Foremost, short sale properties are, by definition, “subject to lender approval.”  This means that any offer must be ultimately accepted by the lender(s) on the property (typically the bank or financial institution that owns the mortgage).  Often times, there are multiple lenders involved – meaning the property’s “owner” had an initial mortgage, and then likely a second mortgage, home equity line, or other debt associated with the property.  It is not uncommon to go even further, and have three or more lenders involved.  In any event, all lenders on the property must agree to the proposed sale price.  This is exceedingly difficult when there are “too many cooks in the kitchen” and multiple approvals are required; if one does not agree, the deal is dead.  The “owner” of the property may agree to the price, but ultimately has no say in the final approval. 

In this regard, short sale listings are inherently misleading to begin with, given the “list price” is rarely a price to which the lender(s) have agreed to accept.  At best, the “list price” is actually a request for an “opening bid” on the property, subject to later (and potential lengthy) approval.  A short sale property is often listed below fair market value in order to solicit multiple offers.  They are asking you to be the test subject to determine what will, or will not, be accepted; all while other offers or options can still be considered.   

A potential buyer must complete their offer paperwork, often with a deposit, and then wait to hear back from the lender(s).  Inherent in this process is delay, delay, delay.  Bureaucracy alone dictates delay.  Peeling back the onion, one can draw inference from the probability that mortgage service companies often make much higher profits from servicing distressed properties, coupled with the fact the lender(s) may be seeking to pursue foreclosure or other potentially more profitable avenues.  Beware too that the “owner” of the property may be concurrently working with the lender(s) toward a loan modification or other favorable arrangement which would take the property off the market.  A short sale listing is sometimes used by property “owners” to delay a foreclosure.  In any event, there is much delay before any offer will be accepted, and likely much going on behind the scenes as well. 

Once/if your offer is accepted, there are usually strings attached, such as a speedy closing.  This can be good if your own lender is ready to fund the loan; but can also cause problems in your ability to properly inspect the property.  And good luck then trying to negotiate any repairs – that’s often off the table to begin with.  “As-is” can be a risky gamble, but that is part of the trade-off in the lower price of a short sale (or foreclosure, etc). 

Lastly, the agent listing for the short sale property often has added incentive to act as a “dual agent” by working for a buyer and a seller.  While the process of “dual agency” is disappointingly legal in California, some have complained that short sale listing agents will not fully seek, or even disclose, other offers; waiting and preferring instead to bring in their own buyer.  A few agents and others have been prosecuted for outright fraud by failing to submit all offers, working instead with a buyer who then pays an agent extra to ensure the lower offer prevails, sometimes suppressing appraisals and/or other offers from the lender(s).  That of course is criminal fraud, a rare event, but something that does happen.  

 

Those considering a short sale property must be patient and ensure their agent is familiar with the process and they too are doing their own homework.  There are many great opportunities with short sale properties for those willing to wait.  However, there are no guarantees in the process, and buyers can often end up waiting (and wasting) months to learn their offer was rejected, or a higher offer was accepted at the last minute. 

Determine at the outset if short sale properties are worth your consideration.  If so, be aware of the process, be diligent and be patient.

-Devin Lucas