South Parker & Franktown Blog

Lately, several of my buyers have considered purchasing a home that is in a “Short sale” situation and I’ve determined it’s important for them to know the upside and downside of this particular situation, before they write an offer. I’ve outlined several important items below:

What is a “Short sale”?- Here in Colorado, and in my experience, a short sale starts with a property that is currently owned by the homeowner/seller, who is behind in his/her mortgage payments, and who owes more on the property than for what it can be sold. The Seller and/or Realtor, tries to negotiate with the Seller’s lender, to have the lender accept an offer from a buyer that is at fair market value, but is lower than all the loans and closing costs.  This allows the Seller to walk away from the closing without having to bring cash to closing.  

For instance, Sam Seller has a $300,000 loan and thinks there will be approximately $20,000 in closing costs. Sam would need to sell the property for $320,000 to break even on the transaction. But if other similar homes in the neighborhood are selling for $275,000, Sam is in an upside-down position, and will need to bring approximately $45,000 dollars to closing. Sam doesn’t have $45,000 cash, and is also two months behind in his mortgage payments. Sam calls the lender and asks if the lender is willing to accept a short sale on his property, and allow him to sell the property for $275,000.  If the lender agrees, and Sam can get a buyer to buy the property, then Sam won’t have to bring money to the closing table. (However, the Seller may still be financially responsible for the difference, so check with your CPA for financial consequences).

Sounds pretty easy doesn’t it? In fact, it is one of the most difficult transactions currently out there and here are some reasons why: The real lender may be hidden-a loan can be sold several times and may ending up being owned as part of a whole group other loans, by an investment fund. It can take, and often does, months to track down the real lender, what terms they would be willing to accept, and who will sign the closing documents. In the meantime, a buyer, or several buyers have written offers,  at, or even over full price, and the listing broker can not get any response from the lender for any of the offers. In the meantime, the seller is losing interest in the property, has stopped doing repairs, and is letting the quality of property drift in a downward spiral.   

The buyer, who might have gotten his offer in first, had his earnest money deposited, and is abiding by the contract dates and pays for inspections, appraisal fees, etc., and is often told that the lender is looking at accepting the offer, but must get everything ok’d from their legal & closing departments, might find out that there are several offers and he is in a competing situation.  Months go by, and if lucky, the buyer may get his offer accepted in writing, may get all the financial debts of the seller released and paid for, including past HOA dues, property taxes, and any number of odd items filed against the property, may get to the closing table and may get the lender to sign all the closing documents. But, many times, the Buyer gets horribly frustrated and in the end, just gives up. 

So, headaches for the buyer can be long and arduous. But, if the property is being offered at a great price, and if the buyer can wait out the lender, and if the buyer understands there may be issues with the closing/title docs after closing, then, it might be a great opportunity.