When the average buyer hears the term "short sale", they typically think of good deals and upside-down sellers. The problem with short sales is they are almost never short!
Here is the nitty gritty as to why short sales can take a very long time to close.
In a short sale, you need the seller’s bank to approve the transaction before you can close. Typically banks require tons of paperwork and corporate red tape to evaluate whether or not to approve a short sale. Since the seller is asking the bank to accept a sale price that is less than the actual mortgage amount, the bank needs to verify that a short sale is appropriate. The bank will want to make sure that the seller is indeed unable to afford to pay off the difference between the market value and the existing loan amount.
Just as a bank examines a buyer’s finances with a fine tooth comb before approving their loan, they want to closely examine the seller’s finances to be sure that they aren't giving money away on their investment. With thousands of dollars on the line, banks usually don't rush through this process.
The seller's bank requires many documents, disclosures, and signatures to complete the short sale. Often times they request that they are faxed in. If just one signature or page is missing, the bank will delay the process until the file is complete. Given that the banks are losing money on short sales, they don’t allocate the same amount of resources they would to the customer service department for paying (and profitable) customers. With limited staff and so much paperwork, things get lost — and then the short sale process drags on.
Don't expect a million dollar home for peanuts!
Many times a a distressed buyer opting for a short sale has two loans. The larger loan is being "shorted" while the second loan (a HELOC, for example) is being completely wiped out. These loans are sometimes with different banks. Since each bank has its own systems and procedures that don’t cooperate with the other bank’s system, there can be huge delays. The bank holding the second may approve the short sale but put on a 30-day expiration. So let's say the first bank’s approval came at day 31, the seller must go back to the second bank and start over! As you can see, this can drag out the short sale for a long period.
Now I hope I didn't scare you away from short sales. They can be a great way to get a great deal on a great home, you just have to be very patient! Also remember just because the seller accepted your $200,000 offer on that $1,500,000 home in Stone Cliff doesn't mean that the bank will agree to it! If the bank decides to move forward with a short sale, they would most definitely counter offer that low price to what they want to get out of it. This price is known as the "bank approved price".
If you find a short sale that already has a bank approved price, this typically means a buyer before you has already gone through the process of making an offer and waiting for the bank to do its thing. The bank approved the price and the buyer for whatever reason backed out of the deal. Short Sales with bank approved prices typically will sail through the closing process much much faster than a short sale that has not yet been bank approved. Unfortunately most short sales are not already bank approved.
Common Questions
Why do short sales take so long?
The seller's bank has to approve a price lower than the mortgage balance, which means heavy paperwork and verification. When a second loan and a different bank are involved, delays get even longer.
Are short sales worth it?
They can be a great way to get a good deal on a good home. You just have to be very patient, because a seller accepting your offer does not mean the bank has approved it.