One of my first blog posts way back in December was about the current phenomena that is sadly STILL hitting the housing market and families hard. Short Sale, foreclosures, modifications, and sheriff sales are all part of the sad result of a troubled housing market trying to “correct itself”.
Past Post specifically on Short Sales: http://wp.me/p24GVW-1x
You might wonder what I mean by “correcting itself”. What I mean is that previously before the “busing bubble”, properties were selling like hotcakes at Denny’s. Their prices went up higher and higher because more people wanted houses and mortgage companies were happy to oblige. So, house prices skyrocketed, mortgage companies and banks agreed to write loans for them and happy new home owners “agreed” to pay. Next, those loans that home owners agreed to pay changed to sometimes be more expensive than they initially started. When banks began the process of getting these houses back, the found out that they were overpriced and NO ONE would pay that price for them. Sometimes being tens and hundreds of thousands of dollars over priced.
Banks had a few options. Foreclose on the home and attempt to resell. Work with a home buyer to make the house more affordable for the owner or try to sell the home for what someone would pay for it, thus the Short Sale.
Short Sales happen because the loan is larger than the sale of the property minus all expenses. In a Short Sale, the seller is asking the bank to take less than the amount owed to satisfy the loan. You mint say “Well, this seems to be a straight forward yes or no question right?” But the problem is in this scenario:
Imagine a friend borrowing money from you to buy something. They borrow $100.00. They promise to pay it all back in a month. Next, the friend seems to be going through a hard time and said he can only give you back $75 from the $100 you owed. You know have a choice, accept the $75 or nothing or take back the thing he bought with the money.
You might want to think about whether you will be fine with accepting less than what you loaned.
You might want to take the property that they owe you.
Or, you might say, I need ALL my money and I will take you to court to get ALL my money.
These are the exact same choices left to a bank. We can argue the fairness of this situation but I am just stating what the actual process is and why. At times banks take a long time “deciding” which situation is the best for THEM. They don’t immediately “cab” to the thought of losing that extra $25 dollars.
Selling your house at a loss is as hard as a decision as leaving your house or even losing it to foreclosure. All sorts of reasons cause this situation.
I will give you a few examples I have PERSONALLY dealt with (No names):
- A client suffering from cancer needed to move out of town for treatment. They needed to pay for their current out of town living arrangements and had no money to pay for their previous home as well as not the hassle of selling outright. The problem came as they were behind on their payments. Their choice was sell their home via SHORT SALE. The client needed to complete paperwork from the lender to PROVE they could not afford to pay back all the money owed OR to be able to sell the home for how much is actually owed.
- A client had a fire that destroyed their home. Although them received insurance money for repair, long store short, they were in court suing the contractors for lack of repair and theft of the insurance money. They were left to either find someone trustworthy to repair while waiting on litigation of to just sell their home as is. They are struggling with that situation now.
Now that you understand the dynamics of a Short Sale or Foreclosure, (we will leave Modification explanations for later on) and how it effects both home owner and seller, I will go into the Good, Bad and Ugly of purchasing a Short Sale property.
You should first understand the biggest difference between a Short Sale and a standard home purchase. This difference plays a key role in every part of the process, its successes and pitfalls. This big difference is that instead of this transaction being between two parties, a Short Sale transaction is between at least THREE parties (Buyer, Seller and Bank). Even in the case of an REO (Real Estate Owned or Bank Owned property), it is only two participants (Buyer and Bank). This problem causes a very difficult three way negotiation.
Also, do not think that everyone has the sale goal in this transaction. Sure the Buyer wants the house and the Seller wants out of the house but the bank…ummm the bank wants.. to make sure to come out of it with the best bottom line they possible can regardless of which other parties are “slighted”. Meaning, that if the bank feels that there is a better deal” to be had instead of approving your Short Sale they will pursue this. They will take all the time they need to figure out their best position.
Steps to buying a Short Sale property:
Find a good Real Estate Agent
First find a real state agent that is familiar with and has successfully sold Short Sale properties. This is important because although your Buyer agent cannot truly negotiate with the bank on your behalf, they know the right levers to push with all parties to help successfully navigate the process.
Work on getting preapproved. Make sure you bank officer or mortgage broker understands that you might be interested in a Short Sale.
Once found, make sure it truly is a deal
You will need to make sure you are getting a deal worth going through this process. Believe me the ONLY reason to go through this process is if you are getting a great deal. Your agent can help by giving you a CMA (Comparative Market Analysis) that will more solidly identify the pricing of comparable properties in the area. Along with this, your agent should make sure to include enough “escape clauses” (contingencies in the Agreement of Sale) that will allow you to back out and find another home for various reasons.
This one is very important. Although you fee that this is the house of your dreams, you have spent money getting it inspected and getting your mortgage rate locked in, you may be in for a long wait.. that only leads to disappointment.
You need to find Plan B and C for yourself and this is where the “escape clauses” allow you out of the Short Sale and the ability to legally place another agreement on another home. They passed legislation to speed up the time the bank has to complete a Short Sale. However, there are only incentives for complying no consequences for not complying. So many Short Sales still languish for months.
I cannot say this any more emphatically that the bank can and may hold everything up is the wanted to. If they feel as if they are not getting what the want they cannot be forced into any part of the agreement. It is important to understand that understand that the bank is in the business to make as much money or to suffer the least amount of loss it can. Selling you the house is not necessarily their goal. You must have someone make your offer as attractive to the bank as possible. Even then it might not be accepted.
I have successfully closed four (4) Short Sale buyer side properties and two (2) seller side Short Sale closing accounts recently. As each one i different there are some things that increase your chance to have your offer accepted.
- If your are buying, you might want to consider using the mortgage company that also has the short sale. The are more likely to accept the offer because they will just be trading loans and will suffer less financial losses.
- Make sure your offer is a good one and also still within the general area of the other comparable similar properties. This is where the CMA (Comparative Market Analysis) comes into play. Make a good, fair offer. Look for the Win-Win.
- Understand the more you ask for in contingencies and other clauses, the less likely they will accept your offer. Clauses mean you have apprehension in buying and want to be able to get out. Even if this is true, you want to again give them something. This includes asking for repairs or other things related to the condition of the house.
- Place a big earnest deposit down with your offer. This tells them that you are interested and willing to back up your offer with money before the closing. I can remember doing this as my wife was ready to purchase a car. We dropped off $5000.00 checks at three different dealerships and told them to either: give her “these” terms or call us when we need to pick up our check. Only the best offer was able to cash the check but it showed that she was not just windows shopping of tire kicking. ***But remember, this money will be tied up in this house unless you either close or are able to get out of it and get your deposit money returned.
- Offer to pay closing fees. You might say “Why should I, after all it is what the seller would pay.” Actually the Seller will not pay anything so it all falls under the “Short” or the Short Sale and the bank will have to pay it. The less the bank needs to pay, the more likely they are to accept.
- If you are the Buyer or f you are the Seller, make sure all documents are updated. This might be the most frustrating thing because the documents that banks ask for often run out while waiting and you have to resubmit but keep a calendar of what needs to be updated and send it. Include communicating with the lender on a weekly basis. Bug them. If you are the Buyer, make sure your agent regularly talks to the Seller’s agent to ensure all documents are up to date and communication between Seller and lender happens frequently and regularly.
I could probably go on discussing this or related topics for a while but I will end this post by asking for any questions you might have when considering to buy or sell via Short Sale.
Oh I almost forgot about a great program that helps with Short Sales, foreclosure avoidance and loan modifications. Please look at their site. http://www.naca.com. I would not suggest them if I have no experience in how they help people.