Long Wait of a Short Sale
What is a short sale?
A short sale is a transaction approved by a lender to clear the seller’s mortgage debt for less than what the seller owes.
When they purchased their homes, sellers were required to make down payments to qualify for their mortgages and they may have built up some equity from paying their mortgages. However, some may not have owned their homes long enough to break even or sell at a profit. Further, the local market may have changed; falling home values may have stripped any equity the seller earned to the point that they owe more on their homes than they’re worth.
A short sale can mean that a home is marketed substantially below the seller’s purchase price, which can result in a substantial bargain for you. It’s the lender who is taking the loss though. For that reason, short sales can take months longer than a typical home purchase, and may never happen. That can be a problem for you if you have locked in a low interest rate, or have a deadline to get into your next home.
Why does it take so long?
First, the seller must prove financial distress to the lender, including W-2s, bank statements, payroll stubs, termination letters, financial statements, a letter explaining the hardship, and more. This is a document dumping ground and many times the bank will require the seller to supply the same docs over and over and over again. If the seller is not "on top of it," it can take even longer.
Then the lender must substantiate the current market value of the home to verify what the seller says – that they can’t sell the home for enough money to clear their debt and transaction fees.
This takes time and goes through many departments at the bank.
Before making on offer on a short sale:
Before you make an offer on a home that is advertised as a short sale, we need to check out some info to determine whether this is a good option to purchase AND if you are a good candidate to purchase a short sale.
Is the house a good option for a short sale?
- Can we verify that the seller has provided required short sale documentation to the lender?
- Can we verify that the seller’s lender has agreed to a short sale, and that it is not simply wishful thinking on the part of the seller?
- Do we know the amount remaining on the seller’s note?
- Can we verify market value as well as pending market value, especially if it is lower?
- Is the seller still living in the home and willing to participate in the process by providing the docs in a timely fashion?
- Is the home in pre-foreclosure or already at the judgment stage?
- Is the condition of the home worth it since you'll be purchasing it "as-is?"
Should YOU buy a short sale?
If you have a deadline in which you MUST be in your new home... you shouldn't buy a short sale.
If you must be in the new house before school starts, or before the new baby is born, or because your lease expires... you shouldn't buy a short sale.
If you must sell your current home before buying this home, and you have no temporary place to live after you sell your current home... you shouldn't buy a short sale.
If the offer you write is contingent on the sale of your current home... you shouldn't buy a short sale.
If your access to liquid funds is scarce, or you need the seller to pay your closing costs... you shouldn't buy a short sale.
If the advertised listing price is at the max of your budget or mortgage pre-approval... you shouldn't buy this short sale. (If the bank comes back with a higher price, you may no longer qualify for the home.)
If you have zero patience and plan to call me every day, or your attorney every day, to ask, "Why is this taking soooooo long?????"... you shouldn't buy a short sale.
If, at the end of day, you realize you are a good candidate to purchase a short sale AND the home is worth it, we will proceed with making the offer. Unless the seller's agent knows exactly what the bank requires, the seller will sign your offer and submit it to the bank.
Now, the waiting game begins. We wait and wait and wait for the seller's lender to approve the sale.
Please note, while the time-frames in the contract will undoubtedly change, some things are fixed. You must provide earnest money as soon as the seller signs the contract and you must complete your inspection within 5 days after the seller signs.
While we wait for the seller's lender to respond, you are in a legal contract to purchase this home. If a better home comes on the market, you cannot purchase that home until you have cancelled the purchase contract on the short sale per the terms of the contract--and you may not be able to cancel immediately.
Keep in mind that a short sale has risks and rewards. Yes, you may get a home for less, but you’ll have to work harder for it to close.
And remember, by writing this offer you have promised me that you patience and that you won't call me every day asking what is happening, right?