For the ease of reading this blog post we will call the person owing money the "borrower". We will call the person owed money the "bank". Yes, there are other people out there who loan money like mortgage companies and family, but that just makes things confusing. Besides, we want to get to the point here, which are the short sale problems within this Bad Economy.In the simplest terms we can think of, a short sale is when a borrower elects to sell a mortgaged property for less than what they owe the bank. Of course, this process must be approved by the bank. The supposed main purpose of a short sale is to avoid foreclosure for both the mortgage note holder and the borrower. This short sale generally assumes that banks are not in the business of holding onto properties. Having toured several foreclosed homes in the last year, we would think this must be fact since the bank assumes a lot of risk if the property does go into foreclosure, since we can tell you first hand these are depressing properties. This was once someone's loved home, but has now become a place of hate. This is the first of many short sale problems.
More often than not, the home is in deep need of repair once it enters foreclosure. The borrower will likely remove everything they "own" from the place and maybe some things which they, arguably, do not. The borrower may feel wronged by the bank, so they may do crazy things like pour bleach on the rugs, forcefully remove curtains or blinds, and take the water heater. With all of this in mind, why would the bank want to risk that? Plus, now that
appliances are missing, there are holes in the walls, and the house needs paint, who is left holding the bag for all of that? That is right, the bank. So the $20,000 they were about to lose in a short sale becomes $35,000 after repairs. All the while, the bank is not collecting a mortgage check from anyone.
As you can clearly see, the bank must find the short sale more advantageous than foreclosure, or it would not exist.
During July of 2010, I first encountered the short sale while shopping for a new home. We went from house to house in a depressed market. None of the houses we looked at were move-in ready. We looked at everything from average houses on the market to foreclosures to short sales. We looked at two particular short sales, which were still occupied, that we were interested in. One was a "pre-approved short sale", the other was not. The difference is the bank had already pre-approved the loss that they were willing to accept. The other was marketed as a short sale, but the borrower had not yet approached the bank with the idea of short selling. We signed an offer letter and placed a deposit (earnest money) on the not-yet-approved home.
Again, this was July of 2010. By November of 2010, nearly five months later, we were still waiting day by day for the bank to approve the short sale. The difference in short sale problem price and the mortgage owed was around $20,000. The short sale problem, as we were told, was the property had a second mortgage. The mortgages were with two different banks. When a sale goes down like that, the first mortgage is paid first. The short sale problem was that the second mortgage company was going to absorb most of the loss. The second mortgage bank was trying to convince the first mortgage bank to accept some of the loss with them and the borrower remained locked in the middle.
All the while we sat there with an approved pile of money to give for the property.
We learned a valuable lesson about the economy during this hot, long summer. The banks are not as bad off as they make themselves out to be, or else they would be working hard to fix these short sale problems. The economy cannot be that bad. If both were true, the banks would have jumped on the pile of cash we were trying to hand someone, anyone, for the property. Instead, the borrowers moved out in anticipation of a short sale. After many frustrating months, we found another home and we pulled out of the contract. The last I checked, the house was still vacant, on the market and likely facing foreclosure; a short sale problem indeed.
