Negotiating Short Sales: Key Considerations for Success

by mccollim

In real estate, many short sale offers are denied and much time wasted between the parties. These are a few key pointers to help you achieve success in your efforts.

Today, a significant number of real estate transactions are 'short sales,' which is the formal way of saying that the seller is marketing the property at a price that is short or less than the amount owed to the lender/s. In these transactions, sellers and buyers who have entered into a real estate contract of sale must obtain third party approval, approval by the lending company which holds the mortgage lien on the property, to accept a financial loss and allow the sale to proceed. These types of transactions can be challenging to navigate and involve some patience, some frustration, even the risk of wasting time and resources to ultimately get rejected by the bank. Ultimately, there is a mutual interest between the buyer and seller to follow through with the deal, so it is wise to have some key considerations in mind in order to enhance the success of a short sale and arrive at the desired sale.

Negotiating Short Sales

Key Considerations for Success: Part I.

First, when a buyer presents a contract in a short sale situation, it will involve a myriad of follow up steps and possibly some price and term negotiations. Thus, it is important to have adequate knowledge of the short sale process and preferably a competent real estate professional who is experienced in short sales. Perhaps more significant than the actual technical experience of a professional who is representing you, is having a professional on your side who is willing to go to bat for you, one who is willing to diligently advocate for you, communicate on your behalf, explain to you the steps and how to succeed to the next step. It is more important to have an agent who has good communication, organization, and negotiation skills than someone who just happens to hold some short sale listings (seller clients sales) but makes little effort to advance the negotiation efforts.

Even if you opt to go it alone and negotiate the short sale without real estate agency representation, this and the following key considerations will help you get to the settlement table to finalize that desired real estate sale.

Second, you must have an attitude of flexibility and understanding of why a short sale is ultimately a challenge. It will ultimately be counterproductive in a lot of cases if your attitude is simply, "This is all or nothing. I am going to offer my one and only unyielding offer price; I need to achieve this exact result and I will accept nothing else."

Understand that the seller is making a very challenging and strained decision to sell the price for less than what they owe the lender (bank, mortgage corporation, etc). The seller is stressed and often at risk of going to foreclosure, at least eventually, if the seller does not in some way achieve a sale of the property. The reason why the seller is seeking to sell the property 'short' of what is owed is because the current real estate market is offering average home values which are ultimately less than the seller's loan balance/s. As has become common knowledge, a lot of home values dipped significantly over the late 2000's decade, or they established some balance after skyrocketing in value. Many home buyers paid more than they ideally should have because everyone seemed to mistakenly think that property values would continue to rise astronomically without market adjustments.  

Understand that the lender is taking some very calculated risks in determining whether this short sale transaction should take place at the contract price that is presented to them for their respective 'third party approval.' It may turn out that the lender has already realized a desired profit on the property. It is also possible that the lender calculates that the end result of denying this short sale contract may be foreclosing the property and possibly - and likely - selling it for even less than the offer they have on the table. On the other hand, the lending institution may determine that the potential losses are too great with the short sale offer, that it is far below the market value, that the seller could easily continue to market the property and is likely to receive much higher offers in little time. It may simply not meet the institutions financial goals.

Understand further that the lender is often a very large, sometimes unwieldy, although sometimes efficient organization, which must put its respective heads, its respective authorizing persons, together to determine what is ultimately best for its bottom line. This organizational environment can be more bureaucratic and frustrating than dealing with just one person, like an individual seller. However, they do not owe it to any seller or buyer to justify their internal policies or procedures. They have to ultimately live up to their obligations to their bosses, investors, and corporate decision makers.

So one needs to understand that the lender, who may realize financial losses, may need to reject the contract or compel the seller to effectively re-negotiate the price or terms of the offer. This does not mean that one always should accept the price and terms that appeal to the lender, especially when it cannot be reasonably justified with an appraisal or fair market value - or when there are circumstances, such as significant repairs needed, which need to be factored into the value of the sale.

Of course, a buyer has his or her own goals and needs and financial abilities. The buyer must adhere to those, which could properly result in walking away from the negotiation table when the terms cannot be negotiated in a way that is fair and reasonable and in adherence to such needs. Nonetheless, the buyer is wise to have a flexible attitude to some degree, to have a pre-thought range of values in which they may be willing to negotiate further. A buyer is wise to negotiate the terms that best meet their goals, but a buyer is less likely to meet any purchase goals for the property if there is a total unwillingness to be flexible and understanding of what is at stake for the seller and the lender.

This concludes part one of Negotiating Short Sales. Part two will be coming soon. Your advice and feedback will be greatly appreciated, including your aspirations for the next segment. Please keep in touch.

Updated: 04/19/2014, mccollim
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Rose on 11/11/2014

It sounds like a minefield - but for the buyer a chance to snap up something at a good price, so worth being patient and following the negotiating steps

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