Many clients buying homes in Arizona ask us about short sales. It is not a term commonly used prior to this year. Short sales are pre-foreclosure situations where the homeowner is about to be foreclosed on so they are tying to sell the home. However, they owe more to the bank than what it is worth. This is called “being underwater” on your mortgage. They try to sell it for an amount LESS than what they owe on the mortgage.

There are thus a minimum of 3 parties in a foreclosure: seller, buyer and bank. There is a fourth party if there is a second mortgage. All 3-4 parties must approve the sale. As you can imagine this is very difficult, impossible in many situations. Most short sales do not sell. I have heard up to 80% of short sales never close.

The biggest hurdle for a short sale is getting the bank’s approval for the home to sell for less than the mortgage amount. The bank is writing off the balance of the loan over and above what they get at the sale. It is a very slow process to even get the bank to respond to your offer, much less give approval. It usually takes 2-3 months for a bank to acknowledge that you have put in an offer on a short sale. At that point they will assign a negotiator to the file. That person will order an appraisal on the property. This is usually another month to get this back. Then the bank will look at your offer to see if it is close to the appraised value of the home. It will only accept offers close to the value of the home. If your offer is significantly less than the value of the home it will reject it or counteroffer.

Short sales often do nothing but waste a seller’s time and create frustration. Many times the home is listed on the mls for an artificially low price that the home would never sell for. The listing realtor is doing this just to get offers on the home. The listing Realtor knows that the bank would never approve a sale at that price. This is done all the time, unfortunately.

Other reasons short sales fall apart and do not sell:

• The homeowner abandons the property and can’t be found to sign the final documents (this happened to one of our clients after they waited 3 months and jumped through all the hoops)
• The homeowner declares personal bankruptcy and nullifies the deal
• The buyer gets frustrated and tired of waiting around for 3 months while they see other great foreclosure opportunities pass them by and they finally give up
• The two banks that hold the 1st and 2nd mortgages cannot agree on a price together or how they will split the proceeds. I have seen this happen even when the same bank holds the 1st and the 2nd but they are processed out of 2 different states with 2 different offices responsible.
• The bank takes too long to even acknowledge that there is an offer on the table and the home gets foreclosed in the interim. This should not happen but unfortunately often the offer is sitting in a pile on someone’s desk for months.
• There are other liens on the title that can’t be cleaned up. For example, if there are builder liens, mechanic liens, HOA liens, etc someone needs to pay for those before the home can be sold. The homeowner is destitute and can’t pay. That means either the bank or the buyer has to pay. This is another whole can of worms.
• Just before the deal is finally about to close (this is 3-4 months down the road) the homeowner moves out and intentionally damages the property. I have seen many punch holes in the walls, missing appliances or flooded homes in the past year. I think most people believe they are “getting back at the bank”. As you can imagine, when damage is found at the final walk through the deal falls apart.

This is just a short list of the possible problems and pitfalls with short sales. As a former lawyer, the possible legal problems with short sales is mind boggling. Bank owned foreclosures have clean title and the banks usually respond within 48 hours. The entire deal is under contract within a few days and closes within 30 days generally. We recommend to our buyers that if they want a quick super deal they should try to stick to true foreclosures, instead of wading into the murky waters of pre-foreclosures. Please feel free to call me at (602) 791-0536 to discuss how to tell the differences between foreclosures and pre-foreclosures.

Carmen Brodeur JD
Realtor
Trillium Properties, LLC
9825 E Bell Road, Suite 120, Scottsdale AZ 85260
Cell (602) 791-0536
Carmen@TopScottsdaleHomes.com
www.GrayhawkRealEstate.com