(This article is intended for buyer’s – not agents)
What Are Real Estate Short Sales?
With our economy and real estate sales still in the doldrums, the majority of real estate sales in the California area are termed as short sales. But what are real estate short sales?
In the real estate industry, the term Short Sale seems to have only re-appeared in the last few years. The title is very confusing to some people, including some Realtors® themselves.
When we use the phrase Short Sale, it conjures up all sorts of ideas in our mind. I have been asked if it is anything to do with the length of time the sale takes, or whether there is a shortage of that type of home, and many other impressions of what this type of sale really is.
A real estate short sale is brought about when a home owner cannot afford his mortgage payments any more, and then finds out his home is worth far less than what it was worth just two or three years ago when he bought it. He has no option but to go to his lender and explain the situation to them. A real estate agent is usually called in to negotiate a settlement amount that the bank will accept to pay off the home owner’s debt, so the bank can get it off their books. The bank eventually agrees to a price and the property is put on sale for the price the bank is prepared to accept – usually many thousands of dollars short of what the home owner owes – hence the term Short Sale.
At some stage the homeowner contacts the bank or lender to advise them that he is in financial trouble and cannot keep up with the monthly payments. The homeowner often has to stop paying his monthly payments and his account goes into delinquency.
If the homeowner has a good agent, he will approach her and tell her of the situation. The agent will subsequently try to contact all interested parties – there may be a second mortgage on the home, or a couple of liens. All parties are advised of the situation with this lender and mostly everyone involved agrees to accept lower amounts than are owed to them – eventually. Typically, everyone agrees to accept a payment that is short of the amount owning and a Short Sale is then introduced to the real estate market.
Why are There So Many Short Sales?
Everywhere we look these days, there seems to be Short Sales all over the place. We do not see too many regular, traditional sales listings like we were used to seeing. Why is this?
The main reason is that during the recent economy problems, so many people have been affected by the downturn. Their companies have laid people off till business increases, other companies simply get rid of people under the guise of “downsizing.” Many folks have simply had their weekly working hours reduced, some even put on part time. Whatever has happened in the workplace it has affected most of the general public, and has had a big time knock-on effect.
With many workers now taking home a reduced a pay-check, they can no longer afford what they could before. They are now having a job to meet the monthly mortgage payments, pay for rising grocery store prices, pay for increased gas prices, and so the list goes on.
When a family has a reduced income, they spend less on grocery items, buy less gas and try to make it last longer, lay off their weekly yard maintenance service and do it themselves, spend less on eating out and cook at home. All the services they are cutting down on are therefore going to suffer from the knock-on effect – not from one family, but from hundreds in the area that are in the same boat. Collectively, the cutbacks they are making will affect the local economy and then local businesses start to suffer and the cycle continues as it builds into serious concerns.
Having considered the above, our typical family will start to have problems making the monthly mortgage payments due to the lower pay-check. Eventually they stop paying and the arrears start to build up. Of course, they hope and pray that things will improve soon, so they hang on for as long as they can clutching to that hope.
The situation rarely improves though and they are forced to sell their homes. They call in a real estate agent for help and advice, only to be advised – to their horror – that their home that they bought for $500,000 four years ago is now worth around $295.000. They are devastated, of course, but they have no other choice than to try and sell. But they owe far more than the home is now worth. This is known in financial circles as being “upside down.” Let’s say they still owe the bank or lender $450.000. How are they going to settle their mortgage when they are only likely to get $295,000 for their home?
The real estate agent approaches the bank for them and explains the position and hopes that the bank will play ball. Usually the bank has to settle for much less than is owed, and the real estate agent is contracted to conduct the sale – a typical Short Sale – known because the lender is agreeing to sell the property for an amount SHORT of what is owed.
Multiply this one family by several thousand in your area, and you have the answer to the original question… why are there so many short sales?
Will a Short Sale Affect My Credit Rating?
The short answer is yes and no!
If you have fallen way behind in your mortgage payments and are in what is commonly known as default or delinquency, then the lender will almost certainly report your arrears to the three credit bureaus. This means that your credit history will now be tagged with this “failure to pay,” and as a result your credit history will be tarnished and your credit score will indeed go down.
If you have managed to keep up with your monthly payments and have kept the bank informed of your financial status, they have no reason to report anything to the credit bureaus as you are not yet in default – because you have worked out a payment agreement.
If you can arrange with the bank to accept a short sale agreement because of your situation – you will have to send a letter proving hardship etc. – and can continue to make payments, you are likely to come out of the transaction unscathed.
The most important advice that most people do not adhere to when they run into trouble is “they do not go to their lender and tell them about their financial position.” This is one of the first things you should do. You may have a caring lender who is able to renegotiate your loan resulting in much lower payments – thus allowing you and your family to keep your home and not lose it.
How Long Does a Real Estate Short Sale Take?
There is no real answer to how long a real estate short sale will take. Ultimately, it is all in the hands of the homeowner’s bank or lender.
After a short sale has been agreed by the bank, the home is then put on sale as a real estate listing and everyone sits back and waits for the offers to come rolling in. All clever stuff, right? But is it!
The problem with a real estate short sale is that the lender usually is in no hurry at all to accept an offer and send it off to Escrow. For some unknown reason, the bank just sits on the offers and does nothing constructive to effect a sale. A short sale listing may have as many as 20 offers on it – many of them far in excess of what is being asked – but the banks do nothing much about these offers.
Having a short sale in this situation helps nobody – not the bank, the seller, or potential buyer. I am often asked: “why doesn’t the bank get off its butt and get this show on the road? The answer is a simple “I don’t know.”
Agents, whether for sellers or buyers, are continually frustrated by the bank’s actions – or lack thereof. I have been involved in many short sale transactions. There were up to 12 offers on one of my properties, some way above what the sale price was, but the bank did not move for months. It eventually went into foreclosure. Now that makes no sense at all!
With some of the reasons why a real estate short sale is delayed mentioned above, the answer to the original question is that if a bank has a mind to get this property off their books, they can do it in a very short time. But to do this, they have to actually decide to take action and accept an offer to let the process begin. Getting the bank to accept an offer is the bottom line in why a short sale can take so long.
Typically, a short sale can be done and dusted in as little as 30 days if the bank has a mind to do it. But these quick sales are few and far between. In reality, a real estate short sale can take six months or even up to a year to get them to conclusion.
Why are the Banks So Slow on Short Sales?
I’d like a dollar bill for every time I have heard this one.
There doesn’t seem to be any rhyme or reason why the banks are so slow to make up their minds over offers for their short sales listings. For some reason, it appears that they seem to think that the properties are not going anywhere and there is plenty of time to sort them out. This is how it appears! I’m sure the banks will have other ideas on it.
There is a saying in any buying and selling process that your first loss is your best loss. Simply put, if you hang on and hang on for a better offer, there is the likelihood that one won’t be forthcoming and that the original one you rejected is not there anymore. Have the banks heard of this, I wonder?
But the banks do have their rules and regulations as designated by the “powers that be” up in Head Office. So local bankers may not be in the position to do too much about the situation. Their hands may be tied by internal red tape. But we often don’t know that, do we? So perhaps we shouldn’t be too hard on our local bankers.
But somebody, somewhere, is causing these delays and it doesn’t make financial sense to keep sitting on these delinquent properties. Surely it would make more sense to accept an offer that equals the selling price and move on to the next one.
Do I Have to Pay Commission on a Real Estate Short Sale?
The real seller of the property in a short sale is the lender or the bank. It is they who are pulling the short sale strings – all on your behalf, of course.
Buyers never have to pay a real estate agent commission when they are purchasing a property. They may negotiate certain things or concessions throughout the buying process, but this rarely affects the selling price and is usually taken care of in the Escrow process.
Sellers do not usually pay a commission when their property is being sold as a short sale. The bank is usually behind the short sale process and it is they that take care of the selling agent’s commission.
After all, if a family can’t afford to make their mortgage payments and are in arrears, they don’t stand much chance of paying a commission either.
So, in most circumstances, neither the buyer or the seller has to pay the selling agent’s commission. However, a traditional (regular) real estate sale is very different. The homeowner, with his agent, generally calls all the shots during the sale, and the homeowner is also responsible for paying the broker/agent’s commission.
What Happens After a Short Sale is Closed?
After a short sale is closed and completed, the buyer is usually delighted at being able to purchase the house for a fraction of what it cost just a few years ago. It is the buyer that wins in a situation such as a Short Sale.
Sadly, however, the seller is in a totally different position. He has lost his home, any equity he might have had has been wiped out, and he is left with all his belongings – sometimes out on the street – mostly through no fault of his own.
This situations puts a tremendous strain on any marriage, and all too often, families break up as a result.
If you are involved in this type of situation, try to ensure that you have a place to go – well before the house transaction closes. Even if it is a mobile home on the outskirts of town, you will still have a roof over your heads, and with your family intact. Above all else, get a roof over your family’s head. Yes, it is degrading, and yes, your are now at rock bottom, but you still have your family and your health and strength (hopefully) to fight another day. It can be done!