Advice: Short Sale Long Process

If you're addicted to real estate hunting or window-shopping, you no doubt heard the term "short sale." It may sound enticing, but it's more complicated than it sounds. Los Angeles real estate agent and former Advocate editor in chief Jeff Yarbrough explains the ins and outs of buying or selling a home through a short sale.

The Advocate: What is a short sale?
Jeff Yarbrough: Basically, a short sale comes about when a loan amount on a property exceeds its market value. That's when the term "upside down" comes into play. When they talk about homeowners being upside down, it's because the market shifted, and their loan amount exceeds what people are willing to pay for the house. The main difference is that although the seller is involved in the process, the bank has to also agree with the seller regarding the price of the sale. So a traditional sale is where you have a buyer on one side and a seller on the other, and a foreclosure is when you have a buyer on one side and the bank on the other. In this case you have a buyer, a seller, and the bank, so there's a lot of back-and-forth that wouldn't take place during a traditional or standard sale.

So does this process take longer?
I've always said they should be called "long sales" because they wildly exceed the amount of time it takes to do a standard sale. The reason they're called short is because the seller is basically short on paying off the loan. The longest one I've ever done took a year, and the shortest was 53 days [both representing the seller]. I think it's more normal to take four to six months, starting with the offer being submitted to a bank. So the offer has to be accepted by the seller, and then it has to be submitted to the bank for approval.

Who benefits the most from a short sale?
It's a very convoluted economic model because the bank has already written off the toxic inventory that they own. The banks benefited way back during the height of the economic meltdown by writing off all of these bad loans. The seller is getting out from a situation they can't afford or a situation they no longer want to continue in. Sometimes they're called a strategic short sale, which means they actually can afford to keep going and make the payments, but they just don't want to. The buyer, interestingly enough, is not benefiting either. I've rarely seen a short sale sell for less than what the property is actually worth, so most buyers are paying market value, or they're in competition with a multiple offering that drives it up to the market value. So even if we priced it low, certainly in L.A., the market is going to find the real value of it, and that's what it's going to sell for. So, if I had to determine the one person that it benefits, it would probably be the seller, because they're the one who's being released from a toxic situation.

How common are short sales becoming?
We're going through a second cycle of short sales. The initial cycle happened right after the economic meltdown [in 2008]. And then the banks stopped approving short sales a lot, and they would just allow these homeowners to go into foreclosure. Now, after the government bailout of the banks, the government has sort of forced the banks to be more cooperative with their customers. Even though most of the banks have paid the [bailout money] back, they're still in a position where they've got to continue to appease the Obama administration. Because of that, they're a little more willing these days to allow a short sale to take place.

How underwater should a homeowner be before considering a short sale?
The reality is, if you can't afford to pay the bank whatever that difference is, whether it's $100 or $1 million, that's really your only option. We see the range, from someone who can't afford to come up with $25,000 to someone who is north of a $1 million underwater.

Find out more at JeffYarbrough.com.