If there is a 70% chance that your escrow process will end with a deal-breaker, but only after being stretched beyond 30 days (while your rate lock expires), potentially with no end in sight for months, and after you spend $800 and numerous hours of due diligence and planning, and potentially losing your pre-approval and having to start all over again with a new lender, but not before canceling all the plans you made to move, and all the vendors you would have contacted at that point, for example, your existing lease agreement or home sale, SDGE, EDCO, locksmiths, carpet cleaners, moving companies, etc.
…would you put yourself in this position?
A short sale is when the seller must obtain approval from their lender to sell their home for a price that will result in the lender receiving less than they are owed.
The first hurdle in a short-sale involves getting the seller’s lender to issue preliminary approval. This means they review the listing agent’s estimated cost analysis and then issue approval of the estimated loss. This can take anywhere from a few days to many months.
Once pre-approval is issued, the escrow process resumes in pretty much the same way as a traditional escrow. However there is one huge difference:
In a short-sale escrow, the seller’s lender does not issue the final approval until the very end of escrow.
Even if a short sale escrow takes only 30-45 days (most run much longer)… after doing all of the inspections, disclosures, agreements, trips to the property, loan signing, final walkthrough etc… you (the buyer) will be waiting for nothing left to do but fund… and then the seller’s lender will either approve the deal, or more than likely, issue a counter at that time.
The counter can be as little as a $1,000 for some outstanding HOA dues… or as much as $10k, $20k… $50k, etc. or some other amount that represents the difference between their expected proceeds… and the proceeds they could receive instead by foreclosing and/or collecting mortgage insurance.
The seller’s lender does not do this analysis in the beginning, when it would make the most sense for all parties. Rather, they wait until the very end of escrow because this way they know for sure they have a live buyer who, prepared to pay what the market will bear, who has been fully approved with empirical numbers to work with. They also do it this way because banks are a bureaucratic mess whose incentives are not aligned at all with a broader economic recovery. And most simply put… no single bank manager really looks forward to having their own boss fry their ass for approving a loss.
Of course, upon receiving a counter offer so late in the game, you will be under no obligation to proceed… and you will get your deposit back if you choose to terminate the deal. But this happens after you will have paid a minimum of $800 in inspections and appraisals, and after you end up canceling all the plans you made to move into the new home, and canceling all the vendors you would have contacted up to that point, for example, your existing lease agreement or home sale, moving companies, SDGE, EDCO, locksmiths, house cleaners, carpet cleaners, etc.
There is no control you can use to negotiate against this possible outcome. This is why over 70% of short sales escrows do not close.
So… if there is a 70% chance that your escrow will terminate but not before resulting in major inconveniences, disappointment, and loss of time and money… while potentially losing your loan pre-approval and having to start all over again with a new lender… and a new subject property… why put yourself in this position?