What is a short sale and do I want one?

There are some amazing deals being advertised as short sales.  What are they and do you want one?  

Short sales were exceedingly rare until home prices started dropping.  Now they are seeming everywhere.  And there are bargains to be had if you know what you are getting into...

What is a Short Sale

In simple terms, a short sale is a sale of a home where the lender agrees to accept less than what is owed on the property.   

How Short Sales work

Since the seller can't sell their property for enough to pay off the loan, they will set a price below what is owed.  When an offer comes in, the seller can decide if they are willing to accept and if so will forward it to the bank(s) to see if they will accept less money than is owed.

If the bank refuses to accept, the homeowner can continue to make payments or stop making payments and let the bank foreclose.

Short Sale prices are really just made up numbers

Even if you offer full asking price for a short sale, and the seller agrees, the bank might not.  Remember, even at full price, the bank is going to lose money since the loan won't be paid back in full.  

The asking price is just a price that the seller hopes the bank will accept.  Very often the seller and their Realtor will list at a very low price.  The seller won't get any money out of the deal anyway, so they don't care.  The Realtor wants to generate multiple offers in hopes that the bank will take one.  In this case the winning offer is likely to be much higher than the asking price.

Short Sales can take months to get bank approval

Banks usually don't like not getting all of their money back and are slow to accept less.  For properties that have two loans, the second bank might not get anything at all.  They are really reluctant to accept such an offer.  It is common for banks to take 3-6 months before deciding to accept or reject an offer.

Short sale does not necessarily mean low price

People often think that by definition, short sales are below market price.  In reality, the home is being sold for less than the mortgage amount, but could be above, below or right at the current market value.  For example, if someone owes $500,000 on a house now worth only $400,000, a short sale price of $440,000 would be a bad deal for the buyer.  That would be paying $40,000 more that it is worth!

Short Sales can be good deals

Many Realtors hate short sales.  Instead of one seller, you have to deal with the seller and a bank or two.  In a normal sale, the offer is accepted or rejected in a few days - with short sales it may be a few months.  The properties may need work before a new loan can be issued.  Summed up, short sales are a hassle.  But that means fewer people will bother and that means less competition.

If you have lots of time and don't mind waiting for months to find out if your offer is accepted, you'll have less competition and that generally means a lower price.  In San Diego, you are not likely to get a place for 30% below its current value, but might get one for 10% below value and that is a deal!