How Short Sales Work
A short sale occurs when a lender agrees to accept less than the total amount owed on a mortgage to facilitate a sale.
Typically, the bank holding the delinquent mortgage takes a long time to decide whether to accept a short sale offer. Waiting for an answer on a short sale can be frustrating. Some buyers wait months for a response on a short sale.
Warning About Pricing
Buyers are often drawn to short sales for two reasons: the listed price is attractive, and they believe the seller is desperate. However, not all properties listed as short sales are distressed, nor are all sellers desperate. Furthermore, sellers often price the listed property unrealistically, hoping that buyers will swarm to the listing like moths to a flame.
Pre-Approved Short Sales
If you are considering purchasing a property listed as a short sale, think about looking for a pre-approved short sale property. The real estate agent knows how much the bank is willing to reduce the price if an offer has already been accepted, leaving the buyer. Only then is the agent free to market the property as an approved short sale because banks rarely disclose the minimum price in advance.
With a pre-approved short sale, the wait time for new buyers is greatly reduced. Typically, the seller’s documentation has already been submitted to the bank by the time the earlier buyers leave, and the bank may be close to issuing a short sale approval letter. The missing documentation at this stage is the new buyers’ offers and loan qualifications.
Short Sale Negotiations
Sellers can agree to any type of purchase offers, but they are not binding unless the sellers’ bank agrees to the offer. The terms in the offer do not matter if the bank does not approve them. The real negotiation is not with the seller, but with the bank’s negotiator.
Banks rely on desktop appraisals and pricing opinions from third parties to determine the property’s value. While banks do not want to foreclose on the property, they also want to achieve a fair market value. It is up to the real estate agent to provide comparative sales and document the price offered by the buyer.
Note
Short sales are optional for the seller, whereas foreclosure is mandatory. For buyers, either can lead to a good deal on property, but a short sale may take a long time to close.
How Foreclosures Work
A foreclosure is a banking process where the bank attempts to recover as much of the outstanding mortgage balance as possible from the property. This is done by forcing the sale of the property, typically at auction.
Should you wait for the short sale and see if the house goes to foreclosure? Whether a buyer should wait for the property to be sold in foreclosure and recorded in the bank’s name depends on whether the house has multiple offers. If more than one buyer places an offer on the short sale, the highest and most qualified offer is likely to win.
If the buyer is the only offer and the bank responds negatively to the short sale, or worse, does not respond at all, it may be in the buyer’s best interest to wait for foreclosure. There is also no guarantee the bank won’t reject multiple offers, especially if they are insufficient.
When Foreclosure Becomes Bank-Owned
Sometimes, banks are unreasonable and end up harming themselves. Banks may refuse to accept short sale offers only to gain ownership of the home through foreclosure, which is ultimately sold for tens of thousands of dollars less.
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Getting an idea of what the bank might do by looking at the opening offers published in the event of a foreclosed home. Banks often publish the minimum bid for the auction. If this minimum bid is the amount owed to the bank, it implies to a fair person that the bank does not expect to sell the home to anyone at auction. A fair person does not wish to pay the amount due on the mortgage, or they will only pay the mortgage and buy the house from the seller.
Summary
Do not despair if the bank rejects your short sale offer. Be smart. Resubmit that offer, and you may get another negotiation. The agent may be able to present modified documents on behalf of the seller that could affect how the bank views the short sale file.
If no one submits higher offers, eventually, the bank will place the home for sale as a bank-owned property. Wait for it to reappear on the market as a bank-owned home. If the price is reasonable at that time, buy it from the bank. At least, buyers for bank-owned homes are assured that their deals will close in about 30 days, and likely at a much lower price.
Source: https://www.thebalancemoney.com/short-sale-or-foreclosure-1799094
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