Was that lost sheep or lost sleep? What Little Bo Peep may not have known is that "leaving them alone so they'll come home" may not always be the best strategy. By which I mean, that short sales don't automatically result in a good buy on a house. In order to understand what they are and how they work, a few facts are in order.
The "short" in short sale refers to the fact that the bank is going to receive a sum "short" of (less than) what they are owed on the sale of the property. When a mortgage holder's property value drops below the loan amount (as in a case where they owe the bank $360,000 on their mortgage but due to the fall in the market the property is now competing against similar properties at $325,000, for example) the owner can't sell the property for enough to pay off the bank. If they can wait till the market changes and values come back there's no big problem, but some people for whatever reason need to sell right away. Perhaps they had one of those notorious "Option ARM" loans where the interest rate becomes variable after an initial period and starts to rise, making the homeowner's payment go up every six months. Or perhaps they lost a job, suffered an illness... you name it, we can all think of someone who hit it just wrong and got into a situation where they need to move. If everyone else with an equal home is selling it around $325,000 they can't really sell it for more, no matter how much they "hold out." Some sellers want to maintain their credit score and luckily have enough cash available to "bring to the table" the difference. If they owe the bank $360,000 and sell the house for $325,000, they pay the bank $35,000 from their own funds to make up the difference. But some sellers don't have that option.
The solution might be to list it for market value, but make that "subject to lienholder approval" and after they get a contract with a Buyer, send that over to the bank (mortgage holder, also known as lienholder) and see if they will approve the sale even though they will lose some money. There are strict guidelines for this from the bank's point of view, so it's not always an option, but sometimes it is.
Why would a bank approve that? Well, if the owner is behind in his payments, the day will draw closer when the bank will have to make a move to forclose. If they do that, they are likely to have to spend a lot of money in the process, and end up with an uncertain result, but probably less than they would get by approving the short sale. So the bank, for good business reasons, might be better off allowing the short sale to go through.
My clients often want to know about what these terms mean, and if they are good deals. One thing it helps to know is that the approval process is often uncertain, and will take longer than a regular sale. Two months would be a very short time, in fact it can be two or three times that period. And after waiting all that time to see if the sale is approved, it is definitely not guaranteed. In fact, if you ask agents what percentage of short sales close, you could hear that somewhere between under 20% up to 30% actually close after the long wait (after reading a lot of realtor comments on Trulia). This is partly a factor of how well the Listing Agent understands the process, so one way to improve your chances is to have your agent check and see how many short sales the Listing Agent has managed to close in the last 12 months. But it also has to do with what kind of investors the bank has sold the investment to, as if there are too many people involved in the approval process it can take longer or just fail. Oh, and another problem that might come up is that sometimes even after one offer goes in and starts to be considered, the bank will still take other offers, so after waiting three months with the highest offer, someone else might still be able to submit a higher offer which would then be considered. Sometimes the bank will limit that and not allow subsequent offers, so that needs to be checked in advance of making your offer.
Are short sales the same as Bank Owned property? Absolutely not. Bank Owned properties have already left the possession of the former owner, so when you are dealing with the bank you are dealing with the responsible party and can be assured of a decision. It still may take slightly longer than the 30 day closing period that is typical for the traditional purchase / sale, but it will be nothing as long as the length of the short sale process. There are a couple of down sides. Most Bank Owned properties have been "winterized" (water and heat turned off) and most often are "as is" sales. Sometimes you can miss flaws because of this. In this situation you should still have the property inspected, but this will more serve to tell you if there's something so negative that you should back off from the purchase rather than providing a chance to get the Seller to repair defects, as the typical negotiation does (especially now in our Buyer's market).
So whereas I advise my clients to find out exactly what is involved in a short sale and what their chances are of actually closing before they decide if it's possible or desirable for them, I think Bank Owned properties are well worth considering and can provide a great deal, as long as you are willing to do some fixing up wherever it's needed. And yes, you can still negotiate, although they will have a bottom dollar in mind and will reject unreasonably "lowball" offers. What's unreasonable? That's something to be scoped out by having your agent do CMAs (comparative market analysis) on the home, and finding out what comparable bank owned properties have gone for in the same general area.
Feel free to give me a call or email me with any questions, I'd be glad to talk it all over with you.