It is estimated that 40% of the home sales in Nashville for 2009 are “Distressed” properties. These are properties which are either in or near to foreclosure.
It is the properties “near to foreclosure” that are of the biggest concern. These properties are referred to as “Short Sales” because the Seller is asking his mortgage holder ( also called the “Lender”) to accept a payoff of the mortgage that is short of the original amount.
Foreclosures are straight forward propositions. The Bank acquires the property through the foreclosure process and puts the property up for sale. The buyer makes an offer and within a few days the bank accepts or rejects the offer. The buyer then either walks away or the property is moved to “Pending” status and scheduled for closing.
Short sales however do not conform to this model and have several pitfalls which Buyers AND Sellers need to consider.
How does a Short Sale happen
First a Homeowner has a problem. Possibly they lost their job, had an illness, or a variable rate mortgage has reset at a rate they cannot afford to pay. Second, the Homeowner determines that the present value of the house is LESS than the amount owed to the mortgage company.
What does the Homeowner do?
At this point the Homeowner, with the support of a Realtor/Broker, will approach the Lender and let them know that they do not believe they can continue to make the mortgage payments. This is accompanied by a “Hardship Letter” detailing the difficulties the homeowner is experiencing. The Realtor/Broker will also provide the Homeowner and Lender with a BPO or Broker Price Opinion. This BPO will substantiate the current value of the home.
The Lenders Option
At this point the lender knows that the Homeowner may be facing foreclosure, The Lender also knows that if the home slips into Foreclosure, they may recover as little as 40% of the original loan do to the costs of maintaing and selling the home after foreclosure.
At this point the Buyer enters the transaction and makes an offer on the house. The Homeowner accepts or declines the offer and then approaches the Lender with a detailed statement showing what a sale at that price will net the Lender. The Homeowner has asked the Lender for permission “Sell Short” of the original loan amount.
The Process begins
Now the wheels start to turn in earnest. The Lender frequently will appoint a 1st tier Negotiator to oversee their interests in the home and process the paperwork. The Negotiator will order an appraisal of the home from an independent appraiser. This appraisal will be very important for the Lender’s approval of the Short Sale. In some cases the Lender may require two appraisals to be done.
The Waiting Game
Now the Buyer must show patience. As the Negotiator compiles the dossier on this home days will stretch into weeks. The Buyer must keep in mind that the Negotiator may have dozens of similar cases on his desk and Banks are notoriously slow in these matters.
The End game
Finally the Negotiator has compiled all his information and the file is handed to the 2nd Tier Negotiator. This is the decision maker. He will pronounce a yes or no. They may also, based on the appraised value, barter over the proposed price. This can be very frustrating for the Buyer who may have been waiting weeks or months for an answer only to be told Yes, but we want additional money.
In this event it is very important to remember, the contract is between you, the Buyer, and the Homeowner. The lender is merely approving the Short Sale, not the sale price. Unless the Sellers contract expressly says so, the seller could be legally bound to sell the home to you at the contracted price.
However; the Buyer may not be and should not be bound to pay any price higher than the agreed price on the original Tennessee Purchase Agreement.
The Short sale process can be a long and arduous one. But with an experienced Realtor and knowledge of the process, Nashville Home buyers and Sellers can use the the Short Sale as a way to achieve mutual satisfaction.