Short Sales in New York City: The Pros and Cons for Sellers and Buyers
The term may sound familiar, but what exactly is a short sale, and should you sign onto one?
You may have heard they’re cheaper than the average house buy, but does a short sale benefit both homebuyers and homeowners?
Short sales may be tempting to homebuyers looking for a good deal and homesellers looking to get out from under a high debt home.
On the surface, short sales certainly appear profitable for home buyers, who might assume they’re getting free equity and a higher value home for a bargain price, but short sales can come with some risks, and any short sale will undoubtedly be a more complicated process than a traditional home buy.
In regards to whether or not you should seek one out, opinions vary.
Some real estate experts argue that although a slim margin of short sales are profitable for a buyer, homebuyers are in general better off buying homes that are not in default.
Some brokers won’t even show you short sales, while others might push short sales without warning buyers about the potential risks.
Agents may even push sellers to list their homes as short sales so they don’t go through foreclosure.
In some cases these homes have not even been approved by the bank for the short sale listing.
So should you avoid short sales? Let’s go through the basics first.
What Is a Short Sale?
A short sale is when a homeowner sells his or her property for less than the amount owed on their mortgage, for instance, when they cannot afford to pay the amount owed on the mortgage.
This could be for a variety of reasons.
Maybe home values have fallen, and the owner now owes more than the updated value of the home, or the owner may have lost their job or borrowed too much in the first place.
In any case, a short sale means the seller won’t receive enough cash from a buyer to pay off the total amount owed on the home, and thus they need to strike a deal with the bank.
Typically, the bank or lender agrees to a short sale in order to recoup a portion of the mortgage loan owed to them.
Short sales are less common now than a couple years ago during the Great Recession of 2008, when many homeowners were “underwater” on their home loans, i.e. they owed more than the homes were worth.
How Exactly Does a Short Sale work?
A home seller first needs to talk to their lender about the likelihood of selling their home as a short sale.
With this initial lender approval in place, he or she then designates the home-for-sale as a "short sale/subject lender" deal to any potential buyers.
Once a buyer agrees to make a short sale offer, the homeowner contacts his or her bank, and completes an application asking for short sale status on the home.
There is no guarantee the bank will sign off on the application, but a short sale might be a good option for a bank if they are interested in closing the books on a homeowner loan with a portion of the loan repaid.
Home sellers involved in short sales can expect to file several firms and documents to their mortgage lender to prove that they can’t repay the full value of the loan.
For example, a hardship letter explaining why they can’t repay their mortgage loan, along with filing of records like pay stubs and tax returns is typically necessary.
The bank will then review the short sale application and send out an appraiser to estimate the full value of the property against the short sale offer, and either approve or reject the request.
What Are the Benefits of a Short Sale to a Home Seller?
A short sale, if the home owner can manage to secure one, would be much more beneficial to their personal credit than going into foreclosure.
A short sale not only protects credit, but may help you buy another home down the road.
After a foreclosure, most people are required to wait seven years before obtaining another mortgage loan (while a short sale may cause you to wait two years).
Most people enter short sales to avoid foreclosure. Foreclosing a home can haunt a homeowner for years to come, emotionally and financially.
Selling the home in a short sale gets the property off your hands in a legitimate way, and can allow for some much-needed peace of mind.
You’ll also save on fees. In a traditional home sale, the seller bears the burden of any fees associated, including real estate agent commissions, which can range from 3-6% of the total sale. In a short sale, those fees are paid by the bank.
What’s the Difference Between a Foreclosure and a Short Sale?
In a foreclosure, the bank takes ownership of the house after the buyer is unable to make payments.
This process is initiated by the lender, not the homeowner. The lender will force the sale of the home in order to recover as much as possible of the original home amount.
Most foreclosed homes have already been abandoned, but if the homeowners are still living on the property, the lender will evict them during the foreclosure process.
The foreclosure process typically takes less time than a short sale, as the lender is often trying to liquidate the property as quickly as possible.
To learn more about this topic, read up on our tips for New York foreclosure auctions.
What Are the Drawbacks for Home Sellers on a Short Sale?
Short sales are often a seller’s choice to avoid greater financial ruin, not make a profit. In a short sale sellers don’t earn any profit from the sale—the bank or the lender keep all proceeds.
This means as a seller you won’t be able to use any profit from the sale toward the purchase of a new home—you’ll be starting over.
Most homeowners thinking about a short sale aren’t thinking about the most drastic effect of this deal—your credit.
The effect of a short sale on credit is close to that of a foreclosure, though in some cases you can apply for a new home loan within two years.
A short sale also depends on the will of your lender. They need to give you the green light to go through with the short sale.
This means that the short sale process is often lengthy and unpredictable, even if the seller and buyer agree on terms.
Pluses of a Short Sale for the Buyer
The price, of course! You’re more likely to get a cheaper deal on a short sale.
Sellers might also be more desperate to get rid of the property and accept low-ball offers that wouldn’t fly in a normal home sale.
Putting in a single offer doesn’t guarantee you’ll score a short sale, but if you were to place multiple offers on multiple short sales, your chances of getting a deal will be greater.
There are also certain real estate offices that specialize in these kinds of deals and can help you strategize.
Because inexperienced home buyers may not want to bother with the complexities of a short sale, there will likely be less competition with other buyers for these types of sales.
Sounds Good, But What Are the Risks?
The seller may have paid too much during a time when the market was inflated, in which case you’re not exactly getting a great deal.
If a home sold for $500,000 a few years ago and is now up for a short sale at $400,000, that doesn't necessarily mean the buyer is picking up $100,000 of free equity, it might just mean the seller paid a lot in a rising market and now the market has fallen, thus the value of the house has also fallen.
The seller also may have borrowed too much, meaning the loan value now exceeds the value of the property.
A real estate agent might mistakenly or unethically push a seller into a short sale when a seller doesn’t necessarily qualify for a short sale.
Some agents list homes as short sales without even talking to their sellers, and these sellers might not have proof they qualify for a short sale, and the entire deal could fall through.
A lender may hold out for a higher, market-rate price for a property either in a foreclosure or in a different short sale offer.
The bottom line: this sale could take a while and you may not walk away with the price you signed up for.
Read more: Getting a Mortgage in New York City.
Before You Buy a Short Sale Property
Ask your agent to find out how much is owed on the house. If your agent is experienced with short sales, they probably will also be familiar with the lender, and how difficult the lender might be to work with.
If your offer (and the listed price) is something like 30% of the mortgage, it doesn’t stand a chance.
Look at comparable properties. Some short sales are priced ridiculously low, but realistically, the house will probably sell at closer to market rate.
If you’re only interested in it for the price, or you’re not prepared to pay above a bargain basement deal, pass on the short sale.
Find out if the agent has received a complete short sale package from the seller, and ask about the contents of that package.
A short sale package should include a seller’s hardship letter, W-2s, tax returns, payroll stubs, financial statements, and bank statements. You don’t want your sale to be delayed because the receipt of these documents.
Investigate the lister’s track record. A lister who is advertising a short sale but has never closed a short sale is a risky proposition for you, because it’s up to the listing agent to present the short sale package to the lender and negotiate.
Your agent can’t talk to the bank.
Ask your agent to find out how many offers have been made on the house. In a short sale, the first couple offers are usually at or below the (cheap) listed price, but the third and fourth offers tend to rise above it.
You want to make an offer below market that will still beat the competition.
Find out about the listing agent’s short sale procedure.
Although realtors are required to submit all offers to the seller, not all agents are realtors, which means the listing agent may choose to only pass one offer on to the seller.
Tell the seller you’re willing to up your price, if you’re interested in doing that to make sure your offer gets through.
How to Buy a Short Sale
With real estate prices generally being very high in New York City, you may just find a gem of a deal with a short sale.
Here's how to grab that deal:
- Do research before you make an offer. Your real estate agent can check public records to see how much money the homeowner still owes on the mortgage and look at comparable properties to give you good advice about making an offer.
- Remember that the lender is in control of the selling process. This means anything you agree to with the home-seller may not be set in stone.
- Do a home inspection. You may be tempted to skip this step to speed up the often lengthy short sale process, but don’t risk it. Hire a home inspector to evaluate the home.
- Carefully evaluate your agent. You’ll want to partner with an expert, and preferably someone with demonstrated experience in short sales.
- Know that it may take weeks or months before your offer will go through. Give the lender adequate time to respond.
- Know you’re buying as-is. Because the lender is in charge, they’re less likely to pay for any closing costs or requested repairs.
- Don’t bank on the listed price. A short sale might be listed at a lower price than it will eventually sell for in order to draw in a lot of offers. The lender’s goal is to lose as little money as possible and they’re in the driver’s seat.
You can find more info onhow to make an offer by clicking on this link.
Once the seller has accepted your offer, the listing agent will send it to the lender for approval.
The lender will want proof of funds, including proof that you have your own loan available and you are preapproved, typically via a preapproval letter.
What to do when the price is too high?
The lender might also ask you to increase your sales price. Some lenders reserve the right to renegotiate terms at the last minute.
Ask your agent to send a list of comparable sales that support the price you are offering to pay for the home.
The key factor that is different about a short sale over a regular transaction is if the appraisal by the buyer's lender ends up less than the sales price, resulting in a low appraisal, you can probably get the bank to reduce the price.
The bank will almost always match the appraised value and the seller is not in a position to reject this lower price.
So although you may feel like there are a lot of competitive offers on the short-sale home you have your eye on, and are afraid of dealing with the lender, the bottom line is a short sale must sell.
A bank is looking to close this transaction, and will lower the selling price to match the appraisal.