A lot of people ask me, "What is a short sale?" A short sale is basically a home that is over encumbered. What does that mean? It means that you owe more than what you can get for it on the open market. So, as an example, let's say you have a house that you've bought for $500,000 and it's now worth $400,000 in this market.  So what happens is, if someone really needs to sell their home, due to some kind of hardship in their life, (they've lost their job, one of the spouses isn't working, someone's sick, or something unexpected) and they need to sell their home, then they can approach the bank with the help of a real estate agent an attempt to do a Short Sale.  Essentially, they're asking the bank to forgiveness the amount they are short. That's why they call it a Short Sale.

I always joke that they should really call them long sales, because it seems to take forever to get them approved. I had one that lasted a full six months. And my seller had a huge hardship. They were actually bankrupt. I don't know why the bank didn't move faster, but they didn't. It took forever to get it approved, and we did eventually end up selling the home to the original buyer.  Over the past few months, the approval time is getting shorter, so it makes buying or selling a Short Sale a whole lot easier.

Now you'll see homes that are listed for certain prices and you might look at the price and think, "wow, that's an incredibly low price. And, a lot of times this is done to generate a quick offer.  Consider that if you had a home that you wanted to sell quickly, what is the best and quickest way to get offers? To list it for a low price...right? If you list it for a low price, you're going to have people swarming around your home wanting to make an offer.

Now, remember, a short sale means that you have to ask the bank to forgive how much you're short, and there could be a second or a third loan involved here, so it becomes quite complicated. Now if you're short a big amount, and you had to get the bank to approve what they're going to forgive, right, that price that is being asked may not be the real price.

So let's say, for example, the home was purchased for $500,000, and it's now worth $400,000. So the listing agent might list the home for, say, $360,000 thinking they are going to generate a lot of offers. And guess what? They will. They're going to get all kinds of action on that home. And let's say they get a full priced offer at $360,000 and it gets accepted and the buyer is excited. The seller is excited because they finally get to move on with their life but the bank now has to look at it and basically give their blessing.

Now the bank is not a party to the purchase agreement. It's still the buyer and the seller, but since there is that shortfall, the bank has to approve it because they're the ones (excuse the term) taking it in the shorts.  When looking for homes, you may see a short sale price that is very low. I encourage you to be cautiously excited because it's still got to get approved by the bank.

The bank won't give you an approved price unless you have a bone fide offer. That's why you'll sometimes see a low price for a short sale—because if the bank won't even talk to the seller (or their Realtor) until they have an offer.

No after an offer is received, the Seller, with the help of their Realtor, will have to present that offer to the bank along with what they call a short sale package.

A short sale package is going to require the Seller of the home to submit a bunch of information, because the bank wants to make sure there is a true hardship.  The bank is going to want to see bank statements. They're going to want to see financial statements. They're going to want to see tax returns. They're going to want a letter telling them why you have to sell. Their thought is that if you can afford the home and stay in it, if you can still make the monthly payments.  To the bank it doesn't matter that the home's not worth what you bought it for.

A true hardship could be many things. It could be a divorce. It could be a death in the family. It could be a job transfer or an illness.  After the package is put together and sent to the bank, then waiting begins. So remember, it takes a bit of time and you need to be patient.

So you wait and you wait and you wait, and then you get a response from the bank saying, "Okay, yes. We will approve the short sale."

This wold be fantastic, if it happens. But most of the time the bank will counter back and say, "You know what? We're not going to approve that price. We sent out two real estate agents to do what's called a BPO or broker price opinion. They filled out this long form with pictures of local comparable sales and sent it back to us.  And we believe your home is actually worth $400,000 in today's market. We're not going to forgive it $140,000, down to the $360,000, but we will forgive the debt up to $100,000, down to the $400,000.

And at that point, the agent goes back to the original buyer and says, "Okay. They won't approve $360,000 but they will approve $400,000. Would you be willing to take it?" And here's the crazy thing. Even though you've waited anywhere from 30 to 90 days to get that answer, the bank wants your response within usually 48 to 72 hours. Isn't that crazy? You wait that long but they want a really quick answer after they've responded.

So now we have an answer from the bank and what happens, probably nine times out of ten, the original buyer has already found another home. They waited and waited, but couldn't wait any more. They needed a place for their family. They found a home. They're probably already living in it. The silver lining is that the Seller (and their Realtor) now know what the bank is willing to approve, so you can now have a somewhat normal Escrow.

This is where you may see in the description of the Multiple Listing Service, "bank approved price." And that's how we know. Because somebody else played the waiting game, but lost interest, or maybe they couldn't get financing, or whatever. But now there is a bank approved price.

So if you're looking through the Multiple Listing Service and you've found a short sale and you've heard, "Oh, don't go for short sales. They take forever," but you see in there bank approved, then go for it.  And if you're in Southern California, more specifically, the Los Angeles area, then definitely call me and I'll be glad to help you with the purchase.

Now, if the offer was written properly and everything goes well, it's important to know that all the contingency periods don't start until you get written approval from the bank. So don't worry about your contingency period, because as long as the offer is written well, then all the contingencies start the day you get written approval from the bank.

But remember, more than anything, you're going to need patience. If you don't have patience, I would not recommend short sales for you.