How do short sales work?
Photo by ohadweb
A client recently asked about a home that is in the short sale process. He asked, “How do short sales work?” That’s not an easy question to answer: Amazon has thousands of books on the topic. While short sales can get complex and vary quite a bit, there are some common paths that they take. As an Orange County buyer, it is essential to understand the basics, because about 1 in 5 homes sold in Orange County today are short sales. The following are some general guidelines (there are exceptions):
1. A quick definition of a short sale is the sale of a property for less than the amount the homeowner owes to the homeowner’s lender or lenders.
2. The owner of the home has a “hardship” like their income is down or they were laid off of work, so they have trouble making their payments.
3. The owner puts their home on the market, because their lender will not approve a short sale without an offer in hand.
4. The owner gets an offer and applies for a short sale, asking the lender to accept the buyer’s offer to pay less than the owner owes on their loan.
5. The lender is overwhelmed and says, “I’ll get back to you in a month or two.”
6. One-two months later, lender says, OK, now I’m going to do my diligence, which includes looking at the offer, reviewing the owner’s financials, and getting appraisals done on the home.
7. One-two months later, lender says yes or no on approval and what terms they agree to.
We have seen short sales take less than one month to get approval from the lender and we have seen them take over a year. Because of that uncertainty and delay, they can be the best deals on the market.
If you are buying a home in Orange County, make sure the agent you are working with is experienced in helping buyers with short sales. Many agents shy away from them, most notably all Redfin agents whose policy comes up on their site with any short sale listing:
“This home is flagged as a short sale. We’re sorry, we don’t tour or write offers on short sales because of the slim chance that you’ll get the home.”
We advise our clients to not eliminate any part of the market, especially if they have time.