Short Sales

Contrary to it’s name, a short sale is anything but short. There are a lot of reasons which I will discuss in a bit, but I think one word sums it up and that is “confusion.” During a short sale, the lender forgives a part of the loan to the owner (seller) usually due to the fact that the owner (seller) is underwater on the property and can’t afford or doesn’t want to live in property anymore. Now this is where it gets interesting. Just to arrive at the decision of a short sale probably took months for the bank to approve. During this approval process, the months the owner is behind on the mortgage has grown and foreclosure is now well within the rights of the bank. The next question is how long does the owner get for debt forgiveness before the bank decides to foreclose on the property as the months keep ticking away. And ticking is exactly what is happening before the bank decides to foreclose. Oh, and there is still one more question to be answered by the bank during this short sale period which is how much debt to forgive?

Now, enters the buyer. The buyer has identified a ticking short sale which could be foreclosed upon at any time. The buyer makes a offer which the owner has to run by the bank to determine how much debt forgiveness there is going to be. Trying to get a answer from the bank about a offer in hand is about as easy as going to the DMV to get something handled. The banks aren’t set up to analyze a offer, know the value of the property they have on the books, and have a internal point person to move the transaction along. So we wait, and wait, and wait, and...you get the idea.

Finally there is a answer. It has been decided that the bank is still considering the offer, however before they can proceed, they need to the buyer to do a couple more things. First the bank wants the buyer to get qualified through them. Then they want the buyer to fix some things have become a problem on the distressed property. It goes something like this. “We are still considering your offer, however you need to fix the leak in the pool put in a new hot water heater and change the garage from a converted living space back to a garage.” (Because Fanny and Freddie wont fund until those conditions are met.)

The buyer has waited 3 or 4 weeks to find out that the bank wants them to fix some things on the property before the close of escrow and there is still no decision on the price. And remember the time is ticking away bringing the property that much closer to foreclosure. Absolultely crazy you say. I would have to agree.

Lets say the property goes into foreclosure because the powers that be are too ill equiped to handle the short sale and more time and hence more debt has been incurred. Now the bank knows exactly what it has to do to sell the property. So it sends it’s people out to get the heaters fixed and the garages to be converted. The bank then picks from it’s list of qualified realtors and the house is put on the market. Time goes by and a new buyer is found. Heck, it might even be the joe buyer who originally tried to buy the property. Now the realtor and the bank are looking at the offer and can you believe it? A decision is made to either accept the offer or counter it. The process moves right along and boom, buyer and bank are in contract. 30 to 60 days after that the bank no longer owns the home and joe buyer or should I say joe investor will be up 20 to 40 percent in 2 or 3 years.