Short Sale – Subject to Lender Approval
Don’t worry the White House is not offered as a short sale, it doesn’t even show among the active listings in the local listings database… even though there will be a new tenant next year!
A big percentage of the active listings in the San Diego home listings database today are short sales. After a hot market that came to its peak on November 2005, short sales first appeared in the San Diego MLS mid 2006. Since then one of the most asked questions the buyers ask us is if buying a home that is listed as a short sale is the best deal available as many of these home listings are listed many thousands under the current market value. The listing agent, who has listed such a home as a short sale, must indicate on the description of the listing that it is offered as a short sale. In addition, the listing agent must include on the description or on the agent remarks that the sale is “subject to lender approval”.
This very powerful “subject to lender approval” line, is the reason that the buyers will either have to pay thousands above the listing price – if they really want to buy that property or that the lender will end up foreclosing on that property. When a home is listed as a short sale, either the seller or his agent will set its list price which is always less than the seller’s outstanding mortgage balance to the lender. As you can see in this case, it really does not matter if the seller will accept your offer to purchase the house since the lender is the one that has to agree to accept less than the mortgage balance – in a short sale the seller does not have any equity in the house. In most cases the lenders will not even discuss a short sale unless there is an offer to buy the “qualified” property at a sales price that is less than the mortgage amount owed to them.
In a slow market, if the listing is priced at above or even at current value it might take a very long time to generate an offer and possible expiration of the listing time period or even worse, the lender might end up foreclosing the property if the seller has fallen too far behind the mortgage payments. In order to generate some quick offers that will start the discussion with the lender, a few listing agents have come up with the idea to price the home at a price that is way below the market and include the disclaimer on the listing description that the sale is “subject to lender approval” which basically means that the seller is not obligated to sell the house at the list price or at any price for the matter. When the lender receives the offer, an appraisal will be ordered to determine the market value of the property. If the offer is well under that appraisal, the lender will either counter with a price at or close enough to the property’s current market value. Since the lender will be losing money by accepting a short sale, will also refuse to pay for a home protection plan, give any credits to the buyer or even pay for a termite inspection. Then it’s up to the buyer if they really want to buy the house to pay the lender’s asking price or just walk away from the deal.
To make matters worse for a buyer who has submitted an offer to such a short sale condo listing, in some cases it can take up to two months before the buyer will know if the lender will accept the offer as currently some lenders for every short sale that they process, four more are coming to their desk. In addition, if there is a second mortgage on the house with a different lender, the buyer might have to pay an additional amount to that lender up to the full amount since most first mortgage holders who have agreed to a short sale will only pay up to $2,000 towards the second mortgage holder.
I personally try to avoid dealing with short sales because I believe that a better deal can be found either among the resale homes or among the bank owned properties (foreclosures) that are listed for sale in San Diego.