Short Sales Now Widespread

Since I wrote the article, “What is a Short Sale,” in June 2007, short sales have become much more common. In fact, Inside Mortgage Finance reported that approximately 20% of all home sales closed in March 2008 were short sales. They also said that the number of short sales would have been dramatically higher except for the fact that they estimate about 1 out of every 3 short sales never close.

Why is there such a huge increase in short sales?

The main reason for the increase in short sales is the downturn in the housing market. Falling home values make it more likely that people will not be able to sell their home at a high enough sales price to cover the amount they still owe on the property. When a borrower owes more on the property than the property is worth, and they do not have the assets to pay the difference, they must turn to their lenders and hope the lender will accept less than the amount they owe.

Another issue that has made the increase in short sales so dramatic is the recent trend of purchasing a home with little to no money down. These risky loans have no cushion against property depreciation, since there was no down payment to being with. As soon as values stop rising and start falling, these properties are instantly worth less than the mortgage amount.

Also at issue here are questionable appraisals. There has been a lot of attention recently being placed on appraisal standards and acceptable practices. With the increase in foreclosures, the extra scrutiny placed on the appraisals of these properties has shown that many of the original appraisals were inflated. This was not a problem as long as property values continued to increase, but is a huge problem when they decrease.

Lastly, many lenders are desperately trying to work with homeowners to stem the increase in foreclosures we have seen over the past year. They are taking extraordinary steps to avoid foreclosing on a property, and one of these steps is to accept short sales more readily. The lenders would rather take a lesser amount when the homeowners have a willing buyer, than to go through the time and expense of a foreclosure, and risking losing even more.

Short sales take time.

If you are looking for a great deal by purchasing with a short sale be prepared to wait. Normally, you negotiate with the seller directly, and it may take several days. When it is a short sale, the lender or lenders have to approve the sale. This can take weeks. Expect to wait up to a month or more just to see if the deal is accepted. If you have the ability to wait - and are willing to walk away from a property if the deal is not acceptable to the lender(s) - then you can find a great deal with short sales. Make sure you have a loan officer, Realtor, and attorney who are well-versed in short sales. There will always be more headaches with a short sale but having an experienced team will help.

Sellers should be proactive

Instead of waiting for an offer and then hoping and praying that the lender(s) will accept the offer, many sellers are contacting their lender(s) before they market their properties. By negotiating with the lender beforehand, you can lessen the time it takes, and the headaches involved in these transactions, for everyone involved. Again, make sure you already have an experienced attorney and Realtor who are well-versed in short sales, as well as the local real estate market, before you contact your lender(s).

For more information on how short sales work, see my article, “What is a Short Sale?”

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