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Short Sales: To Buy or Not to Buy, THAT is the question!

by Shannon Smith 11/15/2012 9:00:00 AM

There has been a lot of buzz in the real estate market over the past few years about short sales. Some buyers are under the impression that you can get a screaming deal if you target short sales. While it is possible to do so, there are definitely many more buyers who waste a lot of time chasing short sales than there are those getting great deals. Short sales are best suited to a relatively small subset of buyers. The purpose of this post is to help you evaluate your personal situation to see if short sales are the right type of listing for you.

The most important thing to understand about short sales is that there's almost nothing short about a short sale. Once a short sale is listed, it generally takes 30-120 days for the seller to obtain bank approval on the offer in order to proceed with the short sale.  Once the bank has approved the short sale, the parties can start the normal transaction, which usually takes 45-60 days.  In general, short sales take 3-6 months to close but I have seen them take as long as 12 months to close.  The time needed to close a short sale is one of the issues that makes them less-than-ideal for many buyers.

Here are other unique considerations for short sales: 

1) Loans that need to close in 30-45 days or by a certain date.

Bank approval letters usually give parties around 30 days to close…starting yesterday. Most listing agents can get extensions for the closing date, but you don’t want to go into a short sale transaction knowing that you’ll need an extension because they are not always granted. Frequently, a per diem rate is charged by the seller’s bank if closing dates are not met. For every day past the scheduled closing date that a transaction does not close, the buyer may need to pay $50-$175 per day.

Buyers with an USDA loan or who are applying for a Mortgage Credit Certificate should be wary of short sales, because they are rarely able to close in 45 days. Not only would per diem fees apply in this case, but some short sale approvals can only close in 60 days while government guidelines may not allow an extension.

2) Investors seeking a 1031 exchange.

The time involved in closing a short sale can often conflict with the timeframes needed to close a 1031 exchange and can put both the sale and purchase involved in the 1031 exchange in jeopardy.

3)  Military services members whose temporary living allowance cannot be extended.

When there is a time limit on temporary living allowances, a short sale can be risky because of the time requirements and potential delays involved.

4) Buyers coming into the deal making demands.

Some buyers think that because a short sale property is underwater and the bank is not currently receiving payments, that they can drive the bus in a short sale. As it turns out, the first lien holder actually drives this bus -- and a buyer is lucky to even get on the bus! Demanding buyers may do best to stay away from short sales. Unrealistic expectations rarely result in a successful short sale purchase.

 5)  Buyers with limited or no funds for closing costs.

The vast majority of banks (lien holders) will not pay for many costs that buyers are accustomed to the seller paying in a regular sale. Examples of these costs include: survey, termite inspection/tenting, and HOA documents or liens. Some banks will pay for some of these costs, but if the offer is low, they may cut their closing costs in order to approve the deal. Most banks will allow a credit for closing costs, but often there will still be small financial gaps that need to be bridged at closing, and if the buyer doesn’t have the money, the deal will be canceled.

The list price for most short sales is generally the price the bank is willing accept because they want to sell as quickly as possible. Yes, the short sale process is lengthy, but it is still shorter than a foreclosure. Most often, banks order an appraisal to ascertain market value and will not accept offers much below market price. Banks believe that if they foreclose on the property they will be able to sell the home for an even higher price after foreclosure. The value of a short sale to them is time. As a result, low-ball offers are likely to be rejected. So, if you’re thinking about a short sale, the bottom line is that you need to be serious about your offer, qualified and have funds in the bank for closing costs.

When are short sales a great deal?

With historically low inventory and multiple offers on most standard sales, buyers who are patient and willing to wait have been able to get great deals on short sales. Experienced listing agents can help negotiate buyer credits, which enables buyers to spend their money on repairs and cleaning instead of sales costs. Most importantly, an agent experienced in short sales can increase a buyer’s chances of closing and negotiate a better deal.

It’s also important to recognize that the seller may have the most at stake. This short sale may be their last chance to avoid foreclosure, so it is necessary for buyers to approach it accordingly.

Many agents run from short sales, and I certainly understand why, but all short sales are not the same -- they are like an onion with many layers. They can be difficult and challenging, but also rewarding. Given the right situation, short sales can be the best deal on the market!

 Interested in finding a short sale or any type of home?   Contact me today!  I would love to lend my expertise to your buying or home selling situation!


 Shannon Smith (RA)

Top 100 of Realtors on Oahu 2010

Direct Line: (808) 738-3139
Mobile: (808) 225-3736 




Alex C. | Dec 11, 2012

Very well written post, Shannon. Bottom line, buyers need to have realistic expectations of what a short sale entails/requires and those looking for 'fire sale' deals will be disappointed. Great write up, I'll tweet it now.

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