More buyer info on short sales - what's it all about? Is it the bargain you've been waiting for?

I've been reading alot in the blogs and consumer Q&A and there seems to be an enormous amount of misinformation, or maybe lack of information, when it comes to short sales and what they are all about.   We see questions like "what kind of scam is this. . .I made an offer and it's been three weeks and the house is still on the market, they have my earnest money and I haven't heard a thing."   Well, probably not a scam, just a bank going through the paces, maybe.    A potential short sale can be derailed by any number of small mis-steps on the part of the buyer, the listing agent, the homeowner, or the buyer agent.   

Most buyers are working with a timeline - they can be somewhat flexible but when the rubber meets the road, most of them have a date that they need to be done with this process and occupy a home.  If you are an investor, totally different situation - I'm addressing people who want to buy a home to occupy as their principal residence.

Depending on the bank and the situation, a short sale can take months and months to complete.  I don't claim to be a short sale expert but, if you are an agent still in business right now, you won't survive if you don't have some experience in short sales, even if it's just enough to teach you that you want to run the other way when you encounter one!

I worked with a well qualified cash buyer last year.   We were told by an experienced, knowledgeable listing agent that the property my buyer was interested in was about to go into the foreclosure process and the loss mitigation manager for one of the major banks who held the primary mortgage told her point blank that the bank was looking for a well qualified buyer willing to pay "around $300,000" for the property.   The defaulting homeowner owed around $370K.  My buyer and I determined that based on comps, condition, location, the property was worth up to $325K and immediately wrote a cash offer with no contingencies or stipulations, as is, for $300,000, providing proof of funds, with a closing date as quickly as 2 weeks or as soon as the bank could have the title work done.   

What do you think happened?   It has been over a year and we have never heard a single word - no response at all.   My buyer rescinded his offer after several weeks of no communication from the bank.  The agent made phone call after phone call, the offer package was submitted with all of the required documentation proving the homeowners hardship, financial records, etc., comparable sales were sent, etc., etc.   Nothing.   

What could possibly have prevented the bank from jumping all over this offer, or, at the very least, coming back to the buyer asking for "highest and best"?   Who knows. . .seriously, we never heard another word and the agent's listing eventually expired and the home was foreclosed.  Several months later, after not selling at auction, the home was relisted and sold for substantially below my buyer's offer.   This had to cost the bank close to $100K or more after taking the loss on the original loan, attorneys fees, etc., costs of sale, everything connected to the foreclosure process.   

It doesn't make sense, and if you are the type of person who needs it to make sense, you should probably avoid trying to deal with a short sale situation.   Each and every one is different.   You may hear something within 24 hours (highly unusual), you may be told your offer is accepted but never receive a signed copy of a contract, and then learn that the property has been foreclosed and the seller evicted.   It's bizarre.

One of the most common problems lately is that the original mortgage insurer is killing the deal at the last minute because they feel that the house is being sold for a price that is too low.   Why do they care you ask?   Well, the original mortgage insurer is going to be paying insurance on the defaulted loan and the less that the home sells for the MORE they are on the hook to pay.  
An agent in my office had a foreclosure in escrow for about 8 weeks earlier this year, had signed contracts, inspections done, everything was supposed to be fine - loan was approved.   The day before closing she received a call from the closing attorney's office that her deal had been killed by the mortgage insurance company.   There is no negotiating at that point.   It's done.   That intrusion into what is supposed to be a deal solely between a buyer and a seller, is unpredictable and unsurmountable.   Once that takes place, broker pricing opinions and additional appraisals are ordered and the home is usually foreclosed before it's resolved.

Not to put too broad a stroke on the situation but, generally, it's because you are dealing with a corporation that the short sale and foreclosure process is so frustratingly unpredictable - even for seasoned and experienced real estate agents.   What the bank or mortgage insurer does or believes that affects your deal is TOTALLY out of the control of you and your agent.   It's not like you are negotiating over a repair with an occupying seller.

There are layers of management and staff that everything must go through, things get lost in the shuffle, meetings are held and postponed, various opinions are solicited, one hand doesn't know what the other is doing, and it's just extremely difficult to consummate a residential real estate transaction under these circumstances.  

It's not supposed to be done this way basically! 

Foreclosures are usually better. . .I want to say alot better but that might be overstating.   I closed a foreclosure 4 weeks ago, another cash deal, the listing agent and I never spoke to each other (not for lack of trying on my part) and the day before closing one of his "assistants" called me to ask why I hadn't sent them an extension on the contract.   I told her it was because it was closing tomorrow - there was no need to extend, we were closing 4 days early!   They had no idea.   I don't know how they could have not known - all of the paperwork was in order and I was sending it to all of the people I was told to sent it to at the management company.   The management company was obviously not communicating with the listing agent.   The listing agent was, well, just a "listing" agent - there was no real participation there apparently.   
Consumers are frustrated when they call listing agents on these properties and don't get a reply, or attempt to see the property, or even make an offer, and feel they are hitting a brick wall.   It's because this is how the banks want it  - they hire agents to list their properties on the MLS for a reduced commission or small fee, and that is the extent of their obligation.   Every other aspect of dealing with the property is left to the management company that is hired, i.e., maintaining the grass, etc., checking the property on a regular basis, etc.   If a buyer wants to see one of these properties they are expected to have a buyer agent of their own showing them the property and assisting them with the transaction.  

Here are some pretty common questions that I have seen and a general response:
1.  Why can't I put offers in on several properties without submitting earnest money until one of my offers is accepted?   
Answer:   You can do that but if the bank is not entertaining offers that they deem frivilous, i.e., offers without earnest money (the definition of earnest money would be pertinent here), then your great offer may never be reviewed or considered.   And, what happens if your offer or more than one of your offers is reviewed and accepted?   Are you prepared to purchase more than one property?   If your offer is accepted without changes or a counteroffer, you are party to a legally binding agreement whether you put up earnest money or not.

2.  What if I don't like all of the banks special stipulations and 16 pages of addenda that they require me to agree to when I present an offer?   Can I simply ignore the requirement, strike thru what I don't agree to, or leave them out of my offer all together? 
Answer:   Yes, you can.  But, your offer will not be considered even if it is cash to close asap.  You either play by their rules or you don't play.    Part of the process put in place by the banks is meant to weed out less than serious buyers.   Fishing expeditions are costly and the banks just don't have time for it or resources to deal with it.   Just dealing with legitimate offers that include all required documentation is overwhelming right now.

3.   Why is the property still on the market or active in the listings when I have a signed contract with the bank?
Answer:   because the banks will not allow the listing agent to remove the property from the market until it has closed and even then the process may take several days to a couple of weeks post-closing before the property is removed from the market.       However, listing agents are obligated to advise buyers or buyer agents of the status of the property - sale pending, still accepting offers (back up), etc.  

4.   Once I make an offer thru my buyer agent, and we receive a verbal or email acceptance of my offer or counteroffer, isn't the bank legally bound to sell me the property?   
Answer:  not in the State of Georgia.   Until you receive a contract that has been signed by both parties - or a counteroffer that has been unchanged and signed by both parties, you do not have a legally binding agreement.   There have been many cases of buyers being told that they "got the house" only to find out later that before the bank returned a signed agreement to them, another offer was submitted and accepted.   Sometimes the bank's representative (management company or listing agent) will contact the original buyer and tell them that another offer is on the table and they need to submit "highest and best".   However, there is no "standard" operating procedure here and you may not be given an opportunity to stay in the game.

5.  If I make a full price offer on a short sale doesn't the bank have to sell it to me for that price?
Answer:  not usually.   I'm not an attorney so all of my responses should be taken as such and if you have a particular situation that concerns you, you are better off consulting with your own real estate attorney.   Having said that, there are agents out there listing short sale properties without including "wiggle words" - you have to understand that a short sale listing is a starting point for the bank and the seller to attempt to prevent foreclosure by selling the property at something less than what is owed to the bank.   All short sale listings are "subject to approval" by the lender.  

Many times sellers are told to hire an agent and get the house listed after a preliminary determination that the seller has a legitimate "hardship".   We (agents) are finding out that sometimes homes are being listed as "short sale" BEFORE preliminary approval by the bank - the bank may not even be aware that the home is being offered as a short sale.  

Even when the bank is "in the loop" about the home being offered as a "short sale", they don't typically set the list price of the property - that's up to your listing agent.   The banks have been doing their homework (appraisals) AFTER offers are submitted.   Makes sense when you think it through - if the bank is entertaining the idea of accepting a short sale offer, why would they go even further and perhaps direct a listing agent to market the home for an amount that is less than true market value? 

The listing agent should be studying the comps to determine a reasonable price that should move the home sooner than later - after all, the goal here is to get the house sold BEFORE it forecloses and the seller is evicted.

If the house lists at $113K and you offer $113K but the lender orders appraisals that tell them they should be able to get more, then depending on the difference between your offer and the appraised value, you may not be be successful.   Another kink here - if there is a home equity line or 2nd mortgage, that lender can also object.   AND, you probably have to get a loan also.   Your mortgage lender is going to order an appraisal.   What if they disagree with the listing or contract price?   If they don't feel it's worth the risk, your own bank could raise a red flag here also.

We could go on for days giving examples of the various scenarios that come into play even in a simple, "normal" real estate transaction between a ready, willing and able buyer and an occupying seller.   When you get into foreclosure and short sales, with no "standard" procedure, uniform rules, or laws governing how the fine points of these transactions are handled, it's like the wild west - before you jump in, make sure you have weeks or months to devote to this, patience, plenty of cash for multiple inspections, an experienced buyer agent, and more patience.

Good luck!