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April 6, 2012

Short Sales Require Committed Buyers

It’s unfortunately been fairly common over the past couple years to encounter properties being offered as short sales. In a nutshell, a short sale simply means that the seller owes more on the property than it’s worth. Not only is the owner going to come up short on what’s owed on one or two loans, but he or she will also not be able to cover selling costs such as broker commissions, city and county transfer tax, and various reports typically paid for by the seller and provided to the buyer as part of a disclosure package.

As you can imagine, it’s no picnic for the homeowner. He or she is probably in larger financial distress, and has spent a lot of time consulting with real estate agents, CPAs, and attorneys before reluctantly concluding that a short sale is the best option. For these homeowners, the benefit of a short sale is that it has less of an impact on credit history, and thus enables a seller to recover within a couple years from the short sale. The alternative is walking away and letting the home go into foreclosure, which has a much longer-lasting impact on a seller’s credit history and ability to recover.

And it’s typical for emotions to be running high on the seller side in a short sale, for obvious reasons. Though the seller is working to pursue the sale, he or she is definitely not happy about the situation. The hope is that he or she can resolve the sale as quickly as possible, which is not always easy to do.

When you’re a buyer considering making an offer on a property that’s being sold via a short sale, it helps to know that the only way a short sale can work is to have committed buyers involved. The seller truly does risk having the home foreclosed upon if the short sale isn’t completed in a timely manner, because that seller has stopped paying the mortgage and the lender(s) are not far behind.

I usually talk with my buyer clients about what they should expect in the short sale process. Above all, I ask that they only move ahead with an offer if they truly love the house and feel it’s worth passing on other properties during the wait for short sale approval. The worst way to behave as a buyer is to “throw in an offer” on a short sale property, with an eye toward continuing to look during the one- to three or more months it may take to get approval. Because the buyer suddenly bolting from the contract that has been submitted to the lenders throws the entire process out of whack. The offer is part of a very complex, multi-document hardship package, and any changes result in further delays for the seller. In the meantime, the lender(s) are potentially pursuing the foreclosure process, so there’s limited time to resolve the sale.

Buyers are required to sign a short sale addendum that accompanies the purchase agreement. One of the clauses in the addendum specifies that the buyers will commit to waiting for approval for a period of 45-60 days (whatever the buyer wants to include as a timeframe is negotiable). This means that the buyers should, in good faith, not cancel the contract within a couple weeks after they see another house on the market they like better. Though buyers typically don’t have money held in escrow prior to lender approval, the waiting period is a good faith effort and the seller expects the buyer to hang in there for at least that agreed upon timeframe.

In addition to tolerating the approval period, buyers need to expect the possibility of being countered for more money if the lender believes the property is worth more than the contract price. And buyers should also not be surprised to be asked for some sort of monetary contribution during the escrow period to close the gap between what one lender may be willing to accept.

The key to a short sale is having buyers, sellers, and real estate agents who understand all the potential pitfalls and who are committed to working them out. I’ve closed multiple short sales, and fortunately have had excellent teams in place every time. Something will always come up—sudden runs to the title company to sign random lender documents in person, buyers’ loans taking longer than expected and pushing the purchasing timeframe dangerously close to the trustee sale, for example. But in each instance, everyone was committed and worked to make things happen.


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