Short Sales 101

Here's the real truth about short sales. When a seller cannot sell his house for enough money to pay off the loans against the property, that is called a short sale. For a short sale to work, the bank has to (1) agree to let the property be sold and (2) agree to take less than what is owed.

The bank does not have to do this. They have every right to foreclose on the property and take possession of it. Then the house is known as a "bank owned foreclosure" or an "REO", which stands for Real Estate Owned. It can be argued that it is in the bank's best interest to do the short sale, because after all, they will incur legal fees if they foreclose, the house will sit vacant and can be vandalized, they will have carrying costs, they will still have to hire an agent to sell it, and during all this time the value could drop even further. So it makes sense that a bank would cut their losses and accept a short sale.

Having said that, you must realize that we are not dealing with a rational person, but with a robotic entity, the bank. They may have their own reasons for wanting to foreclose rather than accept a short sale, for example, the numbers show up on different columns in their financial statements, or they may just be kicking the can down the road hoping for some kind of government bailout. The bottom line is, no matter what their reasons are, or even if they have any reasons at all, they do not have to do a short sale. And they don't have to do it even if the real estate agent says the bank has already approved a short sale. The guy who approved it might have been fired, and now there's a new guy who says no.

But let's assume we can get the bank to go along. Now at what price? The bank will do its own appraisals, inspections of the property conditions, market conditions, etc, and will usually take several months to complete their homework. Then they will come up with a price. This price has NO RELATIONSHIP to the listed price. The listed price was just a "teaser" price that the agent came up with to generate activity on the property.

In other words, the seller doesn't care what the price is - he gets zero. So the agent picks a price low enough that he can generate some offers to take to the bank. Of which the bank may reject them all.

So let's say you make an offer because the price is really low, in fact it looks too good to be true. If the price really is that low, what do you think is happening during the 3 months the bank is considering your offer? That's right, other offers are coming in, most likely better than yours. A common tactic of the bank is to counter everyone with "highest and best", meaning take your best shot. Then the bank will accept the best offer and reject the others. So after 3 months of waiting, you have nothing.

So you can do a short sale, as long as you go in with your eyes open. Look at the price as the opening bid in an auction, because that's really what this is. Unfortunately, if you're looking at properties on Realtor.com or some other website, you can't tell what's a short sale and what isn't. All you see is what appears to be a bunch of low priced homes and you can easily get a wrong impression of the market.

Here's what works better - if you're serious about snagging a good deal, it's usually better to go after the bank owned properties. These properties are owned by the bank, the ultimate motivated seller. They put a real and not imaginary price on the house, which they really will accept, and it won't take 3 months to get an answer. You'll be comfortably living in the sweet deal of a home you purchased, while those chasing the short sales will still be at it.