Having been on the buying and selling side of numerous short sales, I’ve encountered many things that can derail a short sale transaction. While many of these will be beyond your control, it’s good to be aware of them before you list your home as a short sale or pursue a short sale as a buyer.
1. Buyer offers too little: Every buyer wants a deal. When you find a home you’d like to make an offer on, make sure your Realtor runs a CMA report (comparative market analysis) so that you’ll know the current market value of the home. If the home is priced competitively and is in line with recent sales, I strongly advise making a full price offer, or an offer very close to full price, especially if you LOVE the home. This is beneficial for a couple of reasons. When your offer is submitted to the seller’s lender, the lender will either hire an appraiser or get a few broker price opinions (BPOs) to determine the market value of the property. Lenders do strongly consider market value before making a decision. If your offer is fair, the lender is more likely to accept it without making a counter offer. If the lender has to give you a counter offer, it adds time to an already lengthy process. Secondly, because many lenders want to see all offers that come in on the property, if your offer is low, the seller and listing agent will be actively seeking higher offers. If a higher offer comes in, you could get bumped. In many cases, the listing agent will notify all parties that another offer came in and advise all parties to submit their highest and best offer. There’s a chance you could retain your position but again, you’ve added time to the process.
2. The seller changes their mind about selling: I just had this happen to some buyers I’m working with and there’s really nothing you can do to avoid this scenario. The sellers decided to pursue a loan modification rather than do a short sale. I’ve also heard of sellers who were unemployed and needed to sell their home but then got employment and decided to keep their home.
3. The lender wants the right to pursue a deficiency: Generally, in the state of Oregon, if your lender files a Notice of Default and pursues a non-judicial foreclosure on your primary residence, after the foreclosure sale, the lender has no right to a deficiency claim on your primary mortgage. (I am not an attorney and am not providing legal advice. If you are faced with this situation, please contact a real estate attorney to discuss.) What I’m seeing happen more and more frequently is that the lender approves the short sale but includes language in the approval letter reserving their right to pursue a deficiency. If the listing agent or the seller’s attorney cannot get this language removed, the seller will often terminate the deal and let the property go to foreclosure. I have heard listing agents tell their seller clients that although the lender includes this language in the approval letter, it doesn’t necessarily mean the lender will go after them. I think this is based on the fact that we’re not seeing it happen very often right now. Keep in mind that the lender has up to 6 years to pursue the deficiency. Just because we aren’t seeing it now does not mean they won’t down the road. It’s ultimately up to you to take your chances but I would never advise my clients to move forward with a short sale based on the fact that we haven’t really seen lenders pursue the seller/borrower. The bottom line is, with that language in the approval letter, they can.
4. The 2nd lien holder demands more money: Many homeowners have 2 loans (or more) on their property. The 80/20 loan was very popular during the peak when home values were still rising. Let’s say the current value of the property is $200,000 and the seller has a first loan in the amount of $280,000 and a 2nd in the amount of $70,000. In this case, if the property sells for $200,000 the first lien holder loses $80,000 and the 2nd gets nothing, unless the first lien holder agrees to pay the 2nd something in order to facilitate the sale. Most often, the 2nd would rather accept a payoff of around $5000 from the 1st than let the property go to foreclosure and get totally wiped out. Sometimes they will hold their ground and take their chances because they plan to hire a collection agency after foreclosure to pursue the homeowner.
5. The seller’s lender determines that the seller has not truly suffered a hardship: Before the lender will agree to a short sale, the seller has to prove that they are unable to keep the property. There must be a hardship, typically things like divorce, unemployment, or overwhelming medical bills. Wanting to sell your house because you’re underwater is typically not a hardship. The buyer may wait for 2-3 months for an answer only to have the lender deny the short sale because they determine the seller should be able to make payments and keep the home.
Unfortunately, you don’t have much control over these things happening but you can prepare yourself. If you’re considering purchasing a short sale, ask your agent to gather as much information as possible from the listing agent about the seller’s situation.
- Have the sellers truly suffered a hardship?
- How many lenders are involved?
- Is the seller committed to a short sale?
- Will the seller accept and submit multiple offers to their lender?
- Is the seller prepared to move forward even if their lender wants the right to pursue a deficiency?
Short sales are no fun for anyone involved but they’ll be around for quite some time. To make the process less painful, make sure you are using an experienced short sale agent, whether you’re on the buying or selling side. A special designation is not necessary, but make sure you ask how many short sale transactions the agent has closed.
Cheri Smith, Broker, SFR
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