Buying a Short Sale Guide

 

When you spot a short sale house that interests you, take your hand off the mouse and step away from the computer. Before you get all excited over the prospect of buying that short sale house, pick up the phone and call your real estate agent. Your agent needs to research that short sale listing first. In some real estate markets, fewer than one in 10 short sales close. Just because that home is listed as a short sale doesn’t mean it’s really for sale (because it’s subject to lender approval), nor does it mean it will sell at the advertised price. Here are 6 things you need to know before trying to buy that short sale.

Comparable Sales For That Short Sale House

The short sales I list in Tennesseeare all priced below comparable sales, yet they are priced in line with pending sales. Why? Because short sales take anywhere from 2 to 4 months, on average, to close, and pending sales will become the comparable sales at closing.

Some short sales are priced ridiculously low. So low that the sellers’ bank will never accept them. These types of listings receive multiple offers. But all is not lost. To get your offer accepted, it will need to be priced near market value. If you’re not prepared to pay above a superficial price on a lowball short-sale listings, then pass.

Mortgage Amounts, Number of Loans and Lenders

Ask your agent to research how much is owed against the home and find out the number of loans that are recorded. A second or third mortgage lender will receive peanuts as compared to the amount a senior lender in first position will get.

Moreover, some lenders, deserving or not, get a reputation for being difficult to work with. If your agent is an experienced short sale agent, he or she will know who these lenders are and can advise you of the difficulty you may encounter.

If your offer is 20% or 30% of the mortgaged amount, it is unlikely that your offer will see the light of day on the negotiator’s desk.

Short Sale Listing Agent’s Track Record

A listing agent who is advertising a short sale but has never closed a short sale is a risky proposition for you. That’s because it’s up to the listing agent to submit the short sale package to the lender and negotiate. Your buyer’s agent can’t talk to the bank.

Some listing agents hire outside companies to do their job, and the results of those negotiations are sketchy at best. Ask yourself, do you want to risk rejection of your short sale purchase because the listing agent has no experience?

Short Sale Seller Qualifications

Find out if the listing agent has received a completed short sale package from the seller, and ask about the contents of that package. A complete short sale package consists, at minimum, of the following:

• Sellers’ hardship letter
• Tax returns
• W-2s
• Payroll stubs
• Financial statement
• Bank statements

Some sellers do not want to cooperate and are slow to return these documents. Others have never been told by their agent that these documents are mandatory. You don’t want your short sale purchase delayed because the listing agent doesn’t have the required documents.

Number of Short Sale Offers Received

Homes priced under market value will receive multiple offers. An agent is not required to disclose the terms of those offers, but you do want to know how many offers you are up against.

Here’s how it generally works:

• When a short sale home first comes on the market, the first offer will most likely be a tad below list price.
• The second, at list price.
• The third offer will be slightly higher, maybe by a $1,000 or $2,000.
• The fourth offer will be significantly more.

You want to make an offer that will beat the competition yet still be below market, or don’t waste your time.

The Listing Agent’s Short Sale Procedures

Although REALTORS are required by the REALTOR Code of Ethics to treat everybody fairly, not every agent is a REALTOR. This means the short sale listing agent may decide to submit only the first offer to the bank and withhold all other offers.

Withholding other offers could be considered to be a violation of the fiduciary relationship formed between the listing agent and the seller. The seller is entitled to receive the highest and best price. Realize that even if your offer is submitted to the bank, as time marches by while waiting for short sale approval, another buyer could outbid you.

Buyers pursue short sales to get a good deal. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like hot fudge on a sundae, ask your agent to call the listing agent to find out if the home is a short sale.

Because you might want to think twice about making an offer on a pre-foreclosure, short sale home. It’s not as simple as you may believe, and very few can close in 30 days or less.

Many of myTennesseehome buyers have waited 4 to 6 months to close on a short sale, sometimes longer.

What is a Short Sale?

A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.

Be aware that the seller need not be in default — to have stopped making mortgage payments — before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.

Check the Public Records

Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer.

If there are two loans, you could have a problem. The first mortgage lender’s position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.

 

 

Hire an Agent with Short Sale Experience

It’s one strike against you if the listing agent has never handled a short sale, but it’s even worse if your own agent has no experience in that arena. You need an experienced short sale agent.

An agent with experience in short sales will help to expedite your transaction and protect your interests. You don’t want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.

Qualifying the Property and Seller for a Short Sale

A lender is unlikely to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender. Sellers may also owe taxes on the amount of debt that is forgiven.

A seller I know once demanded that the buyer slip the seller $1,000 to be given the right to purchase the seller’s property. We said no. This is fraud. The lender legally pursued that seller. Do not be lured by sellers who suggest this practice. In a short sale, the seller receives no money because the lender is losing money.

Submit Documentation and Purchase Offer to Lender

Once the seller has accepted your offer, send it to the lender for approval. You do not have a deal until the lender accepts. Also, send the lender a copy of your earnest money deposit. Do not be astonished if the lender asks you to increase it.

In addition, the lender will want to see that you have your own loan available and you are preapproved. Send a preapproval letter to the lender. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.

Give the Short Sale Lender Time to Respond

Make your offer contingent upon the lender’s acceptance. Give the lender a time frame in which to respond, after which, you will be free to cancel.

Some lenders submit short sales to committee, but most can make a decision within two to three months. Get a name and phone number for the appropriate contact at the lender. Don’t send an offer blindly to a department.

 

Understand Short Sale Commissions

Regardless of the commission the seller has agreed to pay, the lender is actually the entity paying the commission. The reason is the seller is not receiving any money with which to pay a commission. Since the lender is losing money, the lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.

If you have signed a buyer’s broker agreement with your agent, ask if the agent will waive the difference due or you might have to pay it out of your pocket. Some brokers feel it is unfair to penalize the agent, but the lender is calling the shots.

Reserve the Right to Conduct Inspections

Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property “as is,” which means no repairs.

 

 

A reader asks: “We signed a purchase contract to buy a home in Elk Grove. It was a short sale. Our agent told us to wait at least 3 months for the bank to approve the short sale. Then, after we waited 90 days, our agent called to say the seller had canceled our short sale contract because the bank approved some other buyer instead of us. Is that legal? How can a seller cancel our short sale contract?”

Answer: How disappointing for you, and how frustrating to wait all that time, thinking you would get the home. My heart goes out to you. I’m sorry the seller canceled your short sale contract.

Short sales are complex and difficult. Throwing a wrench into the process like this by canceling your short sale at the last minute would be upsetting to any buyer, especially a home buyer who was patient and loyal.

Buyers Can Cancel the Short Sale Contract

Quite often, it’s not the seller who cancels the short sale contract. It’s the buyer. On the whole, most short sale listing agents don’t care which buyer gets the home as long as the buyer is qualified and willing to wait through the short sale process.

Here are reasons why a buyer may cancel the short sale contract by withdrawing the offer:

• Buyers might find a home they like better or a home that can close faster.
• Buyers may get cold feet, known as buyer’s remorse.
• Buyers may have had no intention whatsoever of waiting for the short sale approval but instead made multiple offers on more than one home, taking the short sale that gets approved first.

Note: Some legal experts say it violates contract law for a buyer to submit more than one offer at a time if the buyer is unable to buy both homes.

Sellers Who Cancel Short Sale Contracts

Although it is more common for a buyer to cancel a short sale contract, sellers may have the right of cancellation as well. Sellers typically do not sign a purchase contract without specifying that the contract is subject to lender approval of the short sale.

InCalifornia, buyer’s agents generally attach a “short sale addendum” to the purchase contract. The short sale addendum specifies that the entire transaction is contingent upon lender approval. Banks are under no obligation to approve a short sale.

My legal sources say that if the bank decides to accept a second offer from Buyer #2, the short sale contingency with Buyer #1 fails, and the transaction with Buyer #1 is terminated.

Here are ways a seller can cancel a short sale contract:

• A seller may decide to cancel the listing, and the listing agent will agree.
• A foreclosure may take place, preventing the short sale.
• The seller may be able to accept a higher offer and cancel the first offer.

How Buyers May Prevent Sellers From Canceling the Short Sale

Although it rarely happens, sometimes sellers get cold feet and change their minds about selling. In that event, a buyer who holds a signed purchase contract should seek the advice of a lawyer.

The best thing a buyer can do is read the short sale purchase contract and, if attached, the short sale addendum. A buyer may wish to talk with a lawyer as well. Basically, if the short sale addendum includes verbiage that lets the seller continue to market the property and allows for all offers to be submitted to the bank, the bank can elect to accept an offer at any time that is higher than the first buyer’s offer.

Many buyers believe the short sale addendum protects their earnest money deposit and lets them start a home inspection after short sale approval, which it does, but they don’t read the fine print.

The fine print often favors the seller. If a buyer finds such verbiage objectionable, a buyer may very well insist that the clause be removed in its entirety from the short sale addendum.

For more short sale legal advice, please talk to a real estate lawyer.

Question: How Long Should I Wait for Short Sale Approval?

A reader asks: “I submitted an offer on a short sale almost 5 months ago, and we haven’t heard anything from the listing agent lately. My agent calls every week to find out if the bank has accepted our offer. Half the time the listing agent doesn’t call her back. We don’t know how many offers the bank is looking at or even if our offer is best. How long should a buyer wait for short sale approval?”

Answer: Short sale buyers across the country are singing the blues right along with you. Every short sale is different and as much depends on the lender as it does on the listing agent. Some listing agents outsource their short sale negotiations to a third party, which can often delay a response.

Qualify Your Short Sale Before Writing the Offer

Before you decide to buy a short sale home, ask your agent to do a little groundwork first. Some of the things your agent might do are:

• Examine the Comparable Sales

Many banks will discount the price a little bit from market value, but to get an acceptance, offers should be reasonable and close to the comparable sales.

• Check Out the Short Sale Listing Agent’s Track Record

If the short sale listing agent has very few short sale listings and has little experience actually closing a short sale, your chances of offer acceptance may be slim.

• Ask How Many Short Sale Offers Have Been Submitted

While the listing agent may refuse to disclose the offer prices, the agent should let your agent know how many offers have been received. If there are multiple short sale offers, you may need to offer more than list price.

• Find Out if the Sellers’ Short Sale Package is Complete

Bank negotiators will not process a file if the sellers’ short sale package is incomplete. That file will go to the bottom of the pile if it’s missing paperwork that the bank requires.

• Get the Name and Number of Lenders

More than one lender might mean the file will take longer to close. Some junior lenders are demanding unsecured prom notes from the seller or more money than usual from the first lender. Also, some lenders will consider only the first offer. If you are not the first offer, your offer may fall by the wayside.

How Long Do Short Sales Take?

This is the million-dollar question. I closed oneSacramentoshort sale in 67 days from the date I listed the property to the date it closed. That lender, which was Citi Mortgage, wanted to see every offer (which was very unusual), and we had received a dozen. Some Bank of America short sales, believe or not, can get approval in 3 weeks. Wachovia short sales can turnaround in 24-hours.

Other lenders are so swamped with short sale submissions that its employees can’t respond in timely manner. What once took two months can easily take four months.

The short sale process, from submission to short sale approval, is generally as follows:

• Submission of offer and complete short sale package from the seller.
• Bank acknowledges receipt — 10 to 30 days.
• Bank orders a BPO or appraisal — 30 to 60 days.
• File is reviewed — 30 to 60 days.
• Negotiator is assigned — 30 to 60 days.
• Level II negotiator may be assigned — 30 to 90 days.
• File is approved or rejected — 30 to 120 days.

If you’re running past 120 days, it’s possible that the listing agent or a third-party negotiator is not on the ball and is lax about calling the bank. Calling the bank means waiting on hold anywhere from 10 minutes to an hour or longer.

Or, a lengthy short sale period can also mean the bank has internal problems, not enough staff or has lost the file a few times, prompting the listing agent to resend the package over and over.

It can also mean that the appraisal is substantially higher than your offer, and the listing agent is building a case for a new appraiser.

Unfortunately, you can’t always avoid problems on a short sale. Patience is key. You’ll most likely eventually get short sale approval. Threatening to walk away means nothing to the bank. Your best bet is to stick it out and wait, providing you truly want the home.

On the surface, it may appear that a short-sale buyer is getting a good deal. Although a slim margin of short sales may be profitable for a buyer — because there are always exceptions — much of the time, a buyer would be better off buying a home that is not in default.

You are unlikely to hear real estate professionals tell you that it’s not a good idea to buy a short sale. In part, that’s because real estate professionals profit on a short sale. Everybody makes money except the sellers and buyers. Realize, too, that listing agents might push sellers to list as a short sale, because if the sellers went through foreclosure, the listing agents will not get the listing.

InTennessee, where I work, for example, many agents ignore short sales like the plague.

Here are 11 Reasons Why Buyers Might Not Want to Buy a Short Sale:

1) Sellers Paid Too Much.

If a home sold for $500,000 a few years ago and is now for sale at $400,000, that doesn’t mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.

2) Sellers Borrowed Too Much.

Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower’s loan balance exceeded the value of the property. Appraisals are subjective, and not all appraisers will place the same value on a home. Although against the law, some appraisers are pressured by banks to appraise at the amount the home owner wants to borrow.

3) Stringent Qualifications.

Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.

4) Homes Sell at Market Value.

Lenders aren’t naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.

5) Homes Sell “As Is”.

If a mortgage company agrees to a short sale, it is most likely also paying the closing cost in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:

• Suggested repairs disclosed on a home inspection.
• Pestinspections or work necessary to issue a clear pest report.
• Roof certifications or roof repairs.
• Home protection plans for the buyer.
• Deferred maintenance.

6) Length of Time to Close.

Depending on when the Notice of Default was filed, the lender’s back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.

7) Lenders Can Change Conditions.

Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender’s desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.

Lenders Discount Commission.

Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. Moreover, agents end up doing two to three times the work of a conventional transaction and don’t appreciate getting paid less to do more work. If you have agreed to pay your agent a certain percentage under a buyer broker agreement, you could be liable for the difference between what the lender will pay and what your contract stipulates, if your agent refuses to waive the difference.

9) Higher Buyer Closing Costs.

Because lenders rarely will pay for any extras, like a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.

10) Lose Control of Transaction.

If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller’s lender calls the shots, not the buyer nor the buyer’s lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.

11) Little Seller Motivation.

When the seller discovers that the short sale effect on credit is close to that of a foreclosure, there is little incentive for a seller to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.

This information was provided by Scott Hines, a short sale buyer specialist. Scott is the broker at The Deselms Team, a recognized expert on buying short sales properties. Scott may be contacted for any questions at (615) 268-2881 or at www.PremierBuyersAgent.com . Scott was a top selling buyer’s agent in Tennessee in 2010 and has assisted many past clients navigate the bank “red tape” to successfully purchase short sale homes at below market values.