Short Sales: Are They Worth the Trouble?

short saleFor anyone who has braved the housing market in the past four years, short sales have become synonymous with high risk and high reward. But with so many discounted properties on the market today, are they really worth a buyer's trouble? Maybe -- if you have a lot of time and a strong stomach.

Yes, you can get a below-market price, says Dallas Realtor Loni Parmelly, who specializes in short sales, but it's going to take patience because these deals are slow and difficult.

Unlike foreclosures, in which the owner has walked away and the bank is looking to unload a vacant -- and sometimes, vandalized -- property, a short sale isn't a distressed home that will sell at a rock bottom price. The homeowner is underwater (meaning he owes more on his mortgage than the property is worth), and he has a financial hardship such as a job loss. But to limit the damage to his credit rating, he has agreed to stay in the house (often continuing to pay his mortgage bills) and to help sell it, at which point the bank has agreed to eat the loss. According to RealtyTrac, short sales typically went for nearly 10 percent less than the market price in the first quarter of 2011. (Foreclosures sold at a 35 percent discount.)

What makes the transaction tricky for the buyer is that you're negotiating not only with the homeowner but the bank -- and that creates three big headaches:

1. It takes a long time.

Normally, when you make an offer on a house, you'll hear back within days, or even hours. But banks move very slowly these days because their representatives are overloaded with cases. You might wait 30 to 60 days for a response, perhaps longer if there's a second mortgage on the property and therefore a second bank. The total process can easily take as long as six months from start to finish. "For someone moving a family or relocating for a new job," says Parmelly, "that kind of timeline is incredibly difficult."

2. Your offer can't be contingent on selling your current home.

Banks generally won't accept offers on short sales if they're contingent on selling your current house to get the funds you need. "Even if the buyer is already under contract, there are just too many things that can go wrong," says Parmelly, "and then all the dominoes fall." So unless you're a first-time homebuyer, you don't need the equity from your current home, or you're a real estate investor, it's unlikely that you can make a short sale work.

3. It's an as-is sale.

Banks also typically won't consider short-sale offers that have inspection contingencies in them. So you can either do your inspection before you make your offer -- which would mean spending $500 to $1,000 on the outside chance that you can make a deal (and less than a quarter of short-sale offers lead to a purchase ) -- or do what most people do, and go without an inspection.

As long as you're prepared for these hurdles, you may just land yourself a bargain. But make sure to work with a veteran Realtor because you want someone who knows the ins and outs of the process and can protect your interests throughout the negotiations. And since short sales aren't necessarily identified on or the part of the MLS data sheet that buyers see, always ask your agent whether any house is a short sale before bothering to look at it.

Then, if you fall in love with a house that's a short sale, get yourself a mortgage pre-approval -- another short-sale requirement -- and make a lowball offer. Sometimes you can do that without putting down any money, but if the bank requires a deposit, have your Realtor put language in the offer letter stating that if you don't have a response by a certain date (perhaps 60 or 90 days out -- however long you feel like you can wait), you have the option of retracting the offer and getting your deposit back. That gives you an out, just in case.

When the bank finally replies, it will more than likely counter with whatever value its appraiser gives the house, says Parmelly. "Offer them 15 percent less than that," she says, "and see what happens."

Also see:
Understanding Short Sales
How to Sell Your Home in a Short Sale

5 Reasons Why Real Estate Deals Collapse

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First of all everyone needs to understand banks aren't losing money on short sales because their loans are backed by Fannie & Freddie. Second thing to understand is that a short sale drives area comps down. So if you buy a home that was a short sale chances are in 6 months your home will also lose value. The banks caused all these issues and are profitting from the hardship of others. The Federal Reserve and banks are ruining our country. Lets not help them.

August 16 2011 at 6:59 AM Report abuse rate up rate down Reply

Whatever you do, do not get into debt buying a home! Housing market has been kept up by unprecedented government stimulus. Fannie, Freddie are still loosing money to guarantee mortgages at tax payer expense. But bottom is still far away. Major housing crash is coming:

Nothing has been fixed. Stimulus was borrowed from the future. Debt was the problem to begin with and we have more of it now. Borrowing and spending does not make a recovery. Soon interest payments on debt will be enough to kill any recovery as you know it. Deflationary crash is coming. Individuals, state, local, federal governmers will not have disposable income left to spend. This is the mother of all crashes. 2008 was just the warmup.

August 15 2011 at 10:52 PM Report abuse +1 rate up rate down Reply

CARE is a non-profit organization that specializes in processing short sales! They handled everything with the agents, buyers and the closing. When the bank approved the short sale all we had to do was go in and sign the HUD. They even got all of our closing costs paid, plus they were able to get some of other bills that we had on the house paid for. They are nationwide and if you have an agent that lacks the experience - contact them at EMAIL - and their website is NO UPFRONT FEES and the agents get their full commission! They truly are for the homeowners and they even help out with the sellers since they have to wait. They processing time takes 60-90 days for an approval!!

August 15 2011 at 9:57 PM Report abuse -1 rate up rate down Reply

how nice the banks get their money one way or another, the bailout is worked great for the rich middle class.
finally those rich people are paying their fair share. welcome to the ussa

August 15 2011 at 9:17 PM Report abuse -1 rate up rate down Reply

The banks need to get smart and start working with their borrowers. They need to start handling short sales in a timely manner, or, work with their borrowers to modify the existing loans. They are needlessly foreclosing on thousands of homes every month and further driving down the real estate market. I tried doing a short sale on my home with Citibank, and they took so long to process it that all three buyers walked away from the contracts. Eventually the bank foreclosed, and the auction sale netted the bank two thirds of what the short sale would have netted. I have no sympathy for the banks, they are making a bad situation worse.

August 15 2011 at 9:10 PM Report abuse +1 rate up rate down Reply
Larry Anderson

I have tried over a year to re configure my loan with BofA, promises and promises but in the end no deal. I have a 7%, taxes have soared for some reason, as much as $300 a month over the past 4 years all the while value dropped from $330,000 to less then $200,000, a realiter told me they could probably get oly $160,000 on a quick sale, I put over $100,000 in myself over the past couple of years, a new water pump, all new siding, gutter, new windows and exterior doors, etc. as well as fencing my 5 acres, planted over 30 fruit trees all bearing great, a new heat pump, etc. Our income dropped over 1,000 a month while taxes jumped, school bonds, etc as well as a 20% utility increase as of this past March, had risen as much again last year and the year before. Then tried to work out anything but a rep at the bank sarcastically said that they needed forclosures anyway to justify their participation in the government incentive programs. So for the first time in my life I will have to walk away and loose everything, have 6 kids at home, 2 severely handicapped, one bed ridden 30 years old the other severe epilepsy uncontrolled, etc. What happened to these government programs to help, all I aksed was to try to set a lower interest rate to lower payments, still pay the full amount of $245,000, almost double what the bank may sell if for. Figure? Guess have to see how renting a house will be like, never rented before.

August 15 2011 at 8:51 PM Report abuse +1 rate up rate down Reply

We made an offer on a Short Sale, the house had recently been dropped by another buyer, after that buyer waited 4 months waiting for the Bank's approval. I offered $500,00 over the asking price of the previous buyers offer and asking price. The home was priced at $154,500 and the offer was again accepted buy the seller of the home who was doing the Short Sale, now we had to wait for the Banks approval.

After waiting 6 months, my Realtor, who's group Listed the home for the Bank, called me and congratulated me and said, the Bank was going to approve the Short Sale, you got the house; but with one catch she said. Now, after waiting 6 months, passing up other good deals, the Bank said we could have the home; but the Bank now wanted $180,000, instead of the $154,500.

I told them to take a hike. The Realtor tried to calm me, and said that we could make a counter offer on the the Banks new price! I told her to take a hike. That home sat for 10 months, between the previous buyers who walked and our 6 month wait. After we walked, the Bank priced the home at $165,000 the following day, not the $180,000 they wanted from us.

Four months later, a total of 14 month's that the home sat in the Florida Heat, with no AC, or De Humidifier, that same home was re listed, for $145,000 and sold for $145,000 2 months later. GOOD LUCK WITH SHORT SALES.

August 15 2011 at 8:49 PM Report abuse +1 rate up rate down Reply

Sorry I just don't get it, why do a short sale with someone else. Why not lower what the people owe on the house and redo the loan for the homeowner? That way, the homeowner gets to stay in their home and the bank gets their money. We are over our heads, have done one loan modification, but then got popped for child support when my husbands son went to live with his mom. I finished school and now still can't find a job. So they are making us do another loan modification (they added over $7,000 in fees to the first one), no telling how much this will cost us, just so we can keep our home and our kids in their schools. I don't get it, wouldn't this be much more simple? What we owe on it is almost at the central appraisal district's value. Talked to HOPE (government agency) not much help, still trying to figure out why.

August 15 2011 at 8:30 PM Report abuse -1 rate up rate down Reply
Yvonne Edwards

Short Sales consume a lot of time. The long wait is worth it if the price is not bumped up by the lender.
If a buyer has to wait one year to close it should not left a hole in his/her pocket. I have seen buyers walk away from a transaction on the verge of getting approval. The person who is wasted more than anyone else is the listing agent who lists, markets, negotiate, get cursed out, is demoralized and still has to split commission 50/50. Every listing agent should be given a bonus by the lender. Besides the trauma, short sale can be a blessing to the homeowner, the buyer and the other parties involved. Shorter processing time can reduce the negatives about short sales.

August 15 2011 at 8:26 PM Report abuse +1 rate up rate down Reply

We bought a short sale condo in Florida and were amazed at the deal we got. The only problem possibly with a short sale if you are buying a condo, make sure that the condo occupancy is high. If not you might be on the hook for exorborant condo fees in the future. Most condo fees include pool and maintenance, so if only half of the units are occupied you will have to pay double what is listed as your condo fee. We have 52 units and four are vacant and we all have to pay just a little more.

August 15 2011 at 7:34 PM Report abuse rate up rate down Reply