What’s a Short Sale?
August 2008
As I'm sure you're aware, property valuations in the Fredericksburg real estate market ran up for several years from 2000-2006. Prices reached a peak here in the Fredericksburg region in early 2006 and began to come down later in the year. They've been falling continually since then. People who bought their homes at peak values in 2004-2006 have seen their homes devalue significantly and quickly from the prices that they paid for them. Many had mortgages for 100% of the home’s purchase price and frequently at variable interest rates in the expectation that prices would continue to rise. As valuations started to slide downward and interest rates increased they either could no longer afford the payments or saw little reason to continue to pay their mortgages and abandoned their homes to foreclosure. That's still happening to some extent as lenders are working through their backlogs and the impacts of the new federal relief programs haven't been seen yet.
Other people in similar situations have remained in their homes but now need to sell (retirements, transfers, lifestyle changes, etc.). They may owe more than the home’s current market value but must sell so they list it for less than what they owe their lender(s); hence the term "short sale". Lenders will cooperate with this process in many cases to reduce the number of foreclosures, get rid of unprofitable loans, and write off the losses. It's expensive for them to take a property in foreclosure, hire an agent to sell it, and maintain an asset management team to manage and dispose of these homes so they WILL consider taking a loss on a sale when the borrowers' financial duress can be documented. The problem with the short sale process presently is that the lenders are swamped and can't get through their backlogs fast enough making transactions long and tedious.
A short sale may sound like a sweet deal from the buyer's perspective because there's an opportunity to get a great home at a bargain price. That part is true however, buyers have to be patient and recognize that with current conditions the sale will take several months to come to closure and there's no guarantee it will EVER happen. Why? Because you can negotiate a deal with the seller, come to agreeable terms, and ratify the contract but the sale remains contingent on the lender’s approval and the lender may or may not agree to the terms. Another potential pitfall is that while you’re waiting for the lender’s response to the ratified contract an offer from another buyer may come in. If that happens it gives the lender the opportunity to bargain for the best possible deal and you may end up with nothing or paying more than you had initially agreed to.
So it's important to understand what you're getting into with a short sale. I had clients wait for about 100 days for a response on a short sale when they got frustrated by the lack of communication from the lender, gave up on the deal, and bought a foreclosure. The foreclosure sale took less than 30 days to get done. I've had other clients get impatient and abandon their offers after 35 to 90 days and, unfortunately, I’ve had just one successful transaction with a short sale to date.
If the deal is right, a short sale may result in a great home at a great price but a buyer entering the deal should understand the potential pitfalls and come armed with lots of patience. If you need further assistance please contact me at john@javre.com or 540-907-5280.
Comments are always welcome here.