JULY 2008
Community Paper
The Long and Short… of Buying Short Sales
by Mike Derenthal, Derenthal Realty Group and College Park resident
Short sales. A great opportunity for a buyer to pick up a house for a song, right? Perhaps.
For those of you who got sick of reading anything regarding real estate back when the term “soft landing” was being over-used, you may not be familiar with the term short sale.
Simply put, a short sale is when a home is sold for less than what is owed to the bank. It is not foreclosure, but rather a step that can sometimes happen prior to, and in place of, the bank foreclosing on the property. The banks sometimes opt to sell the home off for less than what is owed to them because the formal foreclosure process can be quite expensive. I have read that on average, a foreclosure proceeding can cost the bank $60,000. From a seller’s perspective, a short sale will typically cause less harm to their credit rating.
We’re going to explore short sales from a few different perspectives over the next few issues. First, as a buyer…
We talk to a lot of buyers who are interested in short sales these days. Some are simply curious, and at the other extreme are those who are downright adamant that they are only interested in looking at short sale properties. I can tell you from experience that, from a buyer’s perspective, going through a short sale transaction can be extremely stressful, and some buyers are in a situation and frame of mind to handle it better than others.
What makes a short sale purchase so difficult for most buyers is the delays that often occur in getting a response on the offer. Typically, when a buyer submits an offer on a home, the offer is presented to the seller and some sort of response is made (be it acceptance, rejection, or a counter offer) within a day or two. When an offer is submitted on a short sale, it is not unusual for the buyer to have to wait four to eight weeks for the response.
Let me share with you an actual scenario that occurred with one of our buyer clients just recently. They were a young couple, looking for their first home. They kept hearing about all of the great deals to be had in short sales. They found a perfect home that was a short sale listing. They wanted it. Their agent informed them on how the process would unfold, and what to expect. The couple eagerly agreed that they were up to it and decided to proceed. They submitted their offer. Here is a simplified version of what happened next:
• The offer was presented to the owner of the home, who agreed to the terms and signed the offer.
• The signed contract (which was contingent upon the bank’s approval) was submitted to the bank’s loss mitigation department.
• A few days went by. No response. The buyers got antsy.
• A few more days went by. Still no response. The buyers began to wonder why their agent was not able to reach someone at the bank for an answer. The For Sale sign remained up on their dream home and they wondered how many other people had been submitting offers.
• Two weeks went by. Multiple voicemails left with the bank’s loss mitigation department in Utah resulted in zero returned calls. The buyers began to notice other properties on the market that looked interesting.
• Three weeks went by. The buyers’ lender informed them that the rate he had promised was no longer available as rates continued to inch up. The house effectively got more expensive for these folks with the slightly higher interest rate.
• Four weeks went by. The bank finally contacted the seller’s agent and informed them that a loss mitigation specialist had been assigned to the case and that a decision would be forthcoming in the next three to four weeks. The buyers at this point were beginning to seriously second-guess themselves.
• Finally, during the eighth week, the bank contacted the listing agent to tell them they had approved the deal if the buyers were still interested in moving forward.
• Hesitantly, the buyers decided to move forward. They conducted a home inspection and found several significant issues. They tried to renegotiate the price with the bank in consideration of the added repairs that would now be necessary.
• Two weeks later (it is now two and a half months since they submitted their original offer), they get an answer from the bank.
I’m going to leave you hanging as to what actually happened in this case for now. To be continued so to speak once we look at this same scenario from the seller’s perspective.
Suffice it to say this was a tough experience for these folks. And it was due in large part to the extreme emotional connection that is typical when buying a home that will serve as a primary residence, even more so when it is someone’s first home. Rest assured we have other short sale buyers (typically investors and / or cash buyers) who find it easier to play these waiting games with the banks. That’s why I honestly feel that short sales can be a great opportunity for certain buyers, but a gut wrenching process for others. It really depends on the frame of mind of the buyer.
If you’re curious to get a more detailed explanation on short sale issues, we’ve compiled a pretty good list of links and some videos on short sales which you can check out at www.DerenthalRealty.com/market-blog.
Feel free to drop me an email at mike@derenthalrealty.com.
by: Mike Derenthal, Derenthal Realty, www.DerenthalRealty.com
1520 Edgewater Drive, Suite E, Orlando, FL 32804
407-965-1919
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