So...You Want to Buy a Short Sale? Be Forewarned...

By
Real Estate Agent with M Realty

house short sale

If you are thinking of buying a short sale (or if you're an agent looking for an outlet for your short sale frustrations), PLEASE read. Understanding this information is a must.

I completely understand the allure of the short sales when you are a buyer. The prices are attractive and there are SO many of them. They have become a necessary evil of the Orange County real estate market. I get it.

If you really want to pursue a short sale, be forewarned. Know what you are getting into, understand the risks, the pitfalls, and what is required to make them happen from a buyer perspective. They may, or may not, be worth it.

What is a Short Sale?

The seller's obligations in a sale (loans, encumbrances, and closing costs), exceed the value of the property. The seller must prove a hardship (job loss, wage reduction, divorce, health crisis, lack of assets) to qualify for a short sale.

A Few Realities

  • There is no Standard Operating Procedures for the banking industry to handle short sales. Every bank has different guidelines and manages them differently; even negotiators within the same bank manage them differently.
  • This is important: Nearly across the board, a banking institution will not consider a seller's hardship application until they submit an offer with a short sale. What does this mean to a buyer? Your offer is used to see if they qualify in the first place. You may sit in escrow for weeks while the bank considers not your offer, but the seller's circumstances.
  • There is no Standard Operating Procedures for how agents handle their short sale listings. Frankly, I think there is a lot of irresponsibility in this area.
  • Many agents leave their listings ACTIVE in the MLS even though they have an offer submitted to the bank. Once an agent has a good offer with a solid buyer, it should go in Backup position. The bank will only look at ONE offer - highest and best - anyway. Why waste an agent's time, a buyer's time and emotion, showing a property that is not really available?
  • The SoCalMLS has a Special Condition field where agents are required to specify that the short sale has an offer submitted to the bank. Unfortunately, most agents don't use it.
  • A short sale process will take as little as 60 days (very rare) or as much as 4 to 6 months (common).
  • The list price is not a reflection of what the bank will, or will not, take. The listing price is positioned to generate offers. Remember, the bank hasn't even looked at these seller's situation yet, let alone evaluate the the market value of the home.
  • There may be past due HOA fees, property taxes, or other expenses, that the bank will ask for a buyer to cover.
  • If the seller declares bankruptcy during the process, your deposit becomes a frozen asset that you likely wait a fair amount of time to recover - if you do.
  • Many short sales ultimately foreclose. Why? If you find out please tell me. There is often NO LOGIC in the way banks (and investors) approve, or disapprove these.
  • More banks are trying to do loan modifications for sellers rather than approve short sales and in some instances, they are incentivized by the government to do so.

Real Life Examples

The following are scenarios that have been experienced by me, my agents, colleagues, and my buyers.

  • My Listing last May: I had 8 offers in 3 days. The highest was $580,000 and it took 4 months to get an approval from Countrywide. By the time it was approved, the market value had fallen precipitously and the buyer was no longer interested. When I asked Countrywide if the process would go more quickly with a new buyer given the hardship had been approved, their response was that the each buyer was a new file and they couldn't provide better than a 4 to 6 month time frame. The home sold for $490,000 4 1/2 months later.
  • An agent within my company, had a short sale in escrow with a solid buyer for 90 days. The bank asked the insolvent seller to come to the table with $3,500 on the $165,000 sale. When the seller was unable to, the bank refused the short sale. The home is currently vacant and worth about $145,000 6 months later. Currently, it's not in foreclosure and the seller hasn't made a payment in about a year.
  • This week alone, I've shown 2 different short sales, marketed on the MLS as Active, that already had offers submitted to the bank without notation in the listing. When I called expressing my buyer's interest in one of the properties, the agent subsequently told me, 'the deal is done'. When asked, "Then why is it active?", his response was, "Don't tell me how to run my business, sweetheart." BTW - Don't call me sweetheart unless you're loving me or you're my husband. :)
  • One of my recent short sale listings was in escrow 60 days with a qualified, ready-to-go buyer. In that time, the bank reviewed the seller's hardship, denied it, and offered a very poor loan modification. Buyers lost 60 days and their offer was never considered.
  • I currently have an investor buyer in escrow on an 'approved short sale'. We've been in escrow 90 days on a property that had an Notice of Default filed in March 2007! Not only has there been no news, the listing agent has told me essentially - don't call us, we'll call you if there is an update. Not very reassuring to my buyer.

This is the tip of a massive iceberg. So if you want to buy a short sale, you certainly have my blessings. Just be armed with patience, don't become emotionally attached to the property, and be prepared to potentially go through the process more than once.

If you have questions, if you think I've gotten any of this wrong, or if I've just scared the hell out of you - leave a comment or give me a call. Happy to chat with you. If you want to create a strategy to buy in Orange County - whether it's a short sale, bank owned, or an equity seller, just let me know and I'm happy to help.

Happy House Hunting!

Originally posted on OC Real Estate Voice.

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Rainmaker
368,313
Dean Moss
Dean's Team - Keller Williams Realty Partners Chicago IL - Chicago, IL
Dean's Team Chicago IL Real Estate Team

Linsey -

Doesn't bode well for Sellers or Buyers involved in a short sale, ehh?

Will banks ever wise up?  Or, do they even care?

DEAN & DEAN'S TEAM CHICAGO

Apr 17, 2009 08:50 AM #1
Rainer
44,342
Linsey Ehle
M Realty - Rancho Santa Margarita, CA

Dean - I guess that's the real mystery.  Do the banks care?  The properties decline in condition and value while they take months to decide leaving all parties living in limbo.  I'm at a loss as to underatand it.

Apr 17, 2009 09:11 AM #2
Rainmaker
655,982
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

We have had similar stories with the short sale process  -- one thing is for sure -- they are anything but short!

Apr 17, 2009 04:11 PM #3
Rainer
10,370
Nancy Birge
Coldwell Banker - Old Lyme, CT
Waterfront Specialist

Great info.....

Apr 19, 2009 01:22 AM #4
Rainmaker
161,942
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Let me clear things up for you:

1. You never open up escrow or spend a dime of your buyer's money until you have a written approval from the bank in your hands.

2. As a listing agent, You don't submit the highest and best. You basically lowball the lender (10% below the lowest comp you can find for the OC). You lowball them with a buyer who is cash strong so they can pick up the cost that the lender doesn't pay, such as your commissions! The lowball will protect you from a declining market and keep your buyers in place during the process. Also, if the buyer walks, you can find other buyers at the approved low price.

3. "Many agents leave their listings ACTIVE in the MLS even though they have an offer submitted to the bank."  Here are the reasons for this: A) When the bank sends a BPO, the BPO will report if the listing is currently active and the pricing info. If the bank finds out that it is not currently active, then they might come back and state that the listing agent did not do their best to minimize loss. B) You want it to be active to keep the DOM count going. C) You want other buyers to see this in case the current buyer walks. D) the OCAR MLS has an option called "Short Sale Offers Submitted" under legal and they should use it (I do).

As a buyer's agent for a short sale, here is what you need to do to make sure that your clients get the home cheap and the foreclosing lender only sees your offer:

1. Find a short sale that hasn't had an offer submitted to the bank first.

2. Make your offer 10% (in OC) below the lowest comps you can find . Have the seller (lender) pay for everything and ask for 3% in closing cost.

3. Tell the owner of the house that your client wants to purchase personal property, such as a pair of shoes for 1k (or whatever) if they end up buying the house. Tell the listing agent that your client will gaurantee a 6% commission should the lender knock down the commissions. Have the owner and listing agent only submit your offer. 

4. Either you or the listing agent must intercept the bank's appraiser/BPO and give them 3 sold comps and 3 active comps that will justify your purchase price.

5. Wait for the bank's response. Now both the listing agent and owner are motivated to work with you.

 

Apr 22, 2009 04:51 PM #5
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Rainer
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Linsey Ehle

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