Short sales are a complicated process. The wait for short sale approval can be very long, and sometimes buyers lose patience.
Further complicating the short sale process is the fact that these listings are sometimes priced under comparable sales. Some agents list them low purposely to attract multiple offers. Therefore, the offer a bank finally accepts might be much higher than the list price because sellers will often pick the highest-priced offer. At some point in the process, though, a short sale will hinge on the bank's approval.
- Banks generally do not approve a short sale until the bank receives an offer from a buyer.
- Sometimes the buyer might walk away even after the short sale has been approved, even if they are still interested in buying the home .
- If a new buyer steps in, their offer would have to match exactly to the terms of the short sale approval letter; that typically works only if the approval letter does not name a specific buyer.
- If the approval letter is specific to a buyer, then the short sale listing agent may need to request a new short sale approval letter, which could restart the whole process.
Approved Short Sale
Banks generally do not approve a short sale until the bank receives an offer from a buyer. Therefore, the usual way a short sale can be approved is for a buyer to submit an offer. The process will usually play out something like this:
- The selling agent lists the short sale.
- The seller delivers the lender's required documents to the agent.
- The buyer submits an offer subject to lender approval.
- The seller signs the buyer's offer.
- The listing agent sends the seller's package and the accepted offer to the short sale bank.
- The buyer waits anxiously, maybe for months.
- The agent finally receives the short sale approval letter.
- If the buyer hasn't canceled the offer during the wait, the sale is completed.
If the seller can show the bank that a short sale is a better option than a foreclosure, then the bank will approve it.
That is typically how you get an approved short sale. Once you have the bank's approval, you know that the seller qualified for the short sale, the sales price was approved, and the buyer's funding cleared. All of these are major components that can make or break a short sale. Assuming the buyer hasn't grown impatient and backed out, the sale can then move forward.
A bank can decide not to approve a short sale for any number of reasons, including:
- It decides a foreclosure is a better option.
- The current owner has too many liens against the property, making a short sale difficult.
- The current owner files for bankruptcy.
- The owner refuses to meet the bank's terms for what they are required to contribute toward the short sale.
When the Buyer Cancels After the Short Sale Is Approved
Sometimes the buyer might walk away even after the short sale has been approved. They may still be interested in buying the home but cancel for other reasons.
Many real estate contracts bestow upon buyers certain rights of inspection and contract contingencies, which give them the right to walk away.
Here are other reasons a buyer may cancel an approved short sale:
- The home needs too many repairs and the bank won't pay for them.
- The appraisal came in low, and the bank may refuse to approve a lower sales price.
- The buyer does not qualify for the loan and is unable to satisfy the lender's funding conditions.
Because the bank is heavily vested in the results of the short sale, it can be more difficult to negotiate final terms on the home sale. Regardless of the terms the buyer and seller may agree to, the bank will have the final say in the matter.
When a New Buyer Steps In
If the original buyer backs out, a new buyer can make an offer. Generally, a new buyer's offer would have to match exactly to the terms of the short sale approval letter, but that typically works only if the approval letter does not name a specific buyer.
To close on the existing approval letter, the following would need to take place:
- The terms of the new offer must match the offer that was approved and be submitted at the same approved sales price.
- The approval letter must not be specific to the previous buyer.
- The buyer must close by the date specified in the short sale approval letter or get an extension approved.
If the approval letter is specific to a buyer, then the short sale listing agent may need to request a new short sale approval letter. Depending on the bank, requesting a new short sale approval letter could very well start the entire short sale process over from scratch.