Originally Posted by TiredX2
Can you explain this to me, please?
Okay... here's "Short Sale 101" :)
First, in case someone reading doesn't know what a short sale is, it's when more money is owed to the banks holding the mortgage(s) than someone can sell their house for. So let's say they owe a total of $300,000 on a house that nobody in the market would possibly pay more than $250,000 on right now (or in the near future), but the homeowner needs to get out (either due to divorce, job loss, whatever) and they attempt to do so before foreclosure. The total amount owed might be on one mortgage, or two mortgages. If it's two mortgages, you have two banks to contend with--with the primary mortgage holder getting first rights to the proceeds of the sale and therefore not writing off as much (if any) of what the home"owner" owes.
I will use the term "homeowner" but clearly, these people don't own their homes--the bank does. ;)
Homeowners have to be approved for short sale by their bank. The bank has to evaluate the homeowners situation, whether they think there is a reasonable expectation that they will not be able to continue to pay the mortgage, for how long, etc. and therefore determine if they're even going to allow the homeowners out of the responsibility at all (vs. roll the dice and see if they stop paying--then foreclose). This process alone takes a while. They have to review bank statements, credit records, personal circumstances (divorce decrees & those payment agreements), job situations, etc. They will also determine what they feel the homeowners can afford in the way of personal responsibility for whatever portion of the mortgage isn't covered by the short sale. So they might determine that the homeowners can't afford to pay ANYthing towards paying off the mortgage; or they might determine that no matter what the sale price of the house--the homeowners can afford to pay another $20,000 towards what is owed (or whatever number they come up with).
Once they determine that the homeowners are compromised and should be let out of the mortgage responsibility (approving the homeowners for short sale), they then have to evaluate the marketability of the house. The major problem with this is that generally they do a BPO (broker price opinion) instead of an appraisal. This is partly because BPOs generate a potential market price based on the direction of the market in the future (per that broker's opinion of where the market is headed) where the appraisal determines the value as of the date of appraisal based on what has actually sold. The broker doing the BPO may feel the market is going up, or going down. Either way, it's highly subjective; and if the broker is wrong about where the market is headed, everyone's pretty much screwed. But this is what the bank uses to determine what they will allow the house to be sold for. And that takes time, too. That process alone can be a 90-day ordeal.
When you put in an offer on a short sale, you first have to get into contract with the homeowner. They have to agree to a price and terms that they want to send to their bank. But then your offer goes off to the bank for THEIR approval of the sale. And only then do you have a contract. In the meantime, the bank can (and often does) counteroffer to try to get you to come up. We were in a situation where we offered about $20k more than a house was going to appraise for (we figured we'd roll the dice that they'd come down when the appraisal came in based on the fact that nobody's going to pay more than appraised price for a house in this market) and the bank came back and wanted $20k more than THAT!!!! We walked away. We had already got our earnest money back (which takes more than a week) and they came back and said "the bank will take your offer now". (we didn't buy that house, btw)
Anyway... some people put their house on the market for what the market will bear and if/when they get an offer, THEN they start the process of approaching their bank to approve themselves and the house for short sale. It's not a short process. Not by a longshot. And if there's more than one bank involved--all the longer.
Some people will have gone through the process of having THEMSELVES approved for a short sale situation, but their bank has not evaluated the house for a price. Some don't bother until they have an offer to consider because the BPO is only good for 30-90 days (which is pretty much the same situation in an appraisal) because markets change. It's possible they could do the work and not have an offer before the BPO is no good anymore. Not worth it.
Let's now compound all of this time with the homeowners potentially using both an agent and possibly also a lawyer that are not fluent in short sales, and therefore unable to properly manage the process, the expectations, or know how/when to follow up, run things up the chain of command, what options might exist to move things along, etc.
Occasionally you will see a short sale listed with an approved price. It's possible that the homeowners can just make up the difference between what the market will get them in a sale price and what is owed; or it might be that the bank did the BPO and that "approved" price is only good for a set period of time. And hey, if that time expires and the realtor doesn't update the description to say that the price approval has expired... oh well.
In several states, there are no clear rules on what the realtor can put in the listing or say about the status of a short sale. I was stunned to see that here in IL, they can actually get away with lying about the state of affairs in a short sale with pretty much no recourse.
So there's a LOT of waiting, there's a lot of things that you probably won't get the owners or bank to pay for in the way of repairs, and there's no way of knowing when you'll not only be under contract, but therefore, when you'll close--and if the house doesn't appraise for the sale price, if the bank will agree to lower the sale price to the appraised value (or closer to it). Given the amount of time you could be left waiting for them to respond and the fact that the market has been dropping--this is a serious concern. To that end, it's best to have your inspections done BEFORE the offer is written up (or at least before it goes to the bank). In fact, homeowners working with experienced agents will require that you do the inspection before the offer goes to the bank in case it uncovers a "deal breaker". So there's money you could be out (in addition to whatever legal fees for your lawyer to review the contract--I know not everyone uses a lawyer, but we do--always).
So the problem really becomes that you have no clue when you will actually be under contract to buy the house; and then once you are, you have no idea if the bank will agree to lower the sale price if it doesn't appraise. We tried to write into our contract that if it didn't appraise, that the sale price would be changed to the appraised price but the best we could get agreement to was that if it didn't appraise, we could legally get out of the purchase and get our earnest money back. But the timing is really the bigger issue. And that will vary by bank and the number of banks involved.
Foreclosures are somewhat easier because really, there's no approval or evaluation process to be done. The bank already owns the house, needs to get rid of it, has set the sale price based on the market with the help of a realtor, and just has to evaluate the offers when they come in based on a series of factors internally. It could take a week (possibly two) but usually, you have an answer within 24-48 hours. Once you're under contract, the major delays in a foreclosure are getting repairs done to get it through an appraisal. THAT can certainly take time, and that timeline is unpredictable; but it's quite a bit more predictable (and shorter) than short sales. And honestly, in some areas, the bank has not only already made sure that the house mechanicals are working--but they've actually gone through and cleaned, replaced carpeting and painted. In other areas, they haven't even cleared out whatever contents were left behind. It differs by where you are. But the timeline on them tends to be much shorter and predictable than short sales--by far.