OK, so I spent some time reading blogs of agents not wanting to make offers on short sales because they find them too confusing and a waste of time as they don't where they stand with their purchase offer nor can they explain the process to their buyers. I also encounter this on my day to day activities as a real estate broker.
First the basics:
1. What exactly is a short sale? Basically, it's getting the lender(s) to agree to accept less than what they are owed in order to release the lien on the property. This can also apply to other people and entities that hold liens on the property, such as the IRS, private individuals and business entities that hold judgment liens and mechanic liens, etc.
2. What's in it for the listing broker? Well, assuming the listing agent/broker is knowledgeable and experienced in order to close the deal, they usually get their commissions knocked down to 4%-5% after spending hours on negotiations with the lien holders.
3. What's in it for the sellers? Less of a credit hit and a chance to rebuild faster than a foreclosure. A chance to settle their debt (if any) prior to foreclosure. They also can stay in their house for free while the short sale is being negotiated.
How to Approach a Short Sale Listing agent:
Either you or a client spot a short sale listing. Prior to showing, you need to call the listing agent and ask the following questions:
1. Have you submitted a purchase offer to the bank? If yes, do you have a buyer in place for this short sale? In other words, are the sellers planning to sell this house to a friend or relative who will rent back and sell back to them in the future? Is the buyer who submitted the offer a real buyer and are they still around? If the answer is yes, you might want to skip this one unless you don't mind being in 2nd or 3rd position with the offer amount currently presented to the bank. If no, then continue to number 2.
2. Have the owners applied for a loan modification? If so, has a BPO been done? If so, when was the date of the last BPO. If a BPO was recently done (within 6 months) were you able to get the BPO price? If no recent BPO was done, then continue to number 3.
3. Are you handling the short sale negotiations yourself or are you outsourcing this to a third party? If it is a third party, ask who will be the point of contact for the BPO? If the point of contact will be someone else besides the agent, ask if they are willing to be the point of contact. If no, then skip this one. If the agent will be the point of contact, then continue to show the property to the client.
How to Approach the listing:
Ideally you want it to be owner occupied with the owners home. You show the home to your clients and if they like it and would like to make an offer, then you have your clients inform the homeowners that they would like for their agent (which is you) to submit an offer to their agent. However, they want to submit a low offer so they will be in a better position to negotiate with the homeowner's lender. Have your client explain that by going low, they will have a better chance to negotiate and make the home lendable (as the buyer will need an appraisal done to finance as well) should the market decline while negotiating the short sale. In return for submitting only their offer, your clients will promise to buy the stove (or a pair of shoes) for a few thousand dollars (or whatever you can negotiate based on home values and discounts). It most likely will become a very positive experience as the homeowners are excited that they will profit from the sale of their home and have money to move.
If the owner is not around or cannot be located (vacant listing), then you will need to explain the intention to the listing agent and promise the listing agent that your buyer will guarantee at least a 3% commission to the listing agent. That the buyer will cover expenses rejected by the lender on the HUD-1. That the buyer will pay the difference of what the first lien holder is willing to pay the second lien holder and what the second lien holder is willing to accept.
How to write the purchase offer:
You ask the seller to pay for all expenses, such as (but not limited to): HOA transfer Fees, Title, termite, home warranty, lawyer/escrow fees (depending on your state), etc. In California, I have "each to pay their own" on escrow. You also ask that the seller pay 3% (use a number, not just a general 3%) in closing cost.
Before I suggest a purchase price, I want to inform you that this works for my area (SoCal) where home prices range from 200k to 2 million and it must be tweaked based on your market area and what experience has taught you. So for my area, I look at the lowest comps I can find. For homes around 100k, I suggest your purchase price to be 30% less than lowest comp you can find. For homes around 200k, 15%-20% below the lowest comp. Homes over 300k, 10% below the lowest comp. For a recent real life example, if Fair market Value of the home is 585k and the lowest comp you can find is 550k, then your purchase offer should be for 500k with 15k for closing cost.
With the owners making money and the listing agent getting guaranteed commissions, your offer will be the only one presented to the bank. No more wondering where you stand and in what position.
After the offer has been presented to the Bank:
It is very important that you make sure that one of the agents involved is the point of contact for the bank's BPO. It is also important that the BPO cannot gain access to the property without you or the listing agent being there. You (or the listing agent) will need to give the BPO person the low 3 active and 3 recently sold low comps with MLS print outs, a Comparative Market Analysis and you can even take it a step further and provide them with a BPO that you have done, that answers questions such as distance from the comp price to the subject property. It will also answer questions that the BPO will have difficult with. If the property has any damages, you should give a copy of a high repair estimate from a licensed contractor (this should have been submitted with the short sale package as well). You can download free BPO forms from the web. You also inform the BPO agent that this property is in foreclosure and the owners would appreciate any help in getting their short sale approved. Their reaction will tell you what you should expect.
The End Result:
Your buyers are happy with their short sale property. Both you and the listing agent made full commission. The previous owners have the financial means to move on and avoid a foreclosure. A true win-win-win situation.
Points of Interest:
1. The listing agent should be very experienced with doing short sales and can handle simple issues, such as the 2nd lien holder asking for more than what the 1st lien holder wants. As you gain knowledge and experience with short sales, you are able to gauge their knowledge before hand so you can even determine whether you want to show their listing or not. If I can't convince them otherwise, I personally avoid "highest and best" agents and those who state they submit all the offers to the bank.
2. The listing agent and/or owner should be educated that submitting the highest and best offer is not always the best thing for them, even in states that have deficiency judgments. Deficiency judgments should be waived in the short sale process.
3. As a buyer or buyer's agent, never spend a dime or give an earnest deposit on any short sale until you have a written approval in your hands from the listing agent.
4. As a buyer or buyer's agent, make offers on as many short sales as you like, and go with the first one that materializes with the terms that are acceptable to you.
5. Inform the buyers they must wait and be patient as to the outcome. My experience gives me the average wait time of 2.5 months. The quickest start to close I had was 10 days and the longest was 1 year!
This has been a no-thrill blog (no pictures and just plain text) to educate agents and buyers as to how to buy short sales at great prices. This works great for my clients and I in my market Area and the numbers and/or process should be tweaked to match your market area. I have been told that my method might be considered unethical and that I am doing a disservice to the owners and their lenders. The fact is, the lenders could care less about the owners. It's all about the numbers with these lenders and they are protecting their investors. My method ensures that the owners will not go into foreclosure. It also allows the property to be marketable when you finally get that approval letter 6-8 months down the road and the buyer walked! Also, I've seen short sales become REOs and eventually sold for less than what the short sale offer price. So in a sense, we are helping the lenders minimize their loss as well.
Feel free to comment (negative comments are welcomed too!) on the blog, make suggestions, ask questions, etc. I hope this has been of some use to you guys and after reading this, I will see more buyers present offers on short sales!
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