What is Contingent Status?
Not surprisingly, there is a lot of confusion among San Diego home buyers as to what it means when a short sale is in contingent status. The goal of this post will be to clarify what is means exactly for a property to be reported as contingent status, as opposed to pending. You can also visit our short sale questions and answers for more information on other related topics.
What Is A Short Sale?
Also known as short pays, a short sale takes place when a property is sold that is worth less than what is owed. Its that simple. For example, if has a market value of $300,000 but the loan against it is for $500,000 then the owner will need to attempt to sell it through a short sale, unless they were to pay the bank the $200,000 to make up the difference, which clearly most people do not have the ability or often the desire to do. Another way to look at it is when a property is sold that has negative equity. Understood? Good.
What is Contingent Status?
In a normal scenario property would be listed for sale and be active on the San Diego MLS. Theoretically, after few days, weeks, or months on the market it would receive offers and eventually accept one. The home would then go into escrow, or what is known in the MLS as pending status. At the conclusion of the escrow the home would be reported as sold.
Now in a short sale there is an extra step to that process because the sale is actually contingent on bank approval. This is because the owner has no equity and so it is the bank that must decide how low of a short pay they are willing to take vs. foreclosing on the property. In theory, other than some tax consequences, the owner of the property really has nothing to lose. They don’t care if the property sells for $270,000 or $300,000. The bank, however, not only has to decide how much of a hit they are willing to accept but also has an interest in protecting property values in the area because they most likely have loans out on other homes in that neighborhood. Therefore, by accepting a price that is too low they not only take a hit on that property but also on its entire portfolio.
Why Do Short Sales Sometimes Take Months?
So here is a typical scenario that many of you may have already experienced. You want to buy a home and you have decided that you want to purchase a Carmel Valley Townhouse. You find the perfect property and it seems like a great deal. In fact, you almost can’t believe how low the price is. You quickly make an offer and find out that you are one of 7 offers on the property. You wait for about two months without hearing anything from the listing agent. Finally, you hear back from them and they tell you to give your highest and best offer. You decide to increase your offer by $15,000 and feel that you are very competitive because you are now $5,000 over the asking price. They call you to give you the good news that your offer has been “accepted” and that they are submitting it to the bank.
Welcome to Contingent Status! Months and months go by without hearing a word from the sellers. Finally after about four months you hear back from them and are told that the bank will not accept your offer but they will take it if you increase your price by $8,000. You grow very frustrated and ask how this can be possible if you were actually over their asking price! Ahhh but wait a moment. Was it the bank’s asking price or was it the owners? Remember the owner has no equity and has made the decision to try and short sell his property. The bank knew nothing of it. Also, remember that on the listing there was some fine print that said “subject to bank approval”. Guess what just happened, you got used. The owner took a shot in the dark to find out what the bank would be willing to take and you were the ginnie pig.
Now that does not mean that you should shy away from short sales altogether. What it means is that you should either have all the time in the world or you should be aware of whether your offer is the first one they are submitting to the bank or if they have already received a prior approval for a buyer that walked. Your agent can help you with this if they understand the process. Typically, in the above scenario there will have been a buyer, maybe its you, that got so fed up with waiting for the bank to get back to them that by the time the bank gave them an answer the buyer had already moved on to something else. During all of that time the property will have been reported as contingent because it was contingent on the bank’s approval. However, the buyer has now gone in another direction and it can open the door for somebody like yourself to step in and make a great deal.
With patience, there are some steals to be had with short sales. You just have to be willing to play the game. If you were to step in at this point and make an offer at the price that the bank has already approved you would find yourself in a much shorter waiting period than the last buyer. The bank will review your offer and pre approval letter but once they approve it the property will go from being contingent to pending. From this point forward it will be much more similar to a traditional equity sale until the day you close.
Leave all questions in the form of a comment and I will be happy to answer each of them.
San Diego Home Finder