to pay the real property transfer tax which is $5.10/$1,000 of the sale price in Las Vegas, Nevada. This is normally paid for by the seller.
  • When you make an offer on a short sale, you must also submit what is called a short sale addendum. The short sale addendum states that:
    • There is no way to know how long the short sale may take.
    • The short sale might not be approved.
    • The price and terms are subject to change.

All that said

I have represented more than 30 sellers and more than 20 buyers. Short sales, under the right condition can be good for the investor. How can you tell if the short sale process will be reasonable?

  • The lender and the investor. Remember that few banks hold the notes. Banks sell the notes in bundles on the secondary market. The investor who purchases that note has final say over whether a short sale is approved and the sale price and terms. So, you can not say that if the note holder is BofA it will take xxxx time. With some banks (USAbank is an example) it does take much longer than others independent of the investor.
  • The market value of the property. There is little if any discount off of the market price. The price that the agent listed the home for does not reflect the sales price. When we consider short sales, we look at market value because that is what you will pay for the property.
  • Who is handling the short sale. It seems, every one (lawyers included) that attended a 90-minute training class is an "expert." We've done well over 30 short sales (buyers and sellers) and we do not do our own short sales. We work with a third party who closes over 100 per month. The take-away is that the entity handling the short sale makes a big difference.

I hope this article is helpful with your understanding of the short sales. Leave a message if you have questions and we will try to answer it.

Thanks for your time.

Eric & Cleo

Eric Fernwood (Realtor)
VIP Realty (Vegas International Properties)
7570 Norman Rockwell Ln., Suite 140
Las Vegas, NV 89143
702-358-8884
EricFernwood@gmail.com
www.LasVegasRealEstateInvestmentGroup.com

© 2014 Eric Fernwood, All rights reserved. EricFernwood@gmail.com, 702-358-8884

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