Short Sales - Patience is a Virtue

Along with foreclosures, short sales have become a major topic of conversation over the last couple of years.  In essence, short sales are pre-foreclosures.  The homeowner, in an attempt to avoid foreclosure, will negotiate with their lender to sell the house for less than what is still owed on the mortgage.  This has also created a market for buyers to buy a home at a significant discount.

The biggest complaint about short sales is the amount of time it takes to get an accepted contract and close on the house.  The buyer's initial offer is to the homeowner.  Once that is accepted by the seller, it goes to the bank (the holder of the mortgage), along with the seller's hardship package which initiates the bank's review process.  Buyers often are frustrated because they think that the seller's acceptance of their offer should lead to a relatively quick close.

Unfortunately, that's usually not the case.  Unlike a foreclosure, where the bank (or Fannie Mae or Freddie Mac) knows exactly what they paid for the home, the bank reviewing a short sale only knows what is remaining on the mortgage.  They have no idea what the market value of the home is, first of all, so that has to be established.  Once they have that value, they can then compare it to the buyer's offer.  That's only one step in the process, though.  Before final approval, all the details of the transaction (price, commission, fees, etc.) have to be approved and signed off by various representatives of the bank, as well as the investor who holds the mortgage.  If there is a 2nd mortgage, all these approvals are needed for the 2nd bank, as well.

If the lender is one of the bigger banks, with a huge portfolio of short sales to deal with, you can expect that the process could take longer than normal.  On average, my experience has shown that short sales can take 4-6 months before a buyer gets their offer accepted by the bank.  I have been lucky in the past and had short sales close in less than 90 days.  I've also been on the other end of the spectrum - I'm working with a client now who had their offer accepted by the homeowner in May of 2011 and we are still waiting for bank approval.

One thing that can expedite the process is making an offer on a house that had been under contract previously.  Many times, buyers will get frustrated by the lengthy wait, find another house and terminate their contract.  Banks usually require that buyers are "locked in" for at least 90 days, but after that a buyer can pull out and get their earnest money refunded.  The new buyer, if they make an offer soon thereafter, can expect that some of the upfront work has been completed by the bank.  This should speed the process along, however, that is never a guarantee.

In the end, short sales are not for everyone.  Most buyers start looking for houses with the intent on finding the one that best suits their needs, making an offer that is acceptable to the seller and closing 30-45 days later.  If that is your plan, I would look only at resales and foreclosures.  You can have reliable expectations for a move-in date with these types of transactions.  If you're not locked into a move-in date, however, and you have the patience of Job, short sales might be the best deal available for you.