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A Special Report Prepared by REALTOR® Errol Mooney
8340 Brentwood Blvd.
Brentwood, CA 94513
2453 Discovery Bay Blvd. Suite 100
Discovery Bay, CA 94505
About Short Sales
“Short sale” is one of the most misunderstood terms
in the real estate industry. Whether you are a buyer
looking for a bargain or a seller looking to get our from
under a troubling loan situation, it pays to understand
what short sales represent and the things you need to
know before making any crucial decisions.
(and How They Affect Both Buyers and Sellers)
The 10 Biggest Myths
About Short Sales
(And How They Affect Both Buyers and Sellers)
“Short sale” is one of the most misunderstood terms in the real
estate industry. Whether you are a buyer looking for a bargain or
a seller looking to get out from under a troubling loan situation, it
pays to understand what short sales represent and the things you
need to know before making any crucial decisions.
A Growing Trend
With the recent growth of the sub-prime mortgage trend and the subsequent fallout
from so many questionable loans, more and more listings on today’s market are
categorized as “short sales.” This is one of the most misunderstood terms in the real
estate industry. As a real estate professional working with both sellers and buyers,
I come across short sale situations every day. I’ve found that people who know
what they are doing are able to avoid the common pitfalls and make good financial
decisions for their future, whether you are a buyer looking to find a good deal on a
home or a seller looking to get out from under your upside-down loan.
The Definition of a Short Sale
Let’s start with a basic definition of a short sale. A short sale (also known as a
“short payoff”) occurs when a lender or lenders accept a discounted payoff on an
existing mortgage. Generally, they agree to minimize—and sometimes completely
eliminate—closing costs for the homeowner in order for the bank to avoid the costs
and hassles of foreclosure. In other words, when a homeowner owes more than can
be collected through the traditional sale of their property, a short sale allows them
to sell the property before it gets foreclosed upon, thus lessening—and in some
cases, eliminating—the negative impact on the individual’s credit rating.
The Definition of a Compromise Sale
If the seller has other assets or is gainfully employed, the lender might choose to do
a compromise sale. In a compromise sale, the lender will place a short demand into
escrow that allows the sale to close, but will require a payoff from the seller for the
balance still owed. This note may be secured by other real property or it may be a
Know How to Make the Right Decisions
Though it’s important to know about the compromise sale option, my focus in this
special report is on short sales. My goal is to provide you with the education and
insights you need before going down the complex path of the short sale. Whether
you are a buyer looking to purchase a short sale property or a seller looking for
short sale approval on your property that may be worth less than you still owe,
this report will outline the pros and cons of short sales. Here, you will find 10 of
today’s most common myths about short sales along with the accurate information
you need to know to make educated real estate decisions.
You will find that the first five myths are geared
toward sellers and the last five are geared
toward buyers, but I highly recommend studying
all of them in order to have a full understanding
of how short sales will affect every facet of your
real estate experience.
Seller Myth #1:
It’s Easy to Get Approval from Your Bank to Conduct a
Perhaps the biggest misconception about short sales is that it is easy to get the bank
to agree to a reduced payoff on the loan. Many homeowners figure that as long as
they are in a situation where their property is worth less than they owe, they are a
candidate for a short sale—with the hopes of “breaking even” at the very least.
The truth is, it’s not that easy to
get approved for a short sale. The
thing to remember is that banks
are always looking out for their
own best interests. Nobody is more
tuned into current property values
than banks and they will generally
do what’s best for their bottom
line. Whether they foreclose or
go to a short sale, they are taking
a hit financially. So, if it makes
more sense for them to foreclose
on your property for any number of
reasons, there is a good chance they will pursue that option. Rarely can the bank be
swayed emotionally by your financial situation. Most times it comes down to this:
if they feel they can save additional time and costs by approving a short sale, then
they will be more willing to work it out with you.
The first thing you should do is consult with a real estate agent who understands
short sales and has a strong grasp of the subtle intricacies of banks’ approval
The thing to remember is that
banks are always looking out
for their own best interests.
Nobody is more tuned into
current property values than
banks and they will generally
do what’s best for their
processes. A knowledgeable agent can offer you guidance throughout the short
sale approval process. Then, once you and your agent have a good understanding
of what you are asking for, contact your lender as soon as possible to discuss your
situation, research your options and ultimately ask for a short sale approval on your
Seller Myth #2:
The Agreed-Upon Short Sale Price is the FINAL Price
This is where many sellers—and the buyers making offers—get caught off-guard
by short sales. Though the initial short sale approval process is quite detailed and
in-depth by the bank, they are primarily looking at the bottom line (that a short sale
will cost them the least amount of extra time and money). Basically, with the initial
price approval, they are willing to put the property out there as a short sale to see
what they can get in return. They will determine a price range at that point, usually
with a “bottom-end” price they are willing to accept.
Where it gets confusing is after a buyer makes an offer that is accepted by the seller
and listing agent. That’s when the “real” short sale approval process begins. At
this point, the bank will re-review the
current market value of the property,
including a full appraisal. They
will also fully review the financial
situations of both the seller and the
buyer to ensure that their investment
is safe. Through this detailed—and
often quite lengthy—process, the bank
will determine if they are still willing
to accept the price. And so begins the
frustrating part of the short sale roller coaster. They may choose to come back with
a counter-offer or pull the plug on the listing altogether. Ideally, they will accept
the offer and it will most likely go smoothly after that. But you always have to
remember the bank will hold the cards as long as they want through what can be a
Where it gets confusing is
after a buyer makes an offer
that is accepted by the seller
and listing agent. That’s when
the “real” short sale approval
Seller Myth #3:
Defaulted Payments and Home Equity Loans Will Not
Impact Short Sale Approval
Unfortunately, many sellers seeking short sale approval from their bank are under
the impression that this is an opportunity to “cut the cord” and get out of their
property clean and scot-free. As you can tell from reading this report, it’s not as
simple as that.
In many cases, homeowners have defaulted on loan payments and/or Homeowner
Association dues. If this is your situation, don’t go into the short sale process
assuming that you will be absolved of these back payments. In fact, any money you
owe will certainly factor into the short sale approval by your bank. You may come
out of the short sale process still owing them money, it may become a compromise
sale or you may not be approved for a short sale at all. Rather, the bank may opt for
foreclosure if the payment situation is severe enough.
If you are considering seeking a short sale at all, it’s important that you keep
your mortgage payments and HOA dues current. This will greatly improve your
chances of getting your short sale approved. It will also help your credit rating.
If all your payments are up to date, then a short sale will not have as much of a
negative impact—and in some rare cases, not at all—on your credit score. If you
have defaulted on payments, then it could have more of a negative impact on your
If your payments are all up to date, then another option you can ask your real
estate agent and lender about is offering your deed in lieu of foreclosure. In a
nutshell, this is when you simply hand over your title deed to the bank before the
foreclosure process begins. This can be a viable option to consider depending on
your situation, but make sure you have the information and guidance you need
from industry experts. Nothing is ever as simple as it seems.
Another factor that can come into play is if you have an outstanding home equity
loan or second/third mortgage. If there are multiple lenders involved, it greatly
complicates the approval process and lessens your likelihood of attaining short
sale approval. The bank that holds your first loan will have the biggest say, but the
more lenders and loans that are involved, the harder it will be to get a short sale
agreement that is to everyone’s liking. In many cases the bank holding the second
loan will not recover much—if any—money in a short sale. If your second loan is
held by the same bank that holds the first, then it slightly increases your chances
Seller Myth #4:
Once Approved for a Short Sale, Your Worries of
Slipping into Foreclosure Are Over
As we’ve discussed in previous myths, you must keep in mind the bank is always
in control and always doing what’s in its best interest. Even though the bank has
indicated it is willing to approve your short sale and allow your agent to put the
listing on the market, they will always reserve the right to retract the offer and
begin the foreclosure process. This can be a very frustrating experience for sellers
looking to avoid the unpleasant foreclosure process.
Rarely will this happen once your short sale is approved, but it’s important to know
that it can. Banks don’t like going through the foreclosure process any more than
homeowners do, but they will do what they have to in order to do what they think
will be best for their bottom line. So, if your listing stays on the market for a really
long time or they begin to feel that the short sale listing price is too high to sell in
the current market, then they may choose to pursue foreclosure of the property.
Again, it’s vital to know what you are getting into when selling your property via
short sale. Make sure you read the paperwork thoroughly and look out for any
deadlines or loopholes that might be included in the contracts. Don’t be afraid to
speak with a real estate agent and lender in order to better understand the playing
field when it comes to short sales and foreclosures.
Seller Myth #5:
Real Estate Agents Are “Cleaning Up” in the
Short Sale Market
While it’s been a tough time for the majority of real estate agents out there in
today’s market, some agents have been able to find business in the short sale and
foreclosure markets of recent years. But it’s not a bed of roses. Listing agents
are generally getting less commission in a short sale because of the bank’s heavy
involvement and in order to keep seller’s closing costs to a minimum. With that
said, it is often a lot more work for an agent to represent the listing because they
are dealing with both the bank and the seller. There is a lot of going back and
forth. They have to manage both sides to keep everyone as happy and informed as
possible throughout the process, oftentimes acting as more than a regular agent.
They are more like an interpreter, intermediary and peacekeeper.
Some agents do have relationships directly with specific banks and are representing
any number of short sale or bank-owned (REO) properties at one time. Keep in
mind that when working with an agent like this, their primary customer is generally
the bank, so they may not be as attentive to the needs of the seller as they would
like. It’s not always the case, but it can be. In fact, one of the most frustrating parts
of short sales for agents and clients is the waiting game because it takes longer to
get the information reviewed by all the parties involved.
That’s why it’s important to develop a relationship with an agent before you pursue
a short sale approval—an agent who not only knows how the short sale market
works, but is definitely on your side throughout the listing process (including
escrow and closing). An experienced real estate professional—with the help of
your lender—can help you explore all your options before you make decisions that
will greatly impact your immediate financial future, as well as your credit rating for
Useful Tips for Short Sale Sellers:
1. CURRENT PAYMENTS. Keep your loan and HOA payments
current to avoid credit problems and increase chances of short
2. LENDER CONSULTATION. Talk to your lender as soon as
possible to see what your short sale options are.
3. REALTOR® CONSULTATION. Talk to a real estate
professional who understands short sales and can guide you
through the approval and listing processes.
4. DO YOUR HOMEWORK. Be flexible in your expectations.
Don’t automatically say “yes” or “no” to the first offer from the
bank. Do your homework and make sure to consider all aspects
of the offer against your financial situation to make the right
5. EMOTIONAL VALUE. Don’t get over-attached to what you
think your home is worth. In today’s changing market, values
are always shifting. You have to set realistic expectations and be
willing to accept what you can get.
6. PROPERTY DAMAGE. No matter what, do not damage the
property on the way out. In some cases, it can result in civil and
sometimes even criminal litigation.
Buyer Myth #1:
Buyers Will Find the Short Sale Market Teeming with
Incredible Values and Even Some Downright “Steals”
It is true that you can find some good deals with short sale properties.
Unfortunately, most buyers go into their home search thinking they will save 10
percent, 20 percent or more when they purchase a short sale property. On average,
most short sales will close at about 3-7 percent off the full market value.
The important thing to remember is just how savvy banks are. They are not going
to approve a short sale if it’s not going to net a decent return for them. They are
losing money no matter what, so they are going to try to lose as little money as
possible. They know market values better than anyone and will set the price based
on what they feel will be just low enough to sell, but will be closest to full market
So what does this mean to buyers? It means you can save a little money by buying
a short sale property, but don’t always expect to find a “steal.” You must also be
sure to factor in any renovation costs that may be associated with the property.
With most short sale properties, it is truly “as-is” and there is rarely any “wiggleroom”
in the negotiations for concessions or repairs. Because the seller is largely
removed from the process, you will not easily be able to negotiate with the bank to
make necessary fix-ups, replace carpet, paint, etc. If you know the property needs
a lot of work, make sure to do a thorough evaluation of all the costs associated
with renovating the property before you make your offer. Determine whether the
reduction in selling price is worth what it will take to make the property livable for
A short sale transaction can be a long, laborious and time-consuming process
and can sometimes fall through completely at different points in the process.
As a buyer, it’s important not to get completely “wrapped up” in one short sale
transaction while watching other buying opportunities pass you by. Work with
your agent to leave yourself some “outs” in the offer process in case you decide to
pursue something else.
Buyer Myth #2:
Banks Are Desperate to “Unload” Their
Short Sale Properties
On the heels of Buyer Myth #1, it’s always crucial to keep in mind that the banks
are motivated by the bottom line. Many buyers go into a short sale offer thinking
that the process will go quicker because they think the banks are desperate to
unload the property. This is the perception for buyers when it comes to foreclosure
properties, as well.
The fact of the matter is that banks
are extremely careful with every
aspect of the short sale, from initial
approval of the price all the way
through to the close of escrow.
When you submit an offer, they will
scrutinize every detail. They will
fully review the seller’s situation
and your financial stability to make
sure there will be no problems with
the transfer of the property or payoff
of the loan. Again, these are the types of things that can often draw out the buying
With that in mind, you need to make sure you are covered on your end before
submitting an offer on a short sale property. Be sure to talk to a real estate
The fact of the matter is that
banks are extremely careful
with every aspect of the short
sale, from initial approval of
the price all the way through
to the close of escrow. When
you submit an offer, they will
scrutinize every detail.
professional and a knowledgeable lender. It is best to get pre-qualified for your
loan and submit a pre-qualification letter with your offer. This will show the bank
that you are not only serious about buying, but willing and able to pay for your
loan. If you want to take it one step further, you can consider getting pre-qualified
by the bank that holds the title. Quite simply, the more information they have about
you, the more faith they’ll have in you as a buyer and thus, the more likely you will
be to have your offer accepted.
Buyer Myth #3:
“Short” Sale Implies a “Shorter” Closing Period
This is where many people have misguided perceptions about short sales. People
hear the term and they think it means that the process will be “shorter” because
both the bank and seller want to sell the property as quickly as possible. That
is true in one sense, because they do want to get it off their books sooner rather
than later. However, they will still take whatever time they need to get the best
return on their investment. In addition to the extra diligence they will take to make
the decision, keep in mind a lot of banks are now too understaffed to handle the
growing number of short sales and foreclosures in a timely manner.
Because most banks are so stringent in the short sale approval process after you’ve
submitted an offer, it can often drag on for several extra weeks—if not months.
You just need to go in knowing that it could be a quick close or it could take much
longer. The frustrating part is that it can be hard to tell until you make the offer.
This is where an agent can help “scout” the listing for you by speaking with the
listing agent (and sometimes the bank itself) to feel out the situation and see what
the desired terms may be.
When I am working with buyers making a short sale offer, I always recommend
that they put a relatively short close period (30 days or less) in the contract. Why?
Because it shows the bank you are ready and willing to close quickly. They will be
drawn to your offer because they know you are more serious. It also gives you an
“out” later if they choose to drag on the escrow process.
But even though the bank may be more apt to accept your offer because of a short
close period, it does not necessarily mean that the escrow will close within that
timeframe. Most times it does not. They can extend the process as long as they
need in order to make their financial decision. This is very important to know and
understand before you make your offer, especially if you are in the process of
selling your current property and trying to “time it” accurately. Make sure your
agent stays on top of the listing agent—and even the bank, if needed—to keep the
process moving forward and to avoid having your contract get lost in the shuffle.
Buyer Myth #4:
The Listing Price is What the Bank Will Most Likely
Accept When You Make Your Offer
Before a short sale is ever put on the market, the listing agent and bank will
determine an undisclosed price range for the property. The high-end will be what
the bank would ideally like to get back. The low-end is the minimum they would
be willing to accept at the time of approval. The listing will generally go on the
market at a pr