Short Sales - the bargains on the Florida real estate market
If the borrower is no longer in a position to pay his interest and/or repayment of his loan, the bank or mortgage institution can reduce the amount of the debts (deficiency) in order to avoid a foreclosure auction, in which subordinated creditors would usually no longer be eligible. The extent of the reduction is significantly influenced by the debtor's personal situation and the current situation on the real estate market. A 10% debt reduction does not necessarily have to be a bargain, it can still be far too expensive, as Florida properties were loaned at well over 100%, sometimes 200%, of the current market value during boom periods. The short sale as a real estate bargain works when the broker you are working with is very familiar with the short sale procedure and - most importantly - has a network that extends into the loss mitigation departments of the banks.
The bank will initiate a short sale procedure only if
- there is a listing agreement with a broker,
- an offer in the form of a contract from an interested party is available and
- the seller makes it credible that he is no longer solvent (hardship letter)
The term short sale is based on the following situation: Let's say the debtor has a mortgage loan of $400,000, but the current market value of the property is only $270,000, so the debtor is around $130,000 "too short". The debtor's intention in a short sale is therefore nothing other than to persuade the bank to cancel the debt. Exactly this situation is the cause of the global economic disaster several years ago. The market values are miles below the mortgage loans issued and the banks are correspondingly undercapitalized and thus no longer in a position to grant further loans (credit crunch).
The debtor has only a certain period of time available for a short sale to initiate the short sale process and avert a foreclosure. The market value of the property is (should be) determined by the local seller-broker by means of a comparative market analysis (CMA). If he offers the property at the determined market value, he competes with the regular offers and his property does not present itself as a supposed bargain - in our fictitious case, for example, $200,000. The description of a short sale usually states that the offer is only valid if the bank accepts the sale price (subject to bank approval or subject to mortgage holder's approval or subject to existing lender's approval) and writes off the difference (deficiency). From a tax point of view, the whole thing is also tricky for the seller, since a reduction in debt is tantamount to an increase in assets. The buyer must ensure that all debts for which the property was pledged are satisfied (subordinated loans, home equity lines of credit etc.).
After receiving a written offer (which should happen quickly due to the "bargain price"), the seller now tries to implement the short sale with the clerk of the creditor bank. Since most of the loans were sold on to other institutions in the form of mortgage-backed securities (MBS) who do not know the current local market conditions, the creditor bank often obtains an independent counter-assessment BPO (broker's price option). If the BPO estimate or the outstanding loan is significantly higher than the offer, the lender rejects the short sale or makes a corresponding counter offer. Now the official bidding war is just beginning, as several interested parties are all competing on the field.
The first signers of the contracts are usually pure cannon fodder to get the "short sale" process going - though nobody says it. In our office there is the popular saying: "short sale is no sale". There are months of back and forth and if you are unlucky, you are outdone at the last second by a higher bid or the bank ultimately does not agree to extreme debt relief. Another delaying factor is the problem that several lenders may be involved in a property and they do not agree among themselves on the amount of debt relief. If all banks involved finally agree to debt relief of $100,000, the property is sold for $300,000 - anything but a bargain for the buyer, as the current market value is $270,000. But this can be overlooked in the heat of the bidding war. With a short sale offer, you should always make sure that the offer price has already been agreed with the bank (bank approved). Count on a negotiation period of at least 4 months for a short sale offer - the result is more than uncertain.
So-called REOs (real estate owned or bank owned properties) are much more interesting, i.e. properties in which the process of forced sale has already taken place so that they are now in bank ownership
Watch out for alleged dumping prices! Mostly they are not agreed with the banks (subject to...) and arise from the imagination of desperate sellers. Even if the bank accepts, a period of several months must be expected and the property may still have been too expensive. The asking price initially stated is usually higher when the purchase is concluded.
The short sale is undoubtedly an attractive way to get a bargain, as the property is still inhabited and maintained. The prerequisites are good preparation for financing (bank pre-approval or proof of capital) and the ability to act quickly, as the property is only on the market for a few months before it is submitted for foreclosure.