What is a short sale, exactly?

Hi Amy,
If your Realtor hasn't already *DRAMATICALLY* warned you about the potential for a long, dragged out process... then your Realtor® is only one of two options;

A) Clueless to what they are asking you to do, and therefore equally clueless to what the shortsale negotiation process requires,
OR,

B) COMPLETELY aware of the potentially torturous process, but prefers to "keep you on the hook" because you are red meat and that Realtor® has a car payment and mortgage coming due and they are praying they just might "slip one past the goalie and score" on this prayer-of-a-process.

Shortsales *DO* happen... but virtually never quickly nor smoothly in the current market environment.

My advice to my own primary residence buyers (as opposed to investors, a different conversation) is... If you want to buy a HOME to LIVE in;
A) Buy one from a seller who has the ability to actually sell (a shortsale seller cannot sell without their bank's permission,)
OR,
B) Buy a shortsale from an INVESTOR who has already negotiated & locked in the deal with the lienholding lender.

YES, you will pay regular retail for the home... but owner-occupant buyers virtually never win in the shortsale clustermuck-of-a-process that entails illogical and unexplained delays, re-starts, losses-of-packages (REGULARLY!) and endless frustrations all the way to the very end.

I sincerely send you good luck... and I suggest you interview a few new buyer's agents... seriously.

Luck!
Dave Donhoff
Leverage Planner

Hi Blueheron,

A shortsale, in real estate, is when the seller wants to sell his home for less than the amount of the liens (mortgages, lines of credit, contractor bills due) and encumbrences (taxes. judgments, etc.) recorded against the home.

The liens and encumbrences are prioritized in order, with the "1st lien" being the first one to get to "drink from the money bucket" whenever the home is sold. The 2nd in line gets to drink to their fill from what is left over. If any additional money is still left after the 1st and 2nd are satisfied, then the next gets to drink, and on down the line.

If you bought a home (real world example from my day job) in Las Vegas 3 years ago for $480,000, with an 80% LTV 1st mortgage of $384,000, and a 20% 2nd mortgage of $96,000... so you actually got in for Zero down....

TODAY you have to move... maybe you lost your job, or maybe even got PROMOTED, and have to relocate.

You put your home on the market, and TOP DOLLAR is only $275,000.

Not only will that NOT cover both loans, it won't even completely pay off the 1st-in-line loan in full.

You, as the seller, have to prove to your lenders that you are destitute... because if you have ANY money that COULD be squeezed out to repay them, they certainly aren't willing to bleed on YOUR behalf by taking the losses while you keep a single spare dollar in hand.

It gets more complicated from that point onward... the lending bank sold the servicing rights off, and the servicer (who collects the monthly payments) has to chase down the final end-owner of the loan note (aka "paper") to get their permission to accept less then the actual face payoff amount. Nothing happens fast, and the people responsible for navigating these requests are simple DELUGED in the mess.

So... are we having fun yet?

Cheers,
Dave Donhoff
Leverage Planner

Wow! Thanks Dave for your excellent explanation.

Blueheron

There is no way to accurately predict what any given lender will do with regards short sales. Each is unique. Each home, each lender, & each borrower are different. Any Realtor that tells a potential buyer otherwise is just plain wrong. There's no "one size fits all".

Even 2 loans with the same lender may, or may not, be handled identically.

/tricia

Dave,
First I want to thank you for responding so fast and offering expert advice for free!!!! I am trying to gather my thoughts to ask some questions.
My realator is new to the process and he is also the realator representing the seller. (I thought that with all the work that goes into a short sale for the realator he should get as much comission as possible to give him an insentive to work hard.) The house is in a neighborhood that we can not normally afford and it is four blocks from our childrens school. We own a house already and are using the equity from this one for the down payment and then renting this house. I would not mind waiting 6 months or longer for this house due to the location. If we do not get this house we may not try to move. We were only interested due to the location and thought we could have a small chance due to the fact that it needs sooo much work and that the seller has not paid a penny in months. The seller does not live there it is empty. This place is aquiring debt at a fast rate if it was purchased for 299,000 and he now owes 345,000 all interest accured and late penalties.
With this said I keep hearing stories of people offering money on a short sale and the bank ignoring the offer and going to auction anyway and then selling it for less that the offer.
- WHY, Why, WHY,!! are the banks doing this are they realy so unorganized or are they so mad that they want the seller to suffer by having forclosure on their record. (Not that this seller will care he still has his house an hour away where he lives)
- Also I have googled Countrywide and have read a lot about how hard it is to do a short sale, in particular, with this company. Have you ever delt with this company?

- Is it helpful to send photos of the place or is it a waste of time because they are not going to agree to anything without a walk thru appraisal?

- Do they always do a walk thru appraisal?

- We were told that the seller is not aloud to ask for a short sale option without a buyer making an offer. That is why the realator is wanting a buyer to put in the paperwork just to see what the bank will say.

I know I am asking a lot of questions but if anyone has any info on any of this to ease my curious brain that would be lovely. I have a long haul ahead of me for maybe nothing!!
Thank you, Amy

I'm a Realtor that has experience both in buying and selling short-sales. That said, all banks are different, so your mileage may vary with what I'm about to say.

My realator is new to the process and he is also the realator representing the seller

Red flag #1. These types of transactions are NOT for the faint of heart. They can take a LONG time, and if neither Realtor (not realator) are not well-versed in these types of negotiations, then I'd either get another Realtor, or at least try to get as educated as you can about the process (which you're obviously doing here!)

With this said I keep hearing stories of people offering money on a short sale and the bank ignoring the offer and going to auction anyway and then selling it for less that the offer

In my experience, the price the bank will consider is usually based upon what is known as a "Broker's Price Opinion" or BPO. This is not a thorough appraisal of value, but rather an actual broker's opinion of price based upon the condition of the property and the surrounding properties' values. The banks with whom I've dealt have had a "set" number in mind, based upon the BPO. A general rule of thumb is that they want around 90% of the BPO. So if the BPO comes in at $300,000, the bank will often not entertain offers that come any lower than $270,000. Of course, all banks are different, but quite often they're wanting to get at least a large percentage of the market value determined by their own appraisals or by the BPO. Many times people see "Short sale", and they think they can offer pennies on the dollar and get the house, but it's been my experience that the banks will ignore (reject) offers that come in too far below their "trigger price". They are trying to lose as little money as possible.

Sometimes, though, the BPO is just too darn high. It's not a real valuation of the property, so the property goes back to bank, and then sells as an REO (real estate owned) property for far less than than the original offer given when it was a short-sale. This doesn't change their standard operating procedures, though. They'll still expect to get at least 90% or higher of the BPO while the house is potentially going through a short-sale. Once it's out of the seller's hands, they often have a whole new set of criteria for what they'll take on a house.

Also I have googled Countrywide and have read a lot about how hard it is to do a short sale, in particular, with this company. Have you ever delt with this company?

Be prepared for them to expect a MUCH higher percentage of the BPO. They are notoriously difficult to work with, and often have very unrealistic expectations with regards to actual marketability of houses. They are rather unbending on their price, and are not very flexible with their sellers.

We were told that the seller is not aloud to ask for a short sale option without a buyer making an offer. That is why the realator is wanting a buyer to put in the paperwork just to see what the bank will say

I've found this to be true of a few lenders, including Countrywide. Some lenders will review the hardship packets of the sellers and agree in advance to a short-sale. Other lenders like CWide will *only* start that process if there's an offer in hand. But just because there's an offer, doesn't mean they'll approve the short-sale. It just means they'll look at it. If the numbers don't align with their trigger-point, they'll reject the offer.

Is it helpful to send photos of the place or is it a waste of time because they are not going to agree to anything without a walk thru appraisal?

Not sure of what you're asking here. Helpful for you personally to send photos of the property to the bank? No. They don't really care. Helpful for the listing Realtor to send photos? Probably not. They often won't even let the listing Realtor give their own opinion of the home's value, but rather get their BPO's and appraisals from outside, non-vested parties.

Do they always do a walk thru appraisal?

Again, not quite sure what you're asking. Do you mean appraisals to determine the value before or during a short-sale? Sometimes. Quite often, they'll take the BPO as the appraisal value and not send a thourough appraiser through.

Best of luck.

Reno Fan, Thank you!
WOW!!! Boy are my odds against me. Maybe I will just watch for the place to go to auction. This would take a miracle!-but we are praying.
How can you find out the BPO?
Thanks Amy

You can find out about the BPO by having your Realtor ask the listing Realtor. Chances are, though, that because it's Countrywide, they haven't yet ordered a BPO, as a short-sale is not technically "in progress".

A generally good rule of thumb that I've seen, however, is that the BPO is usually somewhere around the listing price, if the listing price is within the normal range of other comparable homes in the area.

Sometimes, if the listing Realtor is savvy on these sorts of properties, they can protest the BPO if it's too high, in an effort to get the bank to accept an offer below their trigger price.

I had to do this for a house I had listed. The BPO came in too high for this specific house, and consequently the offers that kept coming in were too low and rejected. I compiled my own research data on the house and presented it to SEVERAL people at the bank. I listed the days on the market, the flaws that the other Realtors saw, as well as feedback from the people I'd shown the house to. I also compiled data of all of the other "comparable" properties that had sold, and outlined the features they had that made them sell, and juxtaposed that data against the property we were trying to sell in an effort to show them that the BPO wasn't necessarily accurate, and that other properties were selling, but this one was not.

This took *weeks* for me to do. I was sometimes on the phone with the bank for hours a day, having to deal with all of the handlers on the account. It was excruciatingly slow and frustrating, but it did help us get an offer accepted. Still, the offer that was accepted wasn't very far under the BPO, but just enought that I had to really, really work hard to "sell" it to the lender.

Forgot to mention, be prepared to wait *at least* 4 weeks to hear anything at all. 4 weeks is a minimum, but closer 6 weeks is the norm in my experience.

OK So I have been reading more this afternoon on the internet and have read that Countrywide would rather go into forclosure that way they can collect on the PMI or house insurance. My stupid question is if the seller has stopped making payments on the house long ago did't he stop paying PMI and the bank can't collect on it; kinda like car insurance?
I have so much to learn!!
Thank you Reno I thought I would be waiting about 2 weeks now I will try to be content waiting 4 weeks although I am reading stories of people waiting over 90 days.
Amy

My friend in Michigan did short sale on her home and it was completed in a month. It was not Countrywide, however, and I have heard they are the worse!

Forgot to mention, be prepared to wait *at least* 4 weeks to hear anything at all. 4 weeks is a minimum, but closer 6 weeks is the norm in my experience.

My buyers just walked away from a short sale after not getting an answer for 5 months. It was Countrywide.

You said your realtor is new to this. Do you know if he's even been in touch with the bank to discuss this short sale? Its very common in my area for the "green agents" to pick a price out of their hat for a short sale, get lots of interest and "hope" the bank will accept it. Before wasting your time, find out where he got his number from and if he's actually spoken to anyone about the short sale. Just because the market value of a home is less than the seller owes doesnt mean it qualifies for a short sale.

We knew walking in that the realator had not talked to the bank. Countrywide will not even consider a short sale unless the seller has a buyer and contract. I do not mind waiting. This house is the perfect size and location for us. Even if we do not get this house in a short sale I am going to try to follow it thru to auction or bank owned. The realator is totally pulling out a number but that number is all we are willing to risk with having two mortgages. It can't hurt to try I figure and maybe the seller will finally get some feedback to what the bank may consider selling it at. I do not have much hope in this house going after everything I have read on the internet today esp with the price we offered but it has been a learning experience and fun dreaming. What bank would take 190,000 on a 345,000 loan (seller bought the place for 299,000 a few years ago and racked up this much on interest not paid and late fees is what we are told. He 100% financed and agreed to only pay interest and then walked away about 5 to 6 months ago) even though the house is not worth even close to that today. They will take it to forclosure.

We knew walking in that the realator had not talked to the bank

There is no such thing as a realator. The correct word is Realtor

That's why the Real Estate website is called Realtor.com, not Realator.com

Terriks, I am sorry I keep spelling it wrong. I have never been that good at spelling and often have a dictionary by my side. I am not trying to insult anyone and often hesitate to write due to my spelling and no spell check on this program. After this I guess I will never spell realtor wrong again. I will also stick to gardening. Amy

Amy, don't sweat it. After all, you're seeking info on how to be a savvy buyer, not be a spelling-bee champion. ;)

I applaud you for your efforts to research and investigate the procedure. So many people don't, and then they get angry at the Realtors when they can't get the deal done. Many, many people go into this process much more unaware than you are at this point. You now know a good bit more than the average person, and I think that's commendable.

I've been searching short sale threads here on GW and none of them include conclusions! Has anyone successfully purchased a short sale home?

This morning we placed an offer on a short sale w/ multiple offers on it. We're trying to find out who holds the mortgage, and I'm prepared to wait up to 60 days before shuffling along. I was just looking for some stories to see if now in 2010 if the banks are getting any better at handling these situations...

I have relatives who are hoping to buy their first house but it looks like all homes in decent areas are short sales. The listing doesn't mention it, but a quick check of the tax records show that they were bought for $500,000 a few years ago and the listing price now is a little over $300,000. They're getting their paperwork in order to get a pre-approval so haven't made an offer on anything yet.

So is it my understanding that several people can make offers on the house and all offers are presented to the mortgage holders? I can see where this could take a long time because the bank may want to sit around for several months waiting to see if they get a higher offer. Are buyers allowed to make offers on several different houses at the same time, hoping that one offer will eventually be approved by a bank and turn into a contract on a house? I know one realtor here who believes it is unethical to do that but it sounds like it's being done.

I think it depends upon the bank in how they want to deal with the short sale process. I know my sister put a bid on a house that was over the other bid, but she was told by her agent that this particular bank accepts the first offer, regardless of if there are competing offers. I don't think there is a law saying that you can't put in multiple offers on multiple houses. But, once you sign a contract, you are on the hook. The only way to get out is to pay a penalty.
As for the process itself, my wife and I heard back that our offer was accepted in about 3.5 weeks. This is pretty quick for a short sale, but we also came in armed with certain info. The house was approved for our price previously by the bank, but the buyer's financing fell through. We offered this price (which was a pretty good bargain considering the comps in the area), and had financing already lined up. We are supposed to close next week, just not sure what day yet.

You always have the option of pulling back the offer unless it has been accepted.

The banks have no idea how to minimize their losses in this market.
Many paces are sitting vacant and being damaged while the banks dither.

I have retracted offers on short sales only to go back and purchase the place as REO later (with the delays that entails) for a lower price.

The bank went from a little trim on the hairline to a full up scalping, all due to their own stumbling around.

I should really thank them though. They reduced my risk at their expense.

I sold the place for slightly more than they initially wanted after only 13 months (held to move it into long term capital gains).

Banks hate losing money so much they are digging deeper holes since no none wants to make a decision.

If you pull the note(s) on the house you can sometimes start to see how deep the bank is in.

I use an attorney to deal with the banks.
I sometimes give him advice on repair costs when he wants to dabble, and he enjoys working over the banks.

Thanks for posting, brickeyee--I was hoping you'd show up with all your experience.

We know that a previous offer has been accepted by the owners (within the last week), but no offer has been accepted by the bank. My BA knows what the bank's "magic number" is due to past negotiation on this particular house that fell through. We submitted a cash offer-no contingencies for $500 above this offer, submitted to the seller as a secondary offer. We'll see, I guess...

In the meantime, we're still looking and I'm talking to RE attorneys to see if anyone in the area has short sale expertise.

We bought the house and closed on it March of 09. I can't believe it has been a year. The house was a house that nobody else wanted at all!!!! So we were the only offer. We had to live with my parents for 6 mo and sink about 40 grand into it. My husband is an electrical contractor so that saved a ton on the electrical and service. We bought the house due to location of our kids school and the blue line in Chicago. So with all the hell we have gone through in the last year it was still worth it. Gook Luck.

Welp, our offer was accepted by the buyers 2 days ago; now starts the waiting game for the lender. We still don't know who holds the mortgage, but I'm trying to find out. Is there anyway to look this up so I don't have to wait on my realtor to find the answer out for me?

We are another short sale success story. Closed almost 2 years ago. Our process was very quick. About 6-8 weeks from start to finish. But the sellers had had a prior deal approved by the lender and the buyers then walked away. So we know the lender would do the deal and what price they had approved.

The lender was WaMu.

One thing to bear in mind though, most of the time from offer to close was spent waiting on them to have the committee re-review. They took weeks and then demanded that we close extremely quickly. Luckily our mortgage broker was able to get us a loan that was able to fund very quickly. Not our first choice for a loan but we don't regret it at all.

They key to to be flexible while dealing with a very rigid bank.

"Closed almost 2 years ago. "

Two years ago there were only a fraction of the houses in foreclosure and short sales that there are now.

The inventory in some places measures over 12 months of sales.

Some of this is a game by the banks.

A mortgage is an asset to a bank.

It counts towards the reserves the bank is required to have.

As long as it is in 'performing' it can be carried at its face value.
If the bank declares it 'non-performing' it is no longer an asset, and they must then find money to replace the asset in their reserves.

By waiting the bank postpones the day of reckoning and the need to raise capital.

This is also why BofA is reducing the principal on some loans made by Countrywide they now own after purchasing Countrywide.

A reduction of 20-30% in the principal allows them to continue claiming 70-80% of the value as an asset, instead of being forced to write the whole value down and raise that much more capital.

Well, I got some good news and bad news today regarding the offer I placed on a short sale.

The good news is that Citi responded in just a few weeks to the offer.

The bad news is that there were two offers in, and the *other* one was the one they accepted because it was the first offer that they came across.

Stupid banks. The realtors are ticked, too, because my offer was higher (although the listing agent wasn't at liberty to say by how much). Additionally, mine was a cash offer w/ no contingencies, whereas the other offer had a financing contingency.

This also leaves the sellers on the hook for more money now since the shortage is greater than it would have been w/ my offer.

No wonder banks are floundering, if this is an example of how they make decisions.

Back to the drawing board for me.

Sorry to hear that revamp. It's really frustrating and totally illogical, isn't it?

I heard from my banker that what sellers are doing is putting the house up as a short sale and waiting for an offer. Then they go back to the bank and try to renegotiate their own mortgage down to a "fair market value" - in other words what the potential buyer offered. So basically you were never going to get the house. You are just a pawn in someone else's game. If it's true, that would be another wrinkle in an already difficult process.

how long does it usually take after the bpo