Is your buyer thinking of buying a short sale? What your buyer needs to know.
This post contains very valuable and important information. I would like to add two points and re-iterate and reinforce two other points that I discuss with my financially distressed Nashville TN homeowners and property owners when seeing if a short sale is right for them.
The two points that I would like to add are:
- Loan Controller - By this I mean the entity that actually controls the loan. This is different from the loan servicer (i.e. the financial institution that the borrower makes their mortgage payment to). Typically, the Loan Controller is the loan investor (the loan owner), or the insurer or guarantor of the loan (think Mortgage Insurance Company (MI), FHA, VA, THDA, USDA Rural Housing, etc.). This is an important point since it is really the Loan Controller's guidelines that dictate the short sale process. Knowing this process can greatly improve the chances of a short sale successfully closing due to setting more accurate expectations up front.
- Standarized Offers - By this I mean that the buyer agent should not add any custom (think home cooked) contract clauses and should only use standard Realtor contracts. I have received too many garbage offers that have terms that will never be approved by the short sale lenders. As a result, I now have detailed Offer Instructions that tell buyer agents how to exactly write their offers. Other than price and financing, if they don't write their offers in accordance with my Offer Instructions, I am authorized (per my listing paperwork with the seller) to reject their offer without presentation to the seller. There is just no point in making the short sale impossible, or at least much more difficult to get approved due to contact terms that are tyoically rejected by short sale lenders.
The two points that I would like to re-iterate and reinforce are:
- Buyer Commitment - If the buyer wants to close in 60 days, or is unwilling to wait more than 60 days for short sale approval, then they should not make a offer on a short sale unless it is a truly pre-approved short sale (think HAFA and FHA), which are relatively rare when compared to the total number of short sales. Furthermore, the buyer must commit to the property for at least 60-90 days. During that time they cannot cancel the purchase without forefeiting their earnest money deposit. Sorry, a short sale offer is not a unilateral option contract where the seller takes all the risk.
- Inspections - I require property inspections to be done before I submit to the short sale lender. I know all the buyer agents will complain about the "wasted home inspection monies", but come on. If your buyer is writing a strong offer (price and terms) then their offer has a high probability of being approved. If not, then you should not submit anyway. Other than in a situation where the seller needs any offer to postpone a foreclosure sale, there is nothing but downside for a short sale seller to accept a short sale offer where the buyer can wait until after short sale approval to do their property inspection. What if after 2-3 months of waiting the short sale is approved, the buyer does their inspection and then decides they don't want the home? The seller may be out of time by then and be unable to sell the home to another buyer before they are foreclosed. From the buyer's standpoint, why would they want to waste 2-3 months of time with a house that they would not buy anyway due to the inspection issues? They may have cost themself a chance at another home they really wanted to buy. If the buyer just wants a price reduction, or repair credit, the chances are great that the short sale will then be declined anyway. Even if the short sale lender does not outright reject such a request, the short sale lender will require documentation of the property condition to be provided and time to review it, which will result in dragging out the short sale by several more weeks.
Thinking of buying a short sale property?
Then you'd better understand what a short sale is, and what it will take to close that deal.
My buyer was looking for a good buy --- not merely a good deal -- but a good buy. Based on his criteria, I told him about several listings that may be suitable. The best one in terms of location, condition, amenities and price was a short sale.
Before writing an offer, I had to set expectations by first educating my buyer on short sale basics from a buyer's point of view.
What's a short sale?
Generally, it's a sale wherein the seller is selling the property for less than what is owed. And as such, the seller's lender will have to approve the sale, price, terms and conditions.
Who accepts the offer
The seller still decides whose offer to accept. Most lenders will only want to look at the best and highest offer. In multiple offer situations, highest offer doesn't always win -- which may be true with regular sales and foreclosures, too. The onus is on the seller to choose/accept the offer which has the best chance of getting approved by the short sale lender.
What are the terms and conditions that a short sale lender is likely to approve/disapprove?
Every short sale lender is different. But there are certain elements that are quite common.
Price. An offer that is too low or below the investor guidelines is likely to be rejected or countered. Just because it's distressed or a short sale doesn't mean the buyer can get it with a significantly low-ball offer. You can deal, but not steal.
Find out how much is owed and to whom, check the comps in the area. Then go from there.
Close of escrow: For example, when the short sale lender grants approval, the lender typically sets an aggressive closing date, usually within 30 days. This makes it challenging for an offer with FHA loan and its 45 days or longer escrow period.
HOA: The lender may also refuse to pay for HOA documents, fines and delinquent fees. If the seller is delinquent, buyer (and seller) may be requested for a contribution to satisfy these demands.
Credits: The lender may also refuse to give credits for closing costs, repairs, replacement and/or warranty.
What does the buyer need to know?
Who is the lender? Some lenders are a lot harder to work with and may take longer than others to approve a short sale, while other lenders (like Wachovia) have a good track record of closing short sales.
How many liens are there, and are they by the same lien holders? Having one lien holder is tough enough. Having two is tougher. But when there are different lien holders, it can become extremely difficult to negotiate the short sale.
Liens against the property can be by anyone besides the banks: utility companies, the IRS, mechanic's liens. Each one of these has a claim against the property and has to be satisfied. If the seller is totally insolvent, the bank may need to offer payouts to these lienholders who may refuse or negotiate for more.
DOES THE AGENT HAVE SHORT SALE EXPERIENCE?
It makes a world of difference to work with a listing agent who has a track record of successful short sales. That agent knows what to do, and can avoid pitfalls and delays in the process.
By the same token, the buyer's agent must also have short sale experience to guide the buyer how to write an offer with a good chance of getting the short sale accepted and approved.
What notices has the seller received?
Notice of Trustee Sale? If the seller is just days away from being foreclosed, there may not be enough time to do a short sale.
Inspections and reports. If there are none, by all means, get them during your buyer investigation contingency period. With so little room to negotiate, the buyer must have all pertinent information to determine if he is getting a good value with the purchase.
Condition of the property. If there are safety hazard issues, the buyer may be able to justify asking for credits or repairs for a loan to be approved. For example, lenders and their appraisers may look for a functional kitchen which generally means having a working stove. There must also be a functional heating system.
How long will it take to get a short sale approved?
There is no one answer to this question. It's not unusual to wait 3-6 months, or even longer. It all depends on the lender, the situation, the market, the completeness of the short sale package, the willingness of all parties to negotiate and/or contribute. This where one must have patience, persistence and perseverance.
Can a buyer continue to look and write offers on other properties?
A buyer can...but this could also mean that the buyer was not acting in good faith when he wrote the offer on the property.
Good faith is defined as: Effort made, information given, or transaction done, honestly and without a deliberate intention to defraud the other party. However, good-faith does not necessarily mean "without negligence:. Also called bona fides, it is implied by law into commercial contracts.
Can a buyer walk away?
After offer acceptance: Like any sale, there are contingency periods after acceptance (or approval by the short sale lender) during which time the buyer is expected to do his due diligence in terms of buyer investigation, loan appraisal and loan approval.
Before offer acceptance: In several states, a buyer can stipulate how long his offer is good for.
For example, in California and per our short sale addendum, the buyer can specify that his offer is good for 45 days or longer from the time the seller accepts his offer until the time the short sale lender approves the short sale. If no approval is forthcoming, the buyer's offer expires.
There are NO guarantees.
BOTTOM LINE
If a buyer doesn't have the patience, perseverance, motivation and/or the time to wait...
Then the buyer should NOT buy a short sale.
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