Short Sales

If you are a Buyer looking for a good deal on a property, you may think Short Sales are a good way to go.  Short Sales are very complicated, and are not always the great deal they appear to be.

When the average Buyer searches through the MLS listings or various web sites, the come across a low price on a property as compared to all the other properties listed for sale in that neighborhood, and they get excited as they see the property may be priced 10% – 40% below the market value.  The potential buyer automatically thinks and believes that the house can be easily bought at that low price, but like most Buyers, once the potential Buyer physically inspects the house and takes a second look at the property, they decide to take a little more off that List Price so that they feel even better about the deal.  So for example, a Short Sale house is located in a neighborhood where houses typically sell for $300,000 – $375,000, and the Short Sale is listed at $225,000, that is about $75,000 to $100,000 below market value.  How did the house get this low price and who chose this price?  The Seller who is in financial trouble along with their Realtor picked this number out of the sky based on the fact that all other homes in the area go for $300,000 plus, and that the house may need $50,000 or so in repairs, plus a little extra off the price to entice Buyers, to get a contract, and to present that contract to the Sellers bank or lender so that any possible foreclosure proceedings will be stopped.

Now, remember what a Short Sale is?  The owner of the house, Mr. and Mrs. Seller owe about $350,000 on their house that has lots of needed repairs and is in fair condition, because Mr. and Mrs. Seller have been struggling over the year, they have fell behind on their mortgage payment, and they certainly have had no extra money to paint, carpet, fix the needed repairs, upgrade the furnace, central air and other items.  Often because Mr. and Mrs. Seller are behind on payments, stressed and depressed, and they know they will be losing their house to a Short Sale or possible Foreclosure, the also do not clean or maintain the house, and the property slips into poor condition.  Now the Sellers contact their friend who knows a Realtor and they beg for help to sell their house, but not only can they not get the normal retail market value, they cannot afford the real estate commission or maybe even the taxes.  They have to sell soon before the bank forecloses on them and then their credit is ruined for at least 8 years, verses possibly 2 years if they sell the house as a Short Sale.  Either way the Sellers are walking away with no money, they are only motivated to save their credit, and to be as honorable as possible with the bank.

Just because the Listing Agent and the Sellers slapped any old price on the listing agreement, does not mean that the Sellers bank/lender (Third Party Creditor) will accept that number or anything close to it.  There are several factors that the Third Party Creditor takes into consideration.  The following is a short list of some of the key items the Third Party Creditor looks at:

  1. The Sellers overall financial situation. Are they in true financial straits, what is their income to debt ratio, what is their ability to catch up on their mortgage payments etc.
  2. Will the Seller be able to pay any of the difference between what is owed and what the property sells for?
  3. Is the Seller collectable for the difference between what the house sells for, and what the outstanding balance will be.
  4. What is the overall situation, and why did the Sellers fall behind on their mortgage, is it due to unemployment, a medical condition, or some other circumstance?

After the Third Party Creditor looks at the Sellers financial situation, they then analyze the actual house or property.  They need to know:

  1. What are the current market conditions?
  2. What is the condition of the house?
  3. What is the value of the home as is and after repairs?
  4. What is the demand like for this home in its present condition?

 

Once the Third Party Creditor’s have all this information, which may take a few weeks to gather as the Seller must present tax forms, bank statements, a hardship letter… and the Listing Agent must present listing and sales comparables, and an independent real estate person or appraiser may do a BPO (Brokers Price Opinion).  All of this information is analyzed by the Third Party Creditors and often is presented to their board of directors or a panel to determine the validity of the Short Sale, as well as what the Short Sale selling price should be.

In most cases a Bank or Lender who wrote the initial mortgage loan on the property may still service the loan, but they may have sold the loan off to one of their investors, perhaps FNMA (Federal National Mortgage Association) or FREDDIE MAC.  These are government agencies who buy mortgages in bundles and then guarantee the mortgage, so that IF a homeowner defaults on the mortgage, these investors pay the difference.  These agencies or organizations are often referred to as “Investors”.  Once the initial Bank or Lender gets all the paperwork that was previously mentioned, and once they analyze the entire situation and package, they then pass on the entire package to the “Investors” (FNMA or FREDDIE Mac) in order for those Investors to have their board or panel take a look into the overall situation, to make the final decision as to what they will accept as a final offer.

By now, you are starting to see exactly why a Short Sale takes a couple 2-3 months just to get all the documentation, and then to have various Banks, Lenders and Investors review and analyze all this.  Remember that there are hundreds if not thousands of Short Sales taking place in most markets, so your package/file is just one of many.

If the house your are trying to buy as a Short Sale only has one mortgage on it, that deal will most likely get through more quickly than if there is a 1st and 2nd mortgage on the house.  It takes time to contact the 2nd mortgage lender, and it takes time to negotiate with that lender in order to have them severely discount their second mortgage loan.  Most second mortgage lien holders are lucky if they receive $5,000 even if their second loan amount was $50,000.  If the second mortgage lien holder does not cooperate in some way, they could actually get $0, nothing if the house goes into foreclosure.  Be sure that the second mortgage lender or lien holder wants to make darn sure that the Seller has no other ability to repay their debt before they forgive most of the loan, so this is why the package could be held up at the Second mortgage lien holder’s bank/office for a while as well.

Once that 2nd mortgage lien holder agrees to accept a small portion of the Short Sale monies, they then must sign off to the first position, 1st mortgage lien holder.  That 1st position lien holder must then send that entire package to the Investor, and then the investors may “accept” your offer, or in most cases they will “counter” the offer, or ask you to bring your offer up, to your “highest and best” offer.  Once you get to this point, you are getting very close to finally striking your deal, and you may be within a couple weeks to final acceptance.  Now the ball is in your court, and you need to decide if you want to counter at all, or stay on the initial number you offered, or you may have to accept the number the Third Party Creditor came back with.  It would be best if you had your pencil sharpened and were already prepared with your market data, as well as repair cost so that you know exactly what your highest and best number is.

 

At this point you make the decision to either continue moving forward with accepting the counter offer, or to counter it, then you wait again for a week or two and see what happens.  If the numbers are reasonable, you will most likely get your house, but if you are shooting numbers that are 40-50% below market value, the Third Party Creditor will most likely wait for a more reasonable offer, they may accept a back up offer, or they may simply let the property go to foreclosure, clear the title and sell the house as a Foreclosure property.

In today’s volatile real estate market, many Sellers are putting their houses into pristine condition, and pricing them to sell.  By time you buy a Short Sale, pay for all the repairs and improvements, you may only be off slightly as compared to negotiating a very good deal with a “normal” Seller.  If you attempt to go the Short Sale route, the rewards could be good, but you had better have patience and a very good understanding of how this all works so that you can see it through to fruition.  Also know that there are no guarantees with a Short Sale or a Foreclosure, in the end you may get the property, you may not.