Short sales have a reputation for being, well, kind of a pain in the keister.
It’s not uncommon to run across horror stories of the short sale process and timeline stretching out over seven months or more. With that kind of timeline, many buyers shy away from short sales, in spite of the great deals out there.
If you’ve got your heart set on buying one anyway, strap in. We’ll go over everything you need to know about how a short sale works.
What’s a short sale? Why buy one?
First, let’s go over the difference between a short sale and a standard sale.
If a homeowner is having financial difficulties, or if the home is underwater, the bank that owns their loan might allow them to sell the property for less than the outstanding mortgage in order to avoid foreclosure. This is a short sale. Though it doesn’t sound very complicated on its face, there is a pretty significant amount of red tape involved, courtesy of the bank.
If this is starting to sound kind of ominous, don’t worry. There are plenty of reasons why buying a short sale works.
Though this isn’t a hard and fast rule, short sales are more likely to be on sale for below market prices, and with a keen eye and some careful research, you can save a pretty penny. The one caveat? Since the owners have been strapped for cash, short sales are also more likely to need a little TLC. This makes them a great choice for real estate investors and weekend warriors.
Of course, there’s another reason a buyer might choose a short sale: sometimes, they just really like the property.
Why does the short sale process take so long?
When you purchase a house through a normal sale, there are just three main players: you, the seller, and your lender. A short sale, however, throws another party into the mix to gum things up—the seller’s bank, who is now trying to recover as much of their money as possible.
As to the specifics of the delays you might face, they could be caused by any number of things. Your most likely suspects include:
The original bank is dragging its feet
When you, the buyer, enter the picture, the bank holding the loan has already gone through the seller’s financials and determined that, yes, a short sale is their best shot at getting the most money back.
However, that doesn’t mean they’re as eager to get the whole thing over with as you (or the seller). Their main goal is to get as much of their money back as they can, and they’re not above drawing the process out if they think they’ll have better options later down the line.
Total Mortgage Processing Coordinator Jake Healy has seen his share of short sales and experienced this first hand.
In one instance, “the short sale approval process took so long that the real estate market improved and the bank increased the price they were willing to accept for the house, even though the borrower’s offer had already been accepted.”
There’s not much you can do to speed this part of the process up, so either stick it out or decide on a time limit in advance so you know when to walk away.
The original mortgage gets sold to another servicer
Most of the time, the bank or lender who originally finances a mortgage doesn’t hold on to it. Instead, they package it with other loans and sell it to another company, who will then service the loan and collect payments and interest. This can happen at any point in the term of the loan.
Of course, that also means it can happen during your negotiations, forcing you and the seller to start from scratch with the new bank.
Jake has run into this issue, too. “The debt was sold from one bank to another bank during short sale process on an unoccupied home,” he told us, “which delayed closing because the buyer needed to make repairs prior to closing to meet FHA guidelines, but no one could get in contact with the new bank to get permission to have the work done.”
The short seller has more than one mortgage on the property
If the seller has run into money troubles, they might have taken out a second mortgage on the property via a home equity line of credit or home equity loan. To complicate things even further, it’s likely that the second loan is held is now held by a different servicer than the original loan.
If that sounds like the recipe for a headache, you’d be right. Both will need to approve the seller for a short sale and then consider and approve buyer’s offer. They’ll have different timelines and processes for each step, and may not be great at communicating with each other.
There are title issues
Every lien or unpaid debt that shows up on the title must be negotiated and settled before the sale can proceed. This can, understandably, take some time.
Marc Laudicina, a managing loan officer here at Total Mortgage, has plenty of experience with short sales. In addition to dealing with them at work, he’s also just closed on one himself. He wasn’t immune to title troubles, though.
“The seller had an old mortgage from 1987 by a defunct lender that was never cleared off the title,” he said, “so my attorney and the seller’s attorney had to work with the FDIC (since the bank didn’t exist anymore) to confirm it was paid. This took a while.”
The loan you chose is complicating things
Since short sales tend to be distressed properties, they’re usually good candidates for renovation loan programs like an FHA 203k or Fannie Mae’s HomeStyle. These allow you to finance the renovation of your new property along with the original loan. Since they require so much documentation in terms of contractor quotes and plans, though, they can take a lot longer to close.
The property itself is causing delays
In order to qualify for certain government loans, you’ll need to pass an inspection. Given that some short sale properties are in less than optimal condition, though, what you have is a chicken-egg scenario—the bank won’t pay for renovations and the buyer can’t renovate until they own it. In this situation, the only option is generally to switch loan types or pay cash.
In northern parts of the country, you might also run into a special variation on this problem. If the house has been vacant and winterized, some lenders will need it to be de-winterized before the inspection can be completed. In this situation, the buyer typically has to cough up the cash.
Your own lender is holding things up
Mortgages are complex processes that involve a lot of paperwork. Sometimes even a standard mortgage can take a while. This can be thanks to the lender’s mistakes or your own, but the end result is still the same: your wait is longer.
The short sale timeline
The basic shape of the short sale process and timeline isn’t very different from your typical sale. However, there are some quirks along the way that you might want to keep in mind.
Quick note before we get started: the timeline laid out here is very general. Your timeline—and even the order in which you hit these milestones—could be very different.
Find the listing and visit the property: 1 week
While on the hunt, keep in mind that the list price may not reflect what the seller’s bank will accept. Generally, the seller sets the list price with the help of their realtor—the bank doesn’t get much input. The only exceptions? Listings that have been pre-approved by the bank. These are less common, but they are out there and are typically quicker to close.
Make an offer and sign sales contract: 1-2 weeks
Assuming you’ve made a reasonable offer and have minimal competetion, the seller has little reason to turn you down, since they make nothing on the transaction regardless of the sale price. This part of the process will go fairly quickly, but remember that a sales agreement with the seller doesn’t guarantee a deal with their bank.
Get approved for a mortgage: 1-2 months
Unless you’re buying cash, you’ll need to get your own lender involved. Depending on your loan type, you might be able to close in as little as 30 days, though renovation loans and some government loans will take longer.
Send your short sale packet to the lender and wait for approval: 1 week–12 months
While you’re getting your mortgage in order, you should also be filling out the right paperwork and making your offer to the seller’s bank. Then you negotiate with them and wait on approval. As we’ve already mentioned, this is the part of the process that can really hold things up. Though the seller might be willing to accept lowball offers, the bank probably won’t.
Get the property inspected: 1 day
Depending on your loan type, an inspection may be required for approval. Even if it isn’t, it’s still a good idea to know exactly what you’re buying. If an inspection isn’t required, though, you might want to wait until after you have bank approval to spend money on an inspection.
Debbie Drummond, an experienced realtor who runs her own real estate agency in Las Vegas says that this isn’t realistic for everyone.
“Many sellers require buyers to complete their inspections within a traditional due diligence period,” she says. “The buyer risks losing the money spent on inspections if the bank doesn’t approve. Doing the inspection will let the buyer know if there are any issues.”
Get the property appraised: 1 week
Your lender will require an appraisal, though it could do you some good, too. If it comes in lower than your offer, you stand a decent chance of negotiating the bank down. If it comes in higher than your offer, don’t worry about the results affecting their approval. The seller’s bank won’t get a copy. Because there’s research involved, expect to wait around a week for your results.
Get approval and close: 1 week–1 month
Once you have approval, the rest of the process is downhill. Depending on your situation, your may have extra steps like a survey or additional paperwork. Expect to have a fairly normal closing process.
Tips for making a short sale offer
Ultimately, there’s not a whole lot you can do to speed up a short sale. However, you can be smart about how you make your offer. The more the bank likes it, the quicker they’ll approve it.
Keep your offer as fair as possible. Since you have no way of knowing exactly what price the bank is willing to accept, lowballing for the heck of it may not get you very far. Instead, take into account the market and state of the property when choosing your offering price.
Be wary of making an offer soon after a large price drop. Most sellers will drop the price by smaller increments to make sure that they get the maximum potential offer. Occasionally though, you’ll run across a very large reduction intended to generate interest. Hold off on offering right away. Because the bank has no proof that the home could not have sold for a smaller increment, they’ll try to counter with a higher approval price, increasing your wait.
Don’t count on using the inspection results to haggle. Most short sales are as-is. Though there are some situations where the bank is willing to make repairs, it’s best to assume you won’t have that option going in.
Don’t expect the bank’s decisions to always make sense. Because there are so many factors at play for the bank approving the short sale, from an outsider’s point of view their actions can look a little, well, stupid. If nothing else, keeping this in mind can save you some sanity.
Is the short sale process worth it?
The answer to this question is entirely dependent on the specifics of your situation. “Short sales can be a great deal, but they’re only for a buyer with time and patience,” Debbie told us.
Broadly, it’s a safe bet to say that a short sale isn’t going to work for you if:
- You’re relocating for a job
- You’re not willing to take on a fixer-upper
- You need to get into a home quickly
- You can’t separate yourself emotionally from the house
- You’re generally impatient
- You’re a first-time buyer and unfamiliar with the basics of homeownership
For those who can afford to wait, can power through the uncertainty, and don’t mind dealing with a project when they finally get the keys, a short sale might be worth it. There’s a reason they’re popular targets for real estate investors, after all—the prices can be great.
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