In the market today, viewing short sales in your area while searching for a home is very common. This is especially true in my area (Riverside County). Before putting an offer in on a short sale you need to take the time and learn what a short sale is and how long it can take to close. To put it simply, a short sale is a home that if sold at the current date, will fall short of the balanced owned on the loan. In a short sale the mortgage company will have agreed to discount the loan because they determined a financial or economic hardship. The financial institution will review the borrowers financial information as well as the current real estate conditions. The seller doesn’t have to be in default for a short sale to take place. Normally a short sale is put into place to prevent a home from going into foreclosure, however if the bank determines that foreclosing on the property will save them more money, they will foreclose instead (rarely).
You may ask the question, “Why does this matter to me? I see a lot of short sales and they are great deals!”.
Buying a short sale is not as simple as you might think and can take many months to close. Just because a short sale is on the market for a particular price, does not mean it will sell for that price or even close to it. Short sales are usually listed below market value so that multiple offers can be taken for review. The financial institution can continue to take offers for a prolonged period. If you are not willing to offer more than the low asking price of a short sale, you will probably not get the property. The major difficulty in short sales stems from “Lender Approval”. The lender must approve the offer. In some cases the offers keep piling up and the lender is not very proactive. The offers could sit for a very long time before even being evaluated and may not even reach a negotiator’s hands. If the seller states they have a “lender approved sale”, that is a good sign, however it is still not a sure thing. A lot of times short sales are listed (By the agent) so low, that the bank will never accept any offer in the vicinity of the price. If your listing agent is not experienced in short sales, it could be very risky. The listing agent is the one who negotiates with the bank and needs to be clear on what the bank will accept. The listing agent also needs to coordinate documents with the seller which could cost a lot of time if not done promptly. Another variable is the bank itself. Some banks are harder to deal with than others.
When it comes time to submitting an offer, it is very important for your agent to find out how many offers are in on the property. A basic rule of thumb is that the first offer will be a little bit under asking price and the second offer will be right around asking. After the first two offers it will start rising and by the fourth or fifth the price will probably be a lot higher than asking. If you feel that there are offers in on the house around market value, i would move on. The reason for this is because short sales are pretty hard to deal with, and if it is at market value it would be best to save your time and find a conventional sale.