yea, nowhere does it say bidding.
a short sale, in the financial world, is anytime someone accepts less money on a debt than what's owed and considers it free and clear. when dealing with real estate, it refers to a very specific case of accepting less money than whats owed on a mortgage.
let me walk you through it.
First, someone stops paying there loan. obviously, if they dont start paying again (ie: set up a loan modification, qaulify for an interest free fha loan to cover the missing payments, etc.) it'll go into forclosure. after 90 days, the official foreclosure process starts with the bank filing a les pendons at the court house. then the whole world knows...
Now, the official foreclosure hasn't happened yet, the bank hasn't taken back the deed to the house yet, but the process has started. During this entire time before the foreclosure happens, what's called a short sale can occur.
A lender typically has a short sale packet (ask your lender for one, they'll be able to send it to you), in which you gotta fill it out and submit tons of information proving you can no longer make payment becuase of life altering situation and you have no money to settle with. Typically, a 3rd party does this. While the homeowner can shortsale their own home, banks will almost always require a 3rd party to be doing it if you want to have any success. You submit the shortsale packet, and the bank will get a BPO or have your house actually appraised to figure out market value. If the house is upside down, it's in a market where homes arn't moving, etc... they may accept a short sale. Basically, they'll offer to settle for 65cents-75cents on the dollar of the loan (usually that range, so, as low as 65% of the loan value). The 3rd party typically arranges to have a buyer buy the home with cash at this steeply discounted rate, and sometimes this buyer is found through creating a "fire sale" on the MLS by simply posting it as 85% of the apraised value or whatever depending on the house.
so, we have a house that is going to be foreclosed on, but before it does the bank offers a short sale. lets say you're the 3rd party and you short sold someone's home that owed 100k on a 100k mortage, and the bank gave you 65% on the dollar and set a date for the short sale transaction... lets say, 30 days from the time they approved doing the short sale, all the official money transfer and paperwork will be done. so you need to come up with 65k in cash to own this thing free and clear. part of the shortsale packet is going to be proving that you have the 65k to buy it yourself, but lets say you dont want it, so you list it on the MLS for 85k, and the thing gets snapped up before the date at which the short sale takes place. you lose 6% in comissions to realtor fees, another few % for closing costs... you come in with a nice healthy 10-12k profit. the original homeowner got out from underneath the house that was gonna ruin their credit, and the bank gets to write off the loss and not take a credit hit.
Lets for a second, talk about why a bank would do this. When a bank has to foreclose on a property, they lose lending power. Meaning, the banks above them won't give them as much money to loan out... for every 1 million in foreclosures, a bank can lose up to 9 million in lending power. This is bad news for banks, becuase they arn't in the real estate business and dont want to be taking back properties, they're in the lending business. If a bank accepts a shortsale, they can write off the bad debt, and don't lose any lending power.
Lets pretend the shortsale did not go through and it DID go into foreclosure. First, the bank would take the house back. The house would then be put on auction at a foreclosure auction, with the minimum bid being what's owed on the bad mortgage of the house. If noone wants to pay that minimum bid (becuase of house declines, maybe the house was way upside down so the minimum bid is 400k for a house that now only appraises at 250k), then the bank gets stuck with an REO (real estate owned property). Now, while people made money at these auctions in the past, now everyone knows about them so often if a house that was foreclosed on had 100k in equity, so it appraises for 250k and it's going up to auction for 150k becuase that's all that was owed on the loan, it'll often get bid up to fair market value anymore. this means that you arn't going to buy a house at a foreclosure auction for cheap anymore and resale it for huge profits and get rich quick anymore. sure, deals come by, but it's rare.
So now the bank has an REO. the bank will fix up the property, and then hey list it with an agent and it goes on the MLS. typically if person A puts in an offer on a house, the seller can reject the offer and move on, or negotiate and counter offer. once they make a counter offer, person A can either accept it or make another counter at which point the seller can reject it and move onto the person B's offer. in other words, once they're negotiating with you, if someone else comes along and says "I'LL DOUBLE HIS PRICE!", tough shit you still got first dibs on whatever original prices you were discussing, up to the actual listed price. in otherwords, its a sales negotiation with the first person you choose to deal with. it doesnt turn into a bidding situation if multiple people want the property. why is this important? becuase with REO's, none of that applies.
with an REO, you submit an offer and the bank will counter offer. at any time during this process the bank can say "someone else offered us more, so we're gonna deal with them instead, unless you want to up your offer". this creates a bidding situation over multiple people wanting the property.
if the original loan on the property was 400k, it appraised for 250k, the bank put 10k into cleaning it up, and they end up selling it as an REO for 230k... they obviously lost alot of money and end up losing alot of lending power, but at least it gets it off the books and they can move on with life. remember what i said earlier? banks aren't in the real estate business, they're in the lending business.
so... short sales --> foreclosure --> foreclosure auction --> REO. that's the natural progression of a house if nobody wants it. short sales are rare, up until this year banks rarely accepted short sale offers but now they're desperate and i think some obama legsislation gives them incentives to accept short sale offers now.
as for "they do it different here", the nationwide shortsale negotiation company i've worked with is HQ'd in florida, so i doubt they have some super different definitions from the rest of the world on how they conduct real estate business. while every state has slightly different processes and nuances, what i just told you is the generic version of how real estate works in every state, every area.
any questions? i'm getting pretty well versed at this stuff.
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