Potential Short Sale?  Not if it Sells for ≥ 10% Over Market

If you have been in a cave (or simply aren’t up on the housing market), a “short sale” is when a homeowner owes more on their mortgage than the home is worth (called “being underwater”), and to sell, must get the bank to accept a “haircut” (or an amputation) on the outstanding balance.

Up until now, that’s not something that banks have been eager to do.

And even if they are, the presence of multiple mortgages can make the logistics a nightmare.

For these reasons and more, short sales have a deserved reputation for being cumbersome, drawn-out affairs.

50-50 Odds

That’s when they succeed.

Something like 50% of the time, the bank(s) do not agree to reduce the mortgage(s), the owner defaults, and the banks foreclose.

At that point, the affected home typically comes off the market for 6-8 months while the title gets cleaned up, and the bank gets its selling ducks in a row.

As you might imagine, the condition of an abandoned, neglected (redundant?) home usually does not improve while all that happens. 

Worse For Wear

Because of the risks and headaches associated with short sales, Buyers understandably shy away.

And because it’s only fair to let prospective Buyers know what they can expect, about two years ago the local MLS added a new field asking if the home was a “potential short sale.” 

So, here’s the $64k question:  what percentage of the time do Sellers accurately check that box? (as far I know, compliance is on the honor system, and there are no consequences for not ‘fessing up).

My guess?

Perhaps one-third of the time (or less).

Seller Intentions

That’s not just because no Seller wants to undermine their home’s market value.

It’s also because, at least in theory, the home really isn’t a potential short sale.

That can be the case where — to use some concrete numbers — a home has a fair market value of around $200k, and a mortgage on it for the same amount.

If the owner lists the home at $220k and happens to get that — Voila! — no short sale.

After subtracting selling costs of about 7%, the Seller in this situation can satisfy their mortgage and actually walk away with a nice chunk of change (almost $5k).

No Room to Negotiate

But what if the house doesn’t fetch $220k or anywhere close to it?

If instead the home sells for $200k, the owner has to bring $14k to closing — something that most owners, to preserve their credit, will somehow manage to do.

Still no short sale.

Which brings up scenario #3:  the best the owner can get turns out to be $185k, which means that to sell, they would have to bring about $28k to closing.

At that point, if they don’t have that in the bank but can still make the monthly payments, most Sellers will simply opt to take their home off the market and stay put.

Bottom line:  even though the homeowner was underwater (or extremely close to it) when they put their home on the market, they could legitimately say that at no point was the home a “potential short sale” — because they would simply choose not to sell below a certain price.

Whatever you call the foregoing — my term is “short sale semantics” — my guess is that a lot of Sellers, unfortunately, are engaging in it now, and a lot of frustrated Buyers are encountering it.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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