What is a Short Sale?

Something I am asked almost on a daily basis is "what is a short sale?" What it definitely is not is a "quick sale". Based on experience, many short sales take minimum 90 days if not 6 months to a year to close - if it ever does.

In basic terms, a short sell is when a lender allows an owner to sell a property for less than is owed to the lender. The discounted loan is then "written off" by the lender and the borrower is issued a 1099 from the lender for the discounted amount.

The theory of a short sale is that the seller will not have as big a hit on their credit report if a loan is discounted versus allowing the property to go into foreclosure. For the lender there is a cost savings associated with a short sale versus a foreclosure.

There are numerous problems with the entire short sale process. First, the lenders have not standardized a short sale process thus every lender has different rules. This is part of the reason the process takes as long as it does. The documentation a lender may require is not always the same thus the REALTOR® must endure a pain staking learning curve with each lender in order to finalize a complete package for submittal.

Second, lenders order Broker Price Opinions (BPO) instead of Appraisals to determine the value of a property. Broker Price Opinions are generated by Brokers while Appraisals are generated by Appraisers. Some REALTORS® are adept at creating a BPO but there are many who are not and the process is unregulated. Some BPO's submitted to lenders are just inaccurate. I have also had REALTORS® tell me that the lender "made them" change the value on the BPO after it was submitted.

The third issue is negotiating with the lender before the property ends up in foreclosure. Foreclosures are processed on the first Tuesday of every month. Thus if a property is in the final stages of foreclosure then it is possible an offer can be sitting on a short sale negotiator's desk but the property is now in the hands of the foreclosure department.

This very scenario has happened more than once. In one particular incident an offer was sitting on the short sale negotiator's desk the Monday before the date of the foreclosure. The negotiator could not find the attorney to stop the foreclosure. The property was foreclosed upon and then ended up selling for less than the short sale offer.

Short sales may sound like a deal to a buyer but the truth is that at times the buyer ends up paying more for a property than it is truly worth or they end up spending time and money on a property that they never end up owning because of the inadequacies of the short sale process.

The key for a buyer is to work with a REALTOR® who knows the local market. A good REALTOR® can tell you if a property is a good deal or not. There are many motivated sellers in this market who may be willing to sell for much less than the asking price - or a short sale asking price. You just need to ask.

Sellers, always ask the REALTOR® how many short sales they have completed successfully before hiring them. This one question may save you a lot of time and headache later on down the road.