Two Types of Short Sale: Circus Clowns & Elephant Acts

by Lee Abraham

If Real Estate is a three ring circus, Short Sales are currently the most popular Elephant act under the big top. And while watching the action safely from the stands is fun and entertaining, actually stepping into the ring and doing business with the trainer and his big bad beast can make a Circus Clown out of anyone.

Let’s face it, getting involved in a Short Sale can be tricky. Not to mention risky. Particularly for newbies. Lots of twists and turns to navigate and pitfalls to avoid.

So what do you say we sharpen our skill set a bit before we belly up to the investment buffet, dig in and eat the Short Sale elephant one bite at a time?

Let’s start at the beginning. Short Sales happen when the mortgage loan balance is more than the property is worth. Let’s say the house is worth $100,000 but the owner owes $150,000.

Throw in hardship. You know, a sad situation where the owner lost a job, can’t pay the bills and is behind in the monthly mortgage payment. Unfortunately, in the current economy we all know somebody in that predicament.

Finally, a buyer comes along who is willing to purchase the property for $100,000, and yes, the seller will agree to anything just to get the property off his back, but what about that darn lender who’s left with a $50,000 loss?

I’m glad you asked! Depending on the circumstances, the lender may or may not decide that accepting a new buyer at a $100,000 purchase price who pays the mortgage is better than a delinquent borrower at $150,000 who doesn’t.

We’ll get into the details on the bank’s decision making process some other time, for now I want to make the following point, there are TWO types of Short Sales: Approved and Unapproved.

An Approved Short Sale means the bank has already indicated they are willing to lose the $50,000 and will accept $100,000 for the property. This is the type of Short Sale you want to deal with.

An Unapproved Short Sale means the list price (and amount of loss the bank will agree to) is a mystery. The homework hasn’t been done to determine exactly what the bank WILL take.

Trust me, dealing in Unapproved Short Sales can be a nightmare. Why? The list price is almost always an illusion, way below current market value, inducing multiple offers from aggressive, bottom feeding investors looking to make a killing, and almost always resulting in a bidding war and final highest offer price measurably above the list price. 

And even then, there is no guarantee the bank will accept the highest bid. Result: lots of wasted time and energy, as well as possibly missing a great opportunity on another property because you were distracted with the unrealistic allure of the Unapproved Short Sale list price.

Bottom Line: whether buying or selling, play the Real Estate game stratigically and know in advance if the Short Sale you are getting involved with is Approved or Unapproved.

Want to know more? Join us next time as we look into the process of getting a Short Sale Approved, when our Adventure in Real Estate continues… Follow Abe on Twitter!