There seems to be a misconception out in the public, and among some real estate agents, that a home being marketed as a short sale will shortly (no pun intended) become a foreclosure. I hate to burst the bubble of anyone waiting for a home they really love to go into foreclosure, just because it is a short sale, but that will not always happen.

Short sale, in the simplest definition, just means that a home is being sold for less than the current mortgage. It has nothing to do with the owners ability to make payments, in most cases. Yes, there are those short sales where the owner is reducing the price to entice a buyer, before the bank forecloses, but many sellers in today’s real estate market are selling due to relocation out of the area, downsizing, etc. Not every homeowner out there is having financial trouble.

Case in point, I had an agent present his buyer’s offer on one of my listings recently. When the sellers refused to come down to the buyer’s price, the agent asked me when the home was going into foreclosure and when the redemption period would start. I laughed out loud and simply stated that the owners are not going into foreclosure, and that the reason the buyer’s offer was rejected was due to it being 20% below list price. Obviously, this agent was not well educated, or just had no clue. Anyway, it was good entertainment… most likely influenced by the media.

If you were to listen to the nightly news or read the local paper, you would think that 90% of the homes for sale are bank owned. Many buyers believe they can low ball every seller, because the media says sellers are desperate. Folks, it just isn’t true. Just because it is a buyer’s market, doesn’t mean that sellers have to take any offer that comes across their table.

Now, back to the short sale. With the decline of market value here in Minneapolis and Saint Paul, some home owners who purchased in the last four years are finding their homes are worth less than what they owe. Some do not have the cash to make up the difference when the home sells, so the only solution is negotiating a short sale with the bank. They can however, still afford their monthly mortgage payments.

Bottom line: Don’t get sucked into the trap of assuming a short sale, or low priced home is going into foreclosure. Usually, it just isn’t so.

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5 Comments

  1. beer234 January 8, 2009 at 12:05 pm - Reply

    Good post, however what incentive does a bank have to agree to a short sale if the homeowner is not likley to be foreclosed. From what I understand (admittedly no expert.) part of the process in getting the bank to agree to a short sale is that a hardship letter is written and the bank needs to usally be shown that the difference in sales/note price is a better deal than the $50k that a foreclosure will likley cost them. Otherwise I don’t see where they have an incentive to agree to the sale unless they feel the homeowner will fail to make payments.

  2. Jennifer Kirby January 8, 2009 at 1:25 pm - Reply

    A short sale is simply, as stated, when a home is being sold for less than owed and the owner does not have the funds to pay the difference. If the owner can cover the funds, than there is no short sale. In the past, before this whole financial crisis happened, short sales were very hard to get approved. But now that some area home values have declined so much, some banks have no choice but to agree to some type of short sale.

    Case in point, a home owner I know is doing a short sale. She isn’t facing foreclosure, but due to life changes, she finds the best thing to do right now is sell. Home values in her complex have declined 50-60%. Without going into a lot of detail, the bank has agreed to take a six figure loss. The difference is so large that they know the home owner would never be able to repay that due to her circumstances. With the market the way it is, they know that, in this case, the current mortgage value may not be a true market value for five plus years, if that.

    Of course there is always that underlying threat of foreclosure, and after a home is on the market for a year or two, maybe the home owner finally gets fed up and decides to just let the home go. While a homeowner may not be any where near foreclosure, the bank knows there is always the possibility. Many banks would rather cut their losses from a short sale now than risk later foreclosure. In the case I mention, the bank is taking a six figure loss…if the home went into foreclosure, the bank would have to tack on an additional $50,000+ loss on top of it, as that is what foreclosures are selling for in the area. So yes, the short sale will be a better deal for the bank instead of the possibility of foreclosure.

    But with a short sale, it is totally a case by case situation. Some banks won’t agree to a short sale unless the home has been on the market for a very long time, others agree with-in a couple months. It all depends on the bank and the home owner’s situation.

    Sadly, there is no real simple explanation, but I have tried to present one side of the story here in my post. Hope this helps.

  3. beer234 January 8, 2009 at 6:35 pm - Reply

    It does and thank you. In defense, as a buyer i’ve always assumed that given that the fact that the seller isn’t allowed to keep any of the proceeds of the sale the offer should be whatever the bank will accept vs what the owner wants to bring to the bank. I can understand them taking offense to low ball offers, but a buyer especially an investor should be looking for opportunities to give banks a chance to take a property off their books at whatever price makes sense to them. The owner if they truely want out of the property should be willing to bring any credible offer to the bank on the off chance that it is accepted. This is all assuming that the bank is willing to go no recourse with the owner who is sticking them with the balance of the note.

  4. Jennifer Kirby January 8, 2009 at 8:44 pm - Reply

    Sadly, some banks I have run into are still unwilling to negotiate with a buyer when they bring in an offer. You would think they would at least try to see where the buyer is coming from. Once a bank does the BPO (sort of a quick appraisal of the property, which is usually never completed until an offer comes in), they usually stick to accepting a net around the BPO price. They can get pig headed about this price and refuse anything less, even when two months later, the property value has declined even more and now is worth less than the BPO.

    One home owner I worked with had to have the home on the market for 14 months, with multiple price reductions, before the bank would face reality and allow a short sale. In that case, the home owner could only make payments for another month, and the property went into foreclosure. If the bank would have gotten off their butts and listened to what I and the owner were telling them about the home and the market, they wouldn’t have foreclosed on the home and lost even more money. But who ever said banks were smart when it comes to real estate.

  5. Aaron Dickinson - Edina Realty January 20, 2009 at 4:46 pm - Reply

    Beer234,

    If the offer a buyer submits is clearly ridiculously low (like what Jennifer suggests) then submitting that offer to the bank and expending all that effort on the agent’s part is not a good use of time. As long as the seller is the one deciding what is done, I see no problem whatsoever in rejecting lowball offers that are simply bottom feeding. What if the following week I get a much better offer but I’ve already accepted the bad one subject to bank approval? These lenders have a fair idea on what market value should be and if an offer comes in way below that they’ll know it and reject it in most circumstances.

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