Buy a Home: Short Sales

Lately, Redfin has been working with buyers on lots of short sales. If you are planning to make an offer on a short-sale listing, you should be ready to wait as long as several months for the banks involved in the process to approve or reject your offer. Many types of short sales are a long-shot. And there are also some types of short sales that Redfin won't support. In working with Redfin on a short-sale offer, many buyers keep on touring other homes, and even make offers on regular properties through Redfin in case the short sale doesn't go through. Here's what you need to know when making an offer on what may be a short-sale listing.

A short-sale listing is one in which the owner still owns the property, but owes more money on his mortgage than he will get from selling the property. Short sales require the seller's bank to agree to the final sale price. If more than one bank holds a mortgage on the property, each bank has to approve the sale.

Short sales are different than foreclosures or bank-owned properties. If the home-owner cannot sell the home through a short sale, the bank initiates foreclosure to try to sell the home directly, often in an auction. If the auction fails to turn up a buyer willing to pay at least what the bank was owed on the home, the home becomes Real Estate Owned (REO), where the owner is the bank. The bank then typically sells the property through a real estate agent.

Redfin supports buyers pursuing some types of short-sale listings but not foreclosures. Redfin supports buyers of REO listings except in the Washington, DC area.

You may not realize that the property you are trying to buy is a short sale. Most listing agents identify a listing as a short sale in the agent-only remarks of the Multiple Listing Service (MLS), which brokers use to share listing information. MLS rules nearly always prevent Redfin and others from publishing this information to the web. If you saw a listing while on tour with Redfin, we'll tell you if it is a short sale. Otherwise, you can ask by emailing the property address to askanagent@redfin.com, or we'll let you know once we begin preparing your offer.

If you really want to take a shot at a short sale, you'll have to learn a lot about the process, so read on. If a short sale isn't for you, the folks at Redfin can help you tour and buy other properties that are free and clear to be sold.

You can, up to a point. The seller just wants to get out of the house, so he'll be happy to take any price the bank will approve. But banks won't approve a price if they think they can get more money by foreclosing on the property and selling it themselves. So if your price is below-market, the bank may reject the deal. This is especially true if the buyer had to buy mortgage insurance when first getting the loan, which now encourages the bank to wait for foreclosure.

Short sales can take several months, depending on how long the bank needs to evaluate your offer. While the bank evaluates your short-sale offer, other buyers can submit a competing offer on that property. If the bank approves your offer, it will usually ask you to buy the property as-is, refusing to allocate any money to repair the problems discovered by the inspection. While Redfin normally works on only one offer at a time, short sales take so long that we support buyers who want to continue touring and possibly buying other types of properties. You can usually abandon a short-sale offer at any time.

In many cases, Redfin will not be able to represent you in a short sale. In the first quarter of 2008, we handled 65 short sales but only four were approved by the bank. Many of our clients, frustrated after months of waiting for bank approval, abandoned their offers. For a short sale to have a realistic possibility of bank approval, the seller must meet several conditions. These are our requirements:

• Only one bank has to approve the sale: in other words, the seller has only one mortgage on the property. Many sellers in default will owe money on multiple mortgages to multiple banks, each of which has to approve the deal. In the line to be paid back first, one bank will be ahead of the other. In such cases, the second bank is likely to reject the deal because it is the most likely to lose money.
• The bank has confirmed receipt of the preliminary paperwork: the seller has stopped paying his mortgage, received a notice of default and sent the bank's loss mitigation department the following:
• There are no liens on the property: the seller doesn't owe anybody else the money he'll get from selling his property. If the seller has other debts, those debtors may put a lien on the property which positions them first in line to get money from the sale of the property. In these cases, the bank will almost never allow a sale to go through. The listing agent and the seller may be able to arrange to pay these debts in other ways, but not using proceeds from the transaction.
• The listing agent has experience or training in short sales: your ability to get the property will depend in large part on whether the listing agent can facilitate negotiations between the seller and the bank's loss mitigation department. If the listing agent has no experience closing a short sale or training in this complicated process, the deal will likely take much longer and be much more likely to end unhappily. If the listing agent has neither the experience nor the training, Redfin will only work on the transaction if a short-sale service is involved to support the listing agent.

If you want Redfin to represent you on a short-sale listing, we'll confirm with the listing agent that the listing has a realistic possibility of being available for sale. If it doesn't meet our criteria, we'll help you find another property to buy. Questions? Send an email to askanagent@redfin.com.

To learn more about short sales, here are some helpful resources:

• A Realtor.org article on short sales.
• An article in the Sacramento Bee on short sales being a last resort for lenders.
• A Virginia broker's summary of short sales.
• The entry on About.com on short sales.
• Wikipedia's entry on short sales.
• An article from the Tampa Bay Business Journal on short sales.
• An article from Reuters on on short sales.