The answer is maybe the deal will be a good buy and then again, maybe not.  Here’s the reason why I say this.  If a property is being sold as a Short Sale it means that the loan on the property is for more money than the property can be sold for.  There is a shortage of funds due the lender.  Sometimes a lender will forgive this amount and sometimes it will not.  If the amount is forgiven it may not be a win for the seller because they may have to show this amount “forgiven” as income in their taxes the following year.  It must be shown as income because it was money that was owed by the seller through a note to buy the property, but not paid back to the lender and the IRS looks at this as money in your pocket even though you never see the money.  Update:  The IRS has put a hiatus on the tax due for a short sale in order to assist sellers.  This may not last forever but it is helping them today.

A Short Sale may save the home owner from going into foreclosure but there are potentially major tax consequences in doing one.  If you are a buyer looking for a deal is this the way to find one?  Maybe if the price being asked for the property is  where it should be in the market.  If the seller is trying to break even, pay off his loan, pay the commissions to the Realtors involved in the transaction, and then move on the price might be “at market”.  But if the market today says the property is over priced, it sits and sits and sits.  Sometimes we see these properties have been listed for hundreds of days and with no appreciable price reduction.  If the seller is truly anxious to sell, they aren’t reducing the price right way unless they are working with an agent who is specifically trained in foreclosure and short sale, like Alex, a CDPE.  If you need to sell you need to price aggressively and be willing to take the hit in order to get out from under.

Selling a home prior to it going into foreclosure when it is worth more than the loans on it involves a lot of steps and isn’t easy to do.  One has to swallow their pride and talk to the lender about their situation, follow every step the lender requires and price the home aggressively in order to sell it.  Many people do the first part but forget to do the latter part, the price aggressively part. You need an attorney and accountant as a part of your team.  You must follow every step you are told to or you’ll find a foreclosure on your credit record and that’s a 5 year hit.  A short sale is only a maximum of a 2 year hit and sometimes even less than that.  Think about it, which would you rather have on your credit report?  Your FICO score drops about 50 points with a Short Sale and 150+ with a foreclosure.

Buying a property during a Short Sale could also mean that you also buy past-due taxes owed by the seller and any other liens that might be placed on the property such as homeowner association fees that are past due.  In effect, you get it all — the good, the bad, and the ugly.

Around San Mateo County, for some reason we haven’t been seeing a lot of aggressively priced listings so these short sales sit and sit. We know there are a great number of homes close to default and these homes should be put on the market but when is the $64,000 question.  People are afraid to face the inevitable and unfortunately it’s often human nature not to do what is necessary before it becomes a panic.  A CDPE Realtor, like Alex Wilkas, can help facilitate the many steps necessary to price a home and get it sold.

Truthfully there is about a year’s gap between a buyer and a seller’s understanding on what’s happening in the real estate today.  Buyers are always ahead of the curve because they are out there looking at property a lot and they begin to see the pricing trends way before sellers do.  Sellers only see what their neighbor sold their home for and they want to sell for that same amount, or more and what the news is telling them.  They’re looking in the past not in the future, or even at today.  That past could be six months ago or longer.  They don’t understand what is happening to the market today unless they are actively out there looking to buy, and when they do figure it out they may find their mortgage is for more money than they could sell their home for today.  They are then  “underwater” because they owe the bank more than what their home is currently worth.  Is this bad?  Yes if you can’t afford the payments and can’t refinance to bring them down to where you can afford them.  It’s not bad if you went into your home with a fixed rate loan and you don’t plan on moving any time soon.  You keep on making those payments and hopefully by the time you are ready to sell your equity has moved back into a positive position.

The biggest issue in looking at buying a short sale is understanding that you may not get the property you place an offer on and the reason is complex.  Generally most lenders are huge operations with thousands of loans in their portfolios.  If some of those properties are “underwater” the lender isn’t concerned about this as long as the payments are current.  They do become concerned when the homeowner stops making those payments.  After several months the lender issues a Notice of Default to the owner and tells them they have a certain period of time to pay up what is owed or the property will be foreclosed upon.  How long this takes depends on the lender.  It is during this period of Notice of Default that one begins to see a home listed as a Short Sale.

The banks generally have several departments that handle these properties and if after a length of time the home has not been sold, it is bundled up along with hundreds of other properties and placed on a Notice of Trustee Sale notice where these properties are auctioned off, and yes it happens on the steps of the San Mateo County Court House in Redwood City.

You might be in escrow to buy one of these properties, but only one half of the bank knows this and if the other half decides to sell the place off and the Notice of Trustee Sale takes place, you lose your prospective home.  You do not lose your deposits but you have, in effect, wasted a lot of time trying to buy something at what you hoped was under market.  If you are willing to wait it out, and if the house you hope to buy doesn’t have a lot of mortgages against it, you will get a great buy.  Patience is a virtue and this is one you want to make sure you have.

If the property you’re thinking about buying in a short sale is a condo, caveat emptier.  If there are a lot of defaulting mortgages in the complex the HOA may not be getting all of the monthly operating expenses they require each month. The HOA may find it needs to raise monthly fees to survive.  K’ching.

When a property changes hands the county tax collector gets paid.  In fact, taxes rank higher in the ‘must pay’ list than the mortgage does.  Its likely that taxes are going to be in arrears by the same person defaulting on their loans, and HOA dues.  If you want to buy that short sale property you will have to pay those past due taxes and HOA dues because the seller has no money.  Is this still sounding like a good deal to you?

You’re much better off waiting until the property is taken back by the lender and put back on the market as a Bank Owned Property.  In California the seller must pay all back taxes prior to close of escrow.  The seller must clear all liens against the property, too.  If the seller is a bank or mortgage company, they’re on the hook for that money and it can be sizable.  You, dear buyer, get a property that is generally priced below comps in the area.  That is a good buy.

What is a Short-Sale?  It is a sale of property where the owner owes more to the bank than the property is worth on the open market.  We are seeing the majority of these sales today in areas where there was predator lending practices taking place.  And, unfortunately, these predator lending practices often took place against immigrants.  People with fair income, some debt, but poor English skills who were placed into negative amortization loads that they did not understand.  They were placed in loans with sucker rates — you know the kind — 3% for the first 90 days, and then the rate escalates upward.  Some of those loans escalated up to 7 or 8%.  Some of the people caught in this net find themselves owing more each month on the loan to their house, than they take home.  So, they go to their bank for help and try to sell the house before it goes into foreclosure.  Most lenders are willing to work with the people caught in this net and have their Realtor’s go through many hoops preparing a home for market, pricing the home with the help of the bank, and then hopefully, selling the home.  The bank is in the middle of the process from the beginning because they want to get as much money back on their bad loan, as possible.  But, sometimes things don’t go smoothly for someone trying to buy a house with a short-sale.  Sometimes, even when everyone has done what they were told to do, the bank decides to foreclose and that’s the end of your hopes in buying a home under market.

Your next question should be:  Is buying a property through a Short-Sale a good deal?  Maybe yes, and maybe no.  It is a roller coaster ride for sure because you can do everything you’re told to do and find out that you won’t get the property and you have no recourse against the seller because the seller is the bank that makes the rules that we have to play by. Therefore, they can change the rules any time they like.  And they can and they do. But, if you’re lucky, you can (drum roll, please) get a deal.

So, if you decide to try to buy a home that’s “under water” be aware that you will be asked to do things differently.  You will need to have your loan or loans taken out through the selling bank.  If you’re a risk taker, it could mean the way to buy a home in our Fantasy Island, for less money than your friends spent for a similar property.  But, you must, must, must be a risk taker.  For your agent, they just hope that they get paid in the process because the bank holds all the cards — from pricing the home, to commissions.