Short Sales Explained: Opportunity or Risk?

A short sale happens when a home is sold for less than what is owed on the mortgage, and while it can create opportunity, it also comes with added complexity, timelines, and risk. This conversation walks through both sides — when a short sale can work in your favor and when it may be the wrong move.

Transcript

SPEAKER_01 0:00

Welcome to the Buff Show, a show brought to you by Mountain Buff Real Estate. We are dedicated to chasing down the buffs of the world and bringing their expertise right to you.

SPEAKER_00 0:12

I was thinking we could do a video too where me and you get into like a big street fight in a house. But you do just like cutting scenes, so it's the punches and stuff, but then you show on the house while you're doing it. Um but it it you back off.

SPEAKER_01 0:25

This is my listing.

SPEAKER_00 0:26

But you'd have to really commit to like the kicks and stuff is the thing. Like you'd have to like you. Yeah, you could. I mean, you can go like all extors.

SPEAKER_01 0:34

I'm the best agent in Utah. And then we'll we'll at the end, we'll show you like packing up in your trailer and moving away. And then I'll be like, I'm the real thing. I'm the real thing.

SPEAKER_00 0:45

On a mountain. On top of a mountain. Uh short sales are some of the most complicated real estate transactions possible, and they don't work the way that 90% of the population thinks they do. There you go. There's a way to start that. That's a good intro. I it's been a whole pain in the butt, but if you do your mountain buff intro.

SPEAKER_01 1:02

All right. All right, guys, welcome to the buff show. Today we have Peyton Allen Clancy Fairbanks, who is our short sale expert. If you guys have any short sales, need help with short sales, he is our guy. He's an expert at it, and he loves short sales. They're really short and fun and he likes to work on it. Tasty little treat. Yeah. Yeah. So, dude, how's we're going to go over short sales in this podcast?

SPEAKER_00 1:27

I I let's just start this with the short sale process for me was only complicated because I went into it with not as much knowledge as I should have gone into it, is the simple truth of it. But now that you've been through it, like you understand so much more in depth how you can plan ahead of time with timing, with plans, with documents, with what realistic expectations are. I think that's the hardest thing about short sales, is there's no training. It doesn't seem like anybody has any proper training or videos or anything on it until you actually start doing it.

SPEAKER_01 1:54

Yeah. And every every bank you deal with, every lender is different. So let's let's start out with the basic fundamentals. Like what is a short sale, essentially? Aaron Ross Powell, Jr.

SPEAKER_00 2:03

A short sale is effectively a seller needs to get out of their home, they're distressed, whatever and whatnot, and they're not able to sell the home for a price that would completely pay back the loan from the bank, the mortgage. And so they would approach the bank then and say, Hey, can I pay you less so that we can get this thing sold so it doesn't go to foreclosure? And that's why it's called short. Yeah, short sale is the bank is getting shorted.

SPEAKER_01 2:28

Yeah. And it's less I knew that. No, but the and and why would somebody want to do a short sale? Why not just be like walk out and be like, I'm done?

SPEAKER_00 2:37

So typically the goal would be that it doesn't hit your credit the same way that like a foreclosure would. It also makes it so that you can kind of get the process done. Foreclosure is an even longer process than short sale, I want to say typically. And that's all bank to bank, but it's a it's a rougher process, but it's the credit hit, I think, is the biggest problem.

SPEAKER_01 2:54

I think it is a credit hit. Because if you want to buy a house, if you've had like a foreclosure, I want to say it's like seven years that you can't own a house. It's a solid, it's a solid and versus a short sale. It's like, hey, I worked with the bank, like we hit some hard times, um, we sold it, and and maybe it's like a year or two. I don't know the exact time frame, but it's it's less damaging to your credit than just walking away.

SPEAKER_00 3:17

And some of it might not even hit your credit the same way. Like it yeah, I want to say that there's ways, there's ways that you can approach it that say, hey, we want this to not hit our credit at all. And some banks will approve stuff like that. Yeah. But it is bank to bank.

SPEAKER_01 3:29

Right. So um, like what are the what are the kind of the first steps that you have to go through? If if you're a seller, if you're if you're watching this and you're like, hey, we're in a tight spot, we got to figure this out, like what what and we'll kind of cover this for buyers and sellers, but let's let's hit sellers first. Like, what is it what does this kind of look like? What's the process for them?

SPEAKER_00 3:49

I think a lot of the time you would try to get the home listed, and then once it's on the market and you've decided for certain that you're not able to get the price needed to pay off the loan, then you would call the bank, approach them, and say, Hey, we want to short sell this. What's that process look like?

SPEAKER_01 4:03

And then you can say we've at least tried these pricings. This has been our marketing, this has been our approach, we couldn't get it, and we're gonna have to do a short sale.

SPEAKER_00 4:10

Well, and the bank is gonna regardless, if you do the short sale, they're gonna order an appraisal, and that appraised price, that's what they're gonna dictate like acceptable offers for them to consider. Yeah, and so you have to have the home on the market for a bit. Um, and it makes it easier to start start a short sale, I guess.

SPEAKER_01 4:27

Don't they call that like a broker price opinion, basically?

SPEAKER_00 4:30

They do. I think we got well, ours was a broker price opinion, but yeah, appraisal, BPO, they're both the same thing in a way.

SPEAKER_01 4:36

And and here's the thing it they're not short. A lot of people will see it on the MLS, they're like, oh, it's a short sale. Like the process is normally pretty quick. If I have buyers looking at short sales, I'm like, look, you can buy this, but you're not on your own timeline. Like, sure, maybe some of them close in like 30 to 60 days. I don't know if that's ever happened ever, but most are like three to six months on average. And so if you're a buyer on one of these properties, you have to have all the timing and flexibility in the world and then just be willing to wait it out, right? Because it it just takes time.

SPEAKER_00 5:12

And you're gonna get somewhere between like a three and six percent price reduction on it. Like that that would be what the deal is, because there's a certain amount, like you couldn't necessarily get a 50% uh a 50% price reduction on it or whatever, because the bank's not gonna accept that. There's a certain point for them that it's more financially viable to just go into foreclosure as well.

SPEAKER_01 5:30

Right.

SPEAKER_00 5:31

And so that's the hard thing, too. I think everybody wants a big discount, and it's it's a little discount.

SPEAKER_01 5:35

Trevor Burrus, Jr. So you you really and it it it varies house to house for sure. Aaron Ross Powell, Jr. Definitely. Um But yeah, just just because it's a short sale doesn't mean it's like a screaming deal.

SPEAKER_00 5:46

Aaron Ross Powell No, well, and then that's the next piece of it as well. Well I shouldn't have jumped on the the sale price as quickly, but even on like the process of closing on the home, it's all dictated as well on has has the listing agent submitted all the documentation and started the short sale process. Because part of the, let's say the quickest short sale possible would be two and a half months. That's everything goes perfectly. That first month is submitting documents to the bank before you even get an offer. And so the offer stuff itself, it took us three and a half weeks submitting getting an offer, submitting it to the short sale company to get the answer on the first step of it, which is the FHA variance piece of it, with them not responding at all, with them not I sent them 10, 15 emails in a three-week period and didn't get responded to once. And the only reason we got responded to was because we went and escalated it effectively and and emailed them directly.

SPEAKER_01 6:38

So that's just when it's like offer under review type deal.

SPEAKER_00 6:43

Like it's it's it's well that's the first step of the offer under review. Because then you have to go to the ATP, which is the uh uh something to participate. Like we just saw an advanced uh I don't know, basically, but the offer price. At that point, that's when they actually start submitting it to the investor to see if the investor would accept that offer and consider it. And this is all for our process the simplest process possible because it was one mortgage. The second that you have FHA Utah housing and you've got a second mortgage on the property, the bureaucracy becomes twice as much because all of a sudden that second mortgage has to get approval as well. Sorry, that was that's why the timing is so much.

SPEAKER_01 7:21

I I think the one that I did, there were two mortgages. It was it was insane. Yeah, yep, yep, yep. Um I did one uh it's been a long time ago, but it was up in Cash Valley, Providence, and it took so long. I was I was so ready to be done with that. Similar process, but not short. Um, multiple phone calls every week, emails just following up, and they just move at their own timeline.

SPEAKER_00 7:45

And they just don't care. But that's the other hard piece of it as well, is that e even for the offers, in your mind, not your mind, but a buyer's mind, they're thinking, okay, I'm gonna submit an offer on this house. There's a lot of controls on that offer. Uh short sale will not pay for a home warranty, or short sale will only pay a specific amount for agents' commissions, or short sale will only allow a certain amount for seller concessions. And so for me, the problem that I ran into was I didn't understand all of these variables before we went into it because they don't describe any of the short sale process to you as an agent for sure. They expect that you know all this beforehand. Yeah. So you can get past the FHA variance part of it, get to the ATP part of it, and then they're gonna start throwing things that you might have to be counter-offering before they even present it to the lender. Yeah. I mean, we had to fix our contract for them to even consider showing it to the investor.

SPEAKER_01 8:29

Oh my gosh, that's crazy. So for the seller, what was the process? You guys had it listed, and then it's like we're not gonna be able to get you the number that you need, and we ought to look at the short sale. So, what did that look like?

SPEAKER_00 8:41

But so basically, so then I had to go as an agent, go sign up for equator.com, get everything signed up, and then submit that property for the short sale. And then it took two or three days for them to say, okay, these are all the documents you needed. They gave me 10 tasks. And so the first step was deciding that you weren't able to make enough money to be able to pay off the primary mortgage. The second step was figuring out how to initiate the short sale. Then the third step is after it's been initiated or they're starting the process, submitting all the documentation needed. We were talking, it's basically you're getting like a reverse, you're reversing the mortgage process because it's all the mortgage documents that they're going to need, but it's not to prove how much money you're making, it's to prove how much money you're not making if you're going through hardship.

SPEAKER_01 9:20

Yeah. So they one of them, one of the things you need is a hardship letter from the seller, two years of tax returns, two months of bank statements, pay stubs, monthly income and expense sheet, an authorization letter allowing the agent to speak with the bank. Um and really it's um the hardship is like you got you lost your job, there was a divorce, medical bills, death of a spouse, relocation. Um they're not gonna approve it just because somebody wants to move and they don't want to take a hit on their equity.

SPEAKER_00 9:49

No, no, no.

SPEAKER_01 9:50

There has to be a reason that the bank If if you have equity, they're not gonna be like, we're not taking well, you take less, we're not taking less.

SPEAKER_00 9:56

Yeah, they're gonna say, stay on the property for a bit.

SPEAKER_01 9:58

Yeah, what are you doing? Yeah, so you basically you have to owe more than what you're able to sell it for, essentially, after all the the fees and everything like that. And then you get it listed on the MLS, um, get an offer, and then once you get that offer, then the lender sends out a uh broker priced opinion to BPO where they essentially do their own appraisal. And that that's a huge like weighted thing where if that comes in higher, you're kind of like screwed, right? Um, depending on the offer that you get. So that kind of determines the price that they're willing to sell at.

SPEAKER_00 10:31

Well, and that's the only nice thing too. I do gotta say the nice thing about Equator is we did all of that, we got an appraisal before we got an offer. Well, that's it. And so we had the we had it, we had it listed original price, then we lowered it to the appraisal price, and then I was communicating on figuring out future price reductions, but it has to be at that appraised price for a certain period of time listed to see what happens.

SPEAKER_01 10:50

Yeah.

SPEAKER_00 10:50

Um, and there's a net amount that you're looking for in an offer effectively at that point. They're wanting 88%. So for$315,000 appraisal price, they're wanting$288,200 net price for the bank at the end of the day for offers that they would consider. Interesting. And so you've got your appraisal, you figure that all out, that's how you start structuring offers moving forward.

SPEAKER_01 11:11

So once you get the offers, you send it in, here's the package, and then it's just this review process.

SPEAKER_00 11:16

Yeah. So first there's the there's the for if you got an FHA loan, but there's FHA variance approval. It's basically saying you got the FHA loan, we're wanting to go in the short sale process. Now the government has to approve for you to go in the short sale process after the bank has approved that you go through the short sale process. It'll be different for a conventional loan, it would be different for FHA Utah Housing, but that's kind of where all those steps come in. And so that took three and a half weeks of no communication, 14 emails, them not responding at all, having to escalate to get an answer, three and a half weeks for for us to figure out, okay, for past the government approving the loan, then you submit it to ATP to participate, basically.

SPEAKER_01 11:54

Aaron Ross Powell And do you find the sellers having to like resubmit pay stubs and bank statements and all this stuff as time goes on?

SPEAKER_00 12:01

Uh for me it's all yes. I mean, every single time that you submit a document, probably half the documents are gonna come back that you need to adjust or correct in some way, shape, or form. So with the documents that we originally initiated, they said, hey, we needed these specific things. The WTs need to have this on it, the purchase contract needs to have these specific names on it. There's all of these, every aspect of it, you're gonna have some corrections at some point. Jeez. Um and then once you got to the ATP, that's when they started correcting the offer to make it so that you would could accommodate for what the lender and the investor would specifically want. Now they won't they'll they'll pay late fees on HOA for 12 months, but they won't pay document fees on it, they won't pay like rush fees on it or anything like that. And so that's either gonna come out of the seller's pocket or it comes out of the agent's pocket. I or like that there's money that they will not pay for it. But so if you can get to that step. Yeah, it all depends. Well, and once again, it if if you've got this is where it's really hard with short sales. If you've got people who are truly desperate, don't have any money, living in a trailer home somewhere. Are they still making payments on the home? No. Um, it's actually better to not make payments on a home. Don't take that advice, but the you not making payments on a home shows the bank, yeah, shows the bank that there's some kind of hardship. Yeah. Um, and it starts time clocks for you. Where if you're making payments, they're like, What are you talking about? You're doing just fine. Yeah. Um Yeah. So it's uh every single step of the way is just a huge process.

SPEAKER_01 13:25

So let's wrap this up. So if you're a seller needing to do a short sale, call you. Any other tips?

SPEAKER_00 13:32

I I I just think that if you do go into short sale, having a large conversation with your agent and and working with somebody who does understand the process as good as possible, I think it's worth it. Yeah. I understand the process now because I've been through it. You understand the process that you because you've been through it. But like if you're working with your cousin or something who's who's a new agent, you know, I just wouldn't advise it.

SPEAKER_01 13:54

They take long because people aren't quick and and getting stuff in and familiar with the process and having to resubmit stuff.

SPEAKER_00 14:01

Yeah. Well, and I I I like I fully understand people wanting to use family members or whatever as real estate agents for because of trust and all that. And I think that's all very valid. On a short sale, you want an agent that is committed to staying organized and committed to getting all your documents and understanding the process as much as possible. Because it is going to be really stressful. That that'd be my advice, using somebody that at least has been through the process once, hopefully ten times. Yeah. For buyers, what's your key takeaways if they're looking at a house that's a short sale? If you're you're going to get like a three to five percent discount on the house, it'd be kind of a way to look at it. You you'll kind of know the outcome that you're trying to get out of it, but it could take two months to close, it could take six months to close. So it's there need you it needs to be something where even if they invest your counteroffers after two and a half months, you need to be okay with it. Take everything with a grain of salt.

SPEAKER_01 14:51

Yeah. Yeah.

SPEAKER_00 14:52

And ride the you got to be able to ride the wave.

SPEAKER_01 14:54

Yeah. And get a good home inspector because the house is sold as is.

SPEAKER_00 14:57

100%. Yes, that's correct. They will not they will not pay for repairs at all either.

SPEAKER_01 15:02

Well, there you go, guys. Short sale. Short sales. They're not short. We'll do a follow up podcast too after this short sale completes just to kind of talk about a recap. Yeah. No, that'd be great. Well, thanks for watching, guys. If you need anything, reach out, reach out to us. All right. Bye.