From Brittany Mauriss on August 03, 2009 in CalFinder News
Market conditions have changed the way we look at real estate. It’s no longer customary to call a Realtor, list your home, negotiate a fair deal, and leave a welcome mat for the new owners. What’s commonplace now are foreclosures and short sales.
Speaking of short sales, there’s a lot of confusion when it comes to this term. Even the real estate agents are confused. So, let’s dive in and clear up the confusion.
What’s a short sale?
Photo Credit: Seif Law
When a homeowner owes more than their home is worth, rather than foreclose they opt for a short sale. The proceeds from the sale are less than what is owed and the homeowner is forgiven the difference.The lender has to agree to discount the balance of the loan and the homeowner has to prove financial hardship. All negotiation goes through the bank’s loss mitigation department.
The process of buying a short sale is a long one, so if you need to buy a home quickly, a short sale won’t cut it. In most cases, you never hear back from the bank,and when you do,it’s usually 3 or 4 months after you’ve submitted your offer. I submitted an offer for $10,000 over-asking-price on a non-approved short sale and actually got approved two months after submission - but that’s rare and most likely because I put down a large deposit and overbid.
Active short sale
An active short sale means that the house is currently an active listing on Metrolist (MLS). A short sale hasn’t been approved by the bank. The listing agent decides what the current market value of the home is and lists it as a short sale. If a buyer makes an offer on the home, the listing agent submits it to the bank along with a short sale package. The seller must convince the lender that they are financially unable to pay the difference between what they can sell the home for and the loan balance owed. The short sale package is lengthy and includes financial papers, such as past taxes, budgets, pay stubs, bank statements, etc. Once the loss mitigation department receives this paperwork, along with the buyers offer, the analysis begins. The bank determines if the homeowner qualifies for a short sale and they weigh their options - a foreclosure or a short sale - as to which tactic will bring minimum financial loss. This process takes between 2 to 5 months and possibly longer if there’s a junior lien (2nd
mortgage) on the property.
Photo Credit: Active Rain
Approved short sale
An approved sale means that the lender(s) have agreed to the short sale and the above process has already been completed. This is usually because a previous buyer made an offer and triggered the analysis process, but the buyer got impatient, bought another house, or couldn’t get financing. So, the listing changes from short sale to approved short sale. Now the listing agent knows the approved price the lender will release the property for. An approved short sale is more like a normal sale with a quick close. If you offer the approved price, you have a good chance of being accepted. If you offer less than the approved price, the waiting period (2 to 5 months) may start over again.
Active short contingent
This usually means that there are one or more offers that the owner has accepted, but that the bank hasn’t yet approved. It could also mean that the buyer’s offer is contingent upon selling their home in order to purchase the home that they put an offer on. Don’t be shy with short sale contingents. Yes, it’s “kind of” pending, but don’t let that hold you back from submitting your offer. Be aggressive and bid higher, offer a larger deposit, or pay cash for the home. A cash buyer is in a very strong position and most likely will bump the other offers off the table.
The rules of the game
The MLS has a rule that a listing has to be changed from active short sale to active short contingent once the seller has accepted an offer, which is subject to and contingent upon the bank’s approval. Most original short sale offers are rejected by the bank, so active short contingents make sense to put a back-up offer on. Once the lender has accepted an offer, the listing agent must change the status in the MLS to “pending,” and then when closed to “sold.”