A short
sale is a sale in which the value of the property is
less than the current mortgage amount, and the homeowner may
no longer able to make the payments due to illness, hardship,
or other cause. A lender accepts a discount on a mortgage to
avoid a possible foreclosure auction or bankruptcy. Instead of
buying from a seller, you are purchasing the property directly
from the lender for a discount. For example: A homeowner, who
is facing foreclosure, has an existing first mortgage of
$300,000. You write an offer to the lender for $220,000, which
is accepted as full payment for the loan. This is a short
sale. Why are they willing to take such a discount? Several
reasons. First of all, banks do not like excess inventory and
bad loans on their books; therefore, if they see an
opportunity where they can sell the property without a huge
loss, they will do it. Secondly, lenders know they could lose
a lot more money if the property goes to auction. There are so
many fees involved if the property goes to auction, that they
would be better off taking the discount beforehand and be
finished with the headache of it all.
 If
you would like information on the differences between a Bank
Owned sale, Standard sale, and Short Sale,
visit my page here.
OC
short sale listings are here
At
the time of this writing, foreclosures are at an all time
high, which basically translates into more opportunities for
you. Since foreclosures are increasing, this is the perfect
time to jump into this because there will be more and more
lenders discounting properties. It is safe to say that most
lenders will accept a short
sale, however, you may come across one or two lenders
who will not discount. If the numbers work out for the lender
they will do it.
Don't
be scared off by these short sale properties as they may turn
out to be a great deal for you. But you need to know a few
things before you decide IF you want to pursue a short sale
purchase:
-
A seller must disclose if
the home is either an existing short sale or likely be
one, due to
the market value.
-
A short sale MUST be
approved by the lender. Even though a seller might
accept your offer, it will be subject to approval by the
lender
-
The Lender will (likely) send
out an appraiser to evaluate the property in light of
recent sales - they are looking for market value, too,
and you cannot expect a short sale to be a fire sale (i.e.,
it may NOT be a great deal after all)
-
The Lender must receive
hardship letter and other required documents from the
seller in order to approve a short sale
-
The Lender will likely have a
checklist of requirements and paperwork required for the
short sale process
-
·The Lender will likely request
that the sale be "as is" and due to hardship
will probably not approve any credit for repairs
-
Be prepared for a short
sale to take more time (total time may be 60
days +/-) - this is one of the biggest complaints
from buyers
____________________________________________________________
Why can short sales be difficult for
buyers?
Short
sales can be frustrating for buyers. Because of their complexity,
some buyers and selling agents are avoiding them completely, often
preferring to deal only with listings that are "equity
sellers" (home sellers with an adequate equity position)
or bank owned (REO). The main reasons that they cause
frustration are:
1)
The artificially low list price
2)
Competition from other buyers
3)
The time it takes to get an answer from the seller and
complete the transaction
4)
Additional costs such as deficiencies (past due HOA dues,
property taxes, etc) and/or payoff to second TD.
5)
The fact that lenders play by their own rules
Much
of this frustration could be avoided if the buyers agents
would property educate their clients on the short sale process
to proper expectations.
Why
do many short sale listing agents price the homes low?
Simple
- to
attract offers. When an agent submits the short sale
package to the lender (this includes items like the hardship
letter, tax returns, bank statements, etc) they must also
include a completed purchase offer (Residential Purchase
Agreement, or RPA). To expedite this process, many listing
agents will simply price the home artificially low,
to attract many offers and hopefully start a bidding war. At
this point, there is no clear indication of what price the
lender will finally approve, but with many offers in hand, the
agent will submit the best one and move the process along. At
some point, the lender will review the package, perhaps perform
an appraisal, or hire an agent to perform a BPO (Broker Price
Opinion). The bank or
lender may then reveal their approval range. Once this
happens, the listing agent will have an "approved short
sale".
When
an actual price range is known, the listing agent can alert
all of the potential buyers and ask for "highest and best
offer". If they have multiple offers, they will counter
all of them to get the best price possible. This whole process
may take weeks to many months to complete. This has created an unfortunate environment for buyers, who are
initially enticed by the low list prices. Buyers don't like to
pay full list price so their typical opening offer is 5 to 10%
below list. Instead, many short sale homes sell for well
over list price, because of what might be termed as
"offer baiting" or "teaser pricing".
Isn't the technique of listing the homes low,
dishonest?
While
I don't wish to malign any fellow real estate agents, I do
believe that an ethical listing agent should price a short
sale home according to legitimate comparables (comps). This might delay offers and bank approval, but it
would place the home in a price range that is at least fair.
Offers would be more realistic and there wouldn't be as many frustrated buyers who
had hoped to purchase the property at a
bargain price.
Why
do lenders take so long to respond to short sale offers?
The asset management departments of many
lenders are understaffed and are drowning in short sales.
Offers on short sales go to the bottom of the pile. When an
offer rises to the top, it is reviewed by a committee. With
their large work load, the lenders frequently neglect to
contact listing agents. Instead, listing agents usually have
to spend hours on the phone each week trying to reach the
manager in charge (a frustrating experience in itself!).
The
second reason is that banks and lenders play by their own
rules. They are not part of the Department of Real Estate and
they don't have a particular code of
ethics that they have to abide by (as we Realtors do).
Their motivation to process or respond to their short sales
varies considerably. Banks and lenders usually wish to avoid
the foreclosure process, so I believe that they are more
motivated to close a short sale if the homeowner goes into
default. Else, they march to their own timetable and they will
respond to offers at a time of their choosing.
How
do lenders determine approval price?
Usually
through an appraisal of the property.
Unfortunately, they often rely on real estate agent BPOs
rather than licensed appraisers. Why? Cost of course! They can
pay a real estate agent to complete a BPO (Broker Price
Opinion) at a cost much lower than the cost of a true
appraisal from a licensed appraisal company. The disadvantage
of this can be an erratic price opinion, because:
1)
They frequently use agents who have no local market
expertise.
2)
They open the door for a conflict of interest with the agent performing the BPO.
The
agent may indeed provide a very fair price opinion. However,
BPO agents frequently cover a wide geographical area. Thus,
they may lack local market expertise. I have
been caught in this myself where I had a short sale listing
in an area where I was the local expert. The Broker Price
Opinion provided to the lender was ridiculously high for the
home and the condition of the property.
Worse,
some agents may wish to list the property in the event that it
should go back to the bank in foreclosure. The motivation then
would be to create an artificially high price opinion. Why? So that it the home doesn't sell
successfully as a short sale. If it fails to sell, it may go
back to the lender as an REO (Bank owned
property). The BPO agent, relying on their connections with
lender, may get a nice, new home listing that they can sell
for full commission -- a far
better payday then the small fee they earn for the BPO.
If
a Broker Price Opinion comes in higher than true market value,
it further distorts the short sale process. The lender will be
lead to believe that offers must be in this price range. This
is an outrage to a listing agent who knows the local market,
as this now severally hampers their ability to sell the home.
What
is best strategy for purchasing short sales?
Start
with realistic expectations on pricing - Many
short sales are initially listed with "teaser"
pricing. Ask your agent to run comparables for the property so
that you will have a reasonable idea of what other, similar
properties have actually sold for. This will help you
determine whether the short sale listing is priced to market,
or is listed with a "teaser" price to attract
offers. Armed with this information, determine the maximum
amount you would pay for the home and submit this as a
"highest and best" offer.
Avoid
"low-balling" - Short sale list prices
are often meaningless (see above). As such, don't submit a
"low-ball" offer, as this is certain to be
rejected. Buyers should not try to use the traditional
purchase model of offering less than list price on short
sales. I typically advise my buyers to offer list price or
higher if they want to beat other offers and get their
offer accepted. A buyer in doubt will become a believer
after they have placed several unsuccessful offers!
Have
home choices - It's a good idea to look at several
short sales and have backup homes, in case the offer on the
first one doesn't go through. You may also wish to make offers
on several homes since the approval process can take weeks.
Try
to focus on "approved" short sales - If it
is a new short sale, the approval process will undoubtedly
take the longest. If the listing agent has classified the
property as an "approved" short sale, it may not be
formally approved, but the price
range that the bank will accept might be known through prior
negotiations. If this is the case, submitting your offer at the
"approved" price might enable you close on the home
quickly.
Don't
make an offers on short sales if you need to move quickly - If you are relocating or need to move into a home
quickly, stay away from short sales. The approval process
could drag on and you may not be able to open escrow quickly
enough to accommodate your move. Focus your home search
instead on equity seller properties, or bank and corporate
owned home listings.
Are
you interested in a short sale on your home? See my complete
page for listing
your home as a short sale in lieu of
foreclosure.
If
you would like more information on short sales, bank owned
properties, foreclosures, distress properties, homes in default, or good deals in
South Orange County, please call me! I will be happy to provide you with a list of
Short Sale properties in any area in South Orange County, CA. Call or e-mail me for a list of Short Sales & Bank
Owned Properties!
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