First, a short sale happens when a homeowner wants to sell their home, but owes more than what the house can sell for. For example, let's say a homeowner has a $400,000 mortgage on their home but can now only sell the home for $350,000. If they sell the home for $350,000, they'll have to still come up with the extra $50,000 that they owe the bank to pay back the full amount of the mortgage. If they don't have $50,000, and if they don't have other assets available, they may ask the bank if they can come up "short" on what they owe, and pay the bank $350,000, having the bank "forgive" the other $50,000. Sounds good, right? Well, first, they don't have a right to have the bank forgive the amount that is still owed; the bank will decide whether they will take less than is owed. Also, there may be negative tax and credit consequences to the homeowner.
In contrast, an REO (Real Estate Owned), is property that used to be owned by someone, the owner didn't make the mortgage payments, the bank went through the foreclosure process, and now owns the property.
In my experience, buyers who would like to buy a short sale have to be extremely patient and not get too attached to the home that they want. The homeowner still owns the home, but it's the bank who will decide whether to deal with the sale or not. Sometimes a bank doesn't even bother with an offer at this stage; I made an offer for a client on a short sale about 6 weeks ago and the bank still hasn't even assigned someone to review it! (We are now in escrow on another property).
With REOs I have found that it is much easier to get a response. The home is now the bank's asset and they seem to be much more motivated to sell it. Not that it completely smooth, but I have found it to be easier to help buyers buy REOs than to buy short sale properties.
With both short sales and REOs, you really have the bank dictating terms that they will accept, so you don't have too much power over many of the terms of the sale. With REOs I find that it's easier to negotiate a lower price and some closing cost credits; with short sales, the bank really has no motivation to take a lower price or give any kind of credits. With both, if you get into escrow, you will usually have a shorter investigation/inspection and escrow period and probably won't get a home warranty or repairs.
My conclusion? If it's between a short sale and an REO, my opinion is that you can get a better price and some credits and you can at least get a response from the bank. Of course, this can be different depending on the specific home and specific bank involved.
2008/8/26 Connie
After trying to make offers for my clients on short sales, I have "lovingly" termed them "virtual sales."
Like a lot of areas, San Diego has its share of short sales (home sales where the owner owes more to the lender than what the home can sell for). Although the borrower/seller still owns the home, the bank has to approve the contract because they have to agree to take less than what is owed to it. So many buyers enjoy the idea of the short sale because the price usually looks attractive, but so few actually end up selling.
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Three motivated buyers, three different offers, all the same result:
Buyer 1: We made an offer for the home back in October. We still have not heard an answer (even to this day), so my clients bought a different (non-short sale) home.
Buyer 2: We made a full price offer on a home in December. We never heard anything, except that an answer was "coming soon." My client got so tired of hearing that, that he recently bought a different home and has now closed escrow. The area that the short sale home is located in has gone down in price so I doubt that it can be sold for what my client offered.
Buyer 3: We made a full price offer on a home, also in December. Finally, after 5 weeks, the bank came back and wanted $30,000 more. My clients have moved on.
Although I know that a portion of short sales actually sell, it's amazing to me how difficult it is to actually get a bank's cooperation. I understand that the banks have other priorities and that they need a lot of information before they will approve a sort sale, but if there is a willing, able and motivated buyer, it seems to be in everyone's best interest to actually sell the home rather than let it go into foreclosure, costing the bank more money.
I can only imagine how frustrating it must be for the listing agents too. I have seen listing agents bend over backwards to get a short sale to be approved only to face the same frustration.
Until banks become more motivated to work to on short sales, I counsel my clients about the pitfalls and risks of those "virtual sales," and let my clients decide whether they want to wait it out. I have to explain that the list price isn't necessarily the price the bank will approve. More often than not, my best buyers decide that waiting for a bank just isn't worth it and will move on to other properties.
