Word of The Week: Short Sale
A lot of buyers in Minnesota have approached me about Foreclosures and Short Sales. Most of the time, they’re confused as to what each means. I try to explain it to them in this way: they’re cousins. Related – yes. The same – Absolutely not.
Both of these types of sales fall under the category of “Lender-Mediated” and that’s exactly what they are. Sales of a home that are “refereed” by a Lender, or Bank.
A Short Sale is when a home is sold for less than the amount still owed on the loan.
Quick example for ya: Let’s say you own a house and still owe $150,000 on the loan. Well, you need to move because you just had another baby and you can’t stay in such a small house. So you talk with a Realtor about listing the property and they tell you, “I’m sorry, your house is only worth about $125,000 in this market. If you have to sell, you’re going to need to come up with the extra amount or try to work out a Short Sale with the bank.”
And you say, “Huh??”
Short Sales are tricky, both for buyers and sellers alike. Banks don’t like to lose money, but more than that, they are realizing they don’t want to be home owners. So instead of letting a home go into full-blown foreclosure and take it back themselves, they are agreeing to take a hit on the house without damaging the borrower’s credit as much as they would with a foreclosure.
Let’s get into more detail.
Why would banks do this? Why not just wait for the house to come back to them?
A few of reasons pop out to me.
- First, as I stated earlier, banks are in the business of lending and making money, they don’t know jack about Real Estate. The more they have to deal with foreclosed properties the less they can make money off of loans and other fees from their customers.
- Second, Foreclosures cost money. Not only are real estate values dropping, but it costs a good chunk of change to take a home back. The bank has to get some Broker Price Opinions (BPOs) done on the property by other agents, so they know about how much it’s worth. Then they have to assign an asset manager in the bank to sign documents and oversee the selling process. Next they have to hire a Listing Agent to help put the home on the market and list with the MLS. After that, they may have to fix or make repairs to get the home up to building code requirements. And then….well, you can see it’s not cheap. And it can take a long time to get all this done.
- Third, when a home owner starts missing payments and realizes that the property will go back to the bank, they get angry. They may be upset with their Lender, Realtor who sold them the house, or just The System. Often times they take out this frustration on the Home itself, and that’s not good for the next owner.
I’ve seen a ton of foreclosed properties in the past year, and about 90% of them have a good deal of damage or work to be done inside and out. It’s not uncommon for one of these houses to have no plumbing, furnace, door knobs, carpet, or kitchen appliances. The fact is, people start taking anything of value out of the house when they know a bank is about to take it back. They don’t think long term about the next owner-occupant. And that’s a sad truth.
So what would be the advantages and disadvantages to making an offer on a short sale?
Pros would be: They are cheaper than most owner occupied homes. They are in better shape then your average foreclosed home, and nearly the same low price.
Cons would be: They can take a long time to pan out. Banks aren’t always willing to forgive the loan amount and take a short sale. Some lenders and Realtors aren’t well-versed in short sales and can break the deal if they don’t tale the right steps. Be prepared to wait…
There are some good and bad things that come with these homes, just like all real estate sales. If you play your cards right, though, you can buy a decent house for a lot less than you could have 4 or 5 years ago.
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