A "short sale" is easy to define: It means that when the sale closes, the seller will not have enough equity to cover the mortgage payoffs and costs of sale. The home is not yet in foreclosure either because the seller has been able to keep up with the loan payments even though there is insufficient equity, or because the lender has been willing to workout or agree to a modification of payments pending a sale, or simply because the legal time (90 days in Arizona) hasn’t passed to allow a foreclosure sale. We've been seeing more of both short sales and foreclosures in Flagstaff this year than most real estate agents have ever experienced in the Flagstaff market, so it’s worth knowing that your real estate agent understands them if you intend to become a party to a real estate sale that is “short” or in or headed toward foreclosure. First, let’s look at the risk of buying or selling a home that is sitting in a short sale position. For the Realtor® the risk is that there may be no paycheck at the end of a long and stress-filled process! But let’s look at it from the buyers’ and sellers’ points of view: An ordinary home sale involves an offer and acceptance which culminate in a legally binding contract, sometimes after substantial negotiation. That’s not the end of the road because a real estate sales contract is packed with contingencies that usually are pretty much in favor of the buyer. The most well-known, but by no means the only, contingencies are a satisfactory inspection and the buyers’ financing contingency (unless this is one of those rare all-cash transactions). The buyer can walk away from the deal for many reasons as the transaction progresses. The seller does not have this ability unless the buyer breaches the contract. A “short sale” transaction is pretty much the same EXCEPT that now there is a contingency involving lenders for BOTH the buyer and the seller. The seller owes more to the lender than the house is worth and must now ask the lender to “forgive” some of the money owed in order to close the deal. The lender’s incentive to do so is to avoid foreclosure –lenders are not in the business of owning and managing property and don’t want to “inherit” (via foreclosure) a property that they then have to turn around and sell – with the attendant selling expenses. Nonetheless, the lender is not simply going to rollover on the seller’s request to forgive some of the debt owed. The seller is going to have to prove to the lender that the seller has no other means of paying off the debt – just because the home’s value doesn’t cover the seller’s obligation does not mean that the seller may not have other assets or income to payoff the loan owed to the lender. As you can see, there are two lenders whose approval are needed in a short-sale transaction. As always, the lenders will be making a lot of demands for proof that the buyer and seller representations are true. For the buyer, proof that he or she has the means to repay the loan about to be made; for the seller, that he or she cannot repay the loan that was made when the home was purchased. Dealing with the paperwork involved in lender approvals is the most time-consuming part of most real estate sales transactions, and, with a short-sale, the overall paperwork doubles. Team Heitland has had more than one transaction this year where the buyer walked away while waiting for the sellers’ lender to give approval. While the sellers’ lender has the incentive noted above to take a short-sale rather than a foreclosure, lenders are big bureaucracies who have been forced to lay-off employees at a time when the amount of paperwork they are being asked to process has increased. That’s a formula for delay. With so many homes for buyers to choose from, buyers begin to want to look at the alternatives as the initial excitement of concluding negotiations on their future home dims and the frustration of waiting to move in and enjoy it sets in. Buyers also need to keep an eye on the interest rate on their loan -- the trend has been upward for home loan rates this year and a long escrow without a locked rate can cost the buyer money. Meanwhile, on the other side of the transaction, the sellers and their lenders may still be negotiating how much of the sellers’ other assets or earning power the lender is going to bite into after the home is disposed of. A good Realtor® for the seller can—and should—make this happen faster by preparing a seller “hardship” package at the time of the listing. Sometimes that doesn’t happen, not always because of the Realtors® unawareness of the need to do so, but because the sellers are not cooperating—either with their agent, their lender, or even among themselves (it’s not unusual for a divorce to be at the peak of acrimony during a short sale transaction). Meanwhile, the buyer is cooling their heels, wanting to move into their new home. We’re advising our buyers that they should plan on a delay of at least three weeks after a contract for sale is agreed to between them and the seller before the sellers’ lender will give a stamp of approval. Sometimes that can be two months. And, sometimes the approval will be denied and the home will go into foreclosure or the sellers will put it back on the market, trying to get a higher price that their lender will go along with. What if the buyer wants to stick out the wait — they really want this house and they are under no time constraints about moving in — and meanwhile the seller gets another, higher offer? Can the seller cancel the contract with the first buyer and accept the new, higher offer? The answer is no. The seller can try to persuade the second buyer to stand in a back-up position, but the seller cannot cancel the first contract. The seller is bound to wait for the lender approval, as long as it takes, unless the buyer exercises the option to withdraw and move on to a more attractive, less complicated deal. Tomorrow, I’ll have a few words to say about buying foreclosures. Meanwhile, if you want to buy or sell your Flagstaff home, start by learning about the Flagstaff real estate agents you should choose to represent you: Team Heitland at RE/MAX Peak Properties. | 
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