The ABC’s of Short Sales


The term short sale has become a common household word these days.  It seems that every neighborhood in America has a least one short sale property listed for sale.   As a Realtor, in Truckee, California,   I deal with short sales all the time.  Either a Truckee property owner needs to short sale their home, or a buyer is interested in purchasing a property listed as a short sale. I have found that while most people are familiar with the term they are not necessarily fully informed about the process.

WHAT IS A SHORT SALE?

Property owners who need to sell their homes and who have loans on the property which exceed the current market value of the home are faced with a dilemma.  In order to sell the property they need to pay the balance of what is due at closing from their personal funds, or ask the lender to accept less than what they owe and  “forgive” the balance of the debt.   Both situations are a “short sale”  The term short sale simply means selling a property “short” , or for less than the debt.  Short sales are nothing new they are  just occurring with more frequency now, than in the past.

SHORT SALE LIST PRICE

In a standard sale the property owner looks at several factors to determine what price is appropriate for listing the home for sale.  The property owner also makes the final decision regarding the sale price of the property.  The process of determining the list price and the sale price of a shot sale is quite different.  The listed price of a short sale is often times determined by the Realtor.  The list price MAY be lower than other comparable sales of similar properties in order to obtain an offer.  The listed price and the amount the lender is willing to accept to approve the short sale may also be quite different.  Buyers should be aware that the listed price of a short sale is NOT an approved sale price.  Banks CAN and possibly WILL counter an offer to obtain what their investors feel is an adequate amount, even if the buyer offers the full listed price.

MAKING AN OFFER ON A SHORT SALE

A buyer wishing to make an offer on a short sale property will use all the standard real estate forms used in a normal sale.  There are additional disclosures that pertain to the short sale process which are also used and which should be reviewed carefully.   The offer is submitted to the property owner and  signed and accepted by the property owner BUT the acceptance of the offer is contingent upon approval by the short sale lender.  The property owner has the authority to accept an offer because they hold legal title to the property.  However, they DO NOT  have the authority to sell the property for less than what is owed to the lender.

ESCROW PROCESS AND TIME FRAME

Once an offer has been signed and accepted by the owner it is submitted to the short sale lender for approval.  During this period the buyer is under no obligation to purchase the home.  Escrow is opened by the title company but the buyer is not required to deposit any funds in the escrow account and the escrow period (the time the buyer has to do inspections, obtain financing and complete the sale process) does not begin until the short sale lender has approved the sale.

It can take anywhere for two weeks to eight months to obtain approval of the short sale from the short sale lender.  The process and times vary depending on the bank.  Some banks have a quick, stream lined process, others have a very, long and complicated process. Patience is a must when getting involved with a short sale.

WHAT BUYERS CAN EXPECT TO PAY FOR IN A SHORT SALE

Property owners attempting to short sale their properties are often delinquent on HOA fees (Home Owner Association), property taxes, sewer fees  and utilities.  There can also be  liens on the property such as mechanic liens (liens recorded by unpaid tradesmen) and federal and state tax liens.  Also, many properties have deferred maintenance.  It is important to understand that a property owner will NOT pay to remedy any of the outstanding financial obligations associated with the home, nor will they repair outstanding issues. The bank MAY pay for some items. However, buyers need to be prepared to shoulder the cost of some of these fees in order to obtain the home.

In a standard sale, buyers and sellers negotiate who will pay for items associated with the sale of property.  Typically, escrow and title fees are split between buyer and seller, the cost of repairs needed are negotiated between buyer and seller and compliance with point of sale ordinances are typically covered by the seller.   Additionally, any outstanding HOA fees or unpaid bills associated with the property are paid by the seller either prior to the sale of the property, or at the time of closing with the proceeds from the sale.   However, in a short sale  because the seller is in financial distress the costs associated with the sale have to be paid either by the short sale lender, or by the buyer.

Delinquent Property taxes:  The short sale lender almost always pays outstanding property taxes on the home.

Delinquent HOA Fees:  As a general rule, the short sale lender will NOT pay outstanding HOA fees.  Depending on the HOA dues the amount outstanding can range from a few hundred dollars to thousands of dollars.  The main reason the lender will not pay outstanding HOA fees is because if they end up foreclosing on a property, HOA fees are JR. liens and that debt will be cleared (unpaid) by the foreclosure process.

Delinquent Sewer Fees:   Short sale lenders will try not to pay these fees.  However, if you ask,  the short sale lender will generally pay the fee,  BUT you have to ask and your agent has to keep asking.   Unpaid sewer fees are typically  between $200-$600 dollars.

Point of Sale Compliance Requirements.   There are state and county ordinances that must be complied with in order to sell a property.  In the Truckee and Tahoe area there are several items that sellers are required to comply with at the time of sale.

Sewer Testing and Repair:  Nevada and Placer County (the counties of Truckee and Tahoe) require that sewer lines be pressured tested prior to a sale if the property has not been tested in the past five years. The cost of the testing runs from $300-$800 dollars depending on the distance of the sewer line from the house to the hook up at the street.  If the sewer line fails the pressure test the line MUST be repaired prior to closing.  The cost to repair the line varies significantly.  It can be as little as $200 dollars, or as much as 10k+ if the entire line has to be replaced. The short sale lender will typically NOT pay for the test, BUT if the test is done and there are significant issue they may cover all, or some of the cost.

Smoke Alarms and Carbon Monoxide Detection Devices:  State and Local Truckee and Tahoe ordinances require that all homes have smoke detectors and carbon dioxide detectors through out the home.  The home inspection will indicate if the home is compliant.  Buyers will be expected to install whatever is necessary. $50-$200 dollars depending on the size of the home.

Water Heater Bracing:  State and local Truckee and Tahoe ordinances require that water heaters be braced in a particular manner.  Buyers will be made aware of any issues via the home inspection report and will be expected  to remedy this issue. $15-$30.

 Defensible Space Ordinance:  Nevada County and Placer County (covering Truckee, CA and all of Lake Tahoe)  have an ordinance that requires property owners to clear their lots of debris (pine needles, dead trees etc),remove certain flammable bushes and thin vegetation.  Buyers will be expected to comply with this ordinance.  The cost can run from $200-$5K.

 BMP’s (TRPA REQUIREMENTS): Properties in Placer County in the  Lake Tahoe Basin are required to comply with the TRPA’s guidelines regarding drainage and erosion.  Buyers will be expected to comply.  Costs run from $200-$5k+.

EPA Compliant Wood burning Stoves:  Placer and Nevada Counties (covering Truckee, CA and all of Lake Tahoe) require that all wood burning stoves currently installed in homes be EPA compliant.  If the home inspection indicates that the stove is not compliant it must be replaced or removed.  The short sale lender may pay to have the stove removed, but not replaced.  $800-$2000.

Deferred Maintenance:  Short sale lenders, as a general rule, will NOT respond to a request for repairs on the home.  They view the sale as an “AS IS”  “WHERE IS” sale and rarely are willing to fix anything found during a buyer’s inspection.  Buyers have the legal right to submit a request for repairs, but don’t expect the short sale lender to agree.

Outstanding Utilities:  Outstanding utility bills are not “attached” to the home and don’t have to be paid by a buyer.  However, if the bills are unpaid there may be no utilities turned on at the home.  In order to do inspections, a buyer will have to have the utilities turned on for inspections.  The utility companies charge a nominal fee for this service ($50-$75)

Federal and State Tax Liens:  These are not the responsibility of the buyers.  However, if there is a federal, or a state tax lien on the property, the liens must be removed before the property can be sold.  This process can prolong the sale process by several months.

Title and Escrow Fees: In a standard sale in Truckee and Lake Tahoe, buyers and sellers typically split the cost of title insurance and escrow 50/50.  The same is true for short sales.

WHAT HAPPENS AFTER THE SHORT SALE LENDER APPROVES THE SALE?
If the short sale is approved, the lender will issue a letter to the property owner and the listing agent, representing the seller, which states that the property has been approved for a short sale.  They will also issue an addendum to the purchase contract stating the buyers name, the approved purchase price, the date that the sale must occur on, or before, inspection periods and other terms and conditions set by the short sale lender.  It is very important that you comply with the dates stated in the contract. The short sale lender can and WILL charge a per diem rate (typically $10-$15 dollars a day) for everyday the property closing exceeds the dated stated in the bank’s addendum.
Upon acceptance of the offer by the short sale lender, the buyer is required to follow the terms stated in the contract. The deposit money should be sent to title and the process of purchasing the property begins.  Buyers typically are allowed 10 days for inspections, 17 days to obtain financing and 30-45 days (total) to complete the transaction.

CAN A BUYER CANCEL THE CONTRACT WITHOUT PENALTY AFTER ESCROW IS OPENED?   Yes! If, after inspections and reviewing the costs and fees associated with the property, a buyer  is not comfortable moving forward , they can cancel the contract during the contingency period.  The buyer’s deposit will be refunded minus any inspection fees.  The buyer will be fully informed about costs and issues regarding the property within the contingency period.

IMPORTANT THINGS TO CONSIDER WHEN MAKING AN OFFER ON A SHORT SALE

1. Use an agent who has experience with short sales-both representing sellers and buyers

2. Make a reasonable offer on the property.  Low balling an already discounted property will not result in an accept offer.    Banks are very aware of property values.  Short sales can be great deals, but banks are not going to give away valuable real estate.

3. Be patient.

4. Continue to look at other properties.  Not every short sale offer results in a purchase.

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