Like I insinuated in my last post, a short sale process is not a walk in the park. It does require the cooperation of all the parties involved in the transaction. Here are a few good facts to keep in mind when involved in a short sale transaction:
Whichever side of the fence you belong to in a short sale transaction, I recommend that you read this entire article (including other articles referenced herein) in order to get a complete picture of what goes on in a short sale.
Indeed, a short sale transaction can be a very stressful undertaking for everyone involved. But the end result, if successful, is a ‘win-win’ for all the parties involved.
THE SELLER: In a short sale, the seller is being given the opportunity to salvage his credit by selling the property before the culmination of the foreclosure proceeding. Since the result of a short sale can never be guaranteed, the seller is given a fighting chance as opposed to giving up and facing foreclosure. This is why it is very important that the seller hires an experienced short sale Listing Agent. --- Having an experienced short sale listing agent exponentially increases the chances of the seller in beating the pending foreclosure.
The seller will be required to make a full financial disclosure to the lien-holder detailing all monthly expenses inclusive of groceries, utilities, credit card bills, cell phone bills, car payments baby-sitter and the likes. A financial hardship is necessary; though, I’m hearing a new breed of short sales coming into the market as an aversive mutual financial decision of both the homeowner/investor and the underlying lien-holder.
This is the case wherein the investor/homeowner decides to get rid of a badly depreciated asset as a way to reduce liabilities and to preserve net worth. In this instance, the investor/homeowner may be required to come up with a portion of the deficiency while working under the premise of negotiating with the lien-holder to forgive most of short-fall.
The rest is in the hands of the Listing Agent.
THE LISTING AGENT aka Seller’s Agent: Bear in mind that the Listing Agent has ONLY one primary goal in mind. And that is, to get the property sold before the property gets auctioned off into foreclosure. Remember, the Listing Agent is working against the clock. Once the homeowner is behind on mortgage payments, foreclosure looms in the horizon in as little as 120 days.
The seller then expects the Listing Agent to aggressively market the subject property. Subsequently, the Listing Agent will need to execute good judgment in choosing the right buyer for the property, putting forth the Seller’s best interest in rendering a decision. After all, the main goal is to save the seller’s credit by getting the property sold to a solid buyer to beat the pending foreclosure proceeding. While getting the foreclosure auction postponed is a viable option, it is not always the case, as things vary from one Loan Servicer to another.
For clarification purposes, the company that collects the monthly mortgage payment is NOT necessarily the decision-maker in the short sale approval process. When home loans are originated, most are sold in the secondary mortgage market to a vast array of investors. Some are even held in tranches (A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities).
The investor who ends up buying the loan in the secondary mortgage market is the ultimate decision maker in a short sale approval. For example, homeowner Jon Doe, sends his monthly mortgage payments to Wells Fargo, but the actual owner of the loan is Fannie Mae. If Jon Doe goes through a short sale, the Listing Agent will be dealing with Wells Fargo. In a sense, Wells Fargo would act as the middle man between the Listing Agent and Fannie Mae.
At the height of the subprime market, a lot of these exploding ARM loans were sold off in tranches. --- The high potential yields on these loans were pretty attractive to a lot of foreign and/or private investors. In most cases, it does take much longer to get a short sale approval on loans held in tranches.
THE BUYER: Here are some of the criteria that I’ve used when choosing the right Buyer to be submitted to the underlying lien-holder for purposes of negotiation.
1.) How long is the buyer willing to wait for the underlying lien-holder to process the short sale and make a decision on the price and terms, et. al.. Does the buyer need to move in next 2 to 3 months?
Bear in mind that a short sale negotiation could take anywhere from as little as 2 weeks but as long as 9 months to process depending on the lien-holder. (At least, this is my experience.) Bear in mind also that some banks would start the process over when the Buyer is substituted for another Buyer; as in the case when the current Buyer on contract walks-away and the property is subsequently sold (tied up in contract) to another Buyer.
True experience: I was negotiating a short sale transaction with a huge, nationwide lender; I had gone through the entire process of submitting the short sale packet, comps, BPO/Appraisal and worked through negotiation for about 45 days. Just 2 days before I got the written approval from the bank’s negotiator, the buyer got laid off from work. We got a new buyer right away but to my dismay, the process had to start from step one. This time around, it took this bank 45 days just assign a negotiator for this file which was previously and very recently approved. We had to wait another 45 days just to get an updated approval. It is a ridiculous set-back, in my humble opinion, to start from step one when all that was needed to be done was to put the new Buyer’s name on the Lender Consent/Approval.
Buyers need to realize that in a short sale transaction, nothing is guaranteed. What I’m implying is the fact that the timelines and the decision on the price is pretty much left at the mercy of the underlying lien-holder.
2.) How strong is the Buyer financially? How much is the buyer’s down payment on the loan?
The bigger the down payment, the stronger the Buyer is, in most cases. Down payment source of funds are also verified; hence, be ready to provide your most recent asset statements. A loan pre-approval is also required, NOT just a loan pre-qualification. There is a huge difference. A loan pre-approval would entail that you have signed a loan application with a lender, and your credit, income and assets have been reviewed by the lender. I make it a rule of thumb to ask for a copy of the results of an ‘Automated Underwriting Approval.’ --- There are several versions of this software underwriting system but the most common are DU (Desktop Underwriter) and LP (Loan Prospector). Once the lender enters your credentials into the system, the software gives an initial decision, that is, a loan approval or disapproval, based on the loan guidelines provided by Fannie Mae and Freddie Mac.
A strong loan applicant would also mean that they can close within 30 days from receiving the Lender Consent/Approval for the short sale.
Here’s a very important factor that falls in this criterion: Is the Buyer purchasing this property as a primary residence or as an investment property? It is much harder to get approved for an investment property purchase loan than a primary residence loan. For starters, a purchase loan for an investment property requires at least 25% down, plus reserves/assets enough to cover the full PITI for about 6-12 months.
Of course, an ‘all cash’ buyer is the best choice. Yes, they do exist! --- I sold a short sale duplex in Burien to an ‘all-cash’ buyer a few months ago.
3.) How many contingencies in the purchase offer did the Buyer put in place? Much like bank-owned properties or REOs, short sales are almost always sold ‘AS-IS’. It is then recommend that a pre-inspection is conducted by the Buyer before writing an offer. While it is certainly the right of the Buyer to include an ‘Inspection Contingency’ in the purchase offer, the Listing Agent would most likely choose a Buyer who has already waived (or is willing to waive) this contingency. If the listing agent is knowledgeable in pricing short sale properties, any repairs and defects would’ve been taken into consideration when the property was initially listed.
Some Buyer Agents would argue that Buyers would NOT want to fork out the cost of the Inspection given the uncertainties in a short sale transaction. And I do understand their concern as I would certainly advise my Buyers to get the home inspection done after receiving Lender’s approval. All I’m saying is, if your Buyer really wants the house and there are multiple offers, doing the pre-inspection and waiving the inspection contingency increases your chances of getting your offer endorsed by the Listing Agent to the Seller.
4.) What price will the underlying lender accept? Short sale properties are usually listed between 5% -15% below market in order to induce Buyers to write offers. Depending on the stage of the pending foreclosure, you’ll find that properties closer to the foreclosure auction are usually listed much more aggressively. Assuming that the Listing Agent did his job and conducted a comprehensive valuation analysis, the price that the lender would accept should be right at the listed asking price or within 10% thereof. Of course, there are exceptions to every rule.
True experience: I’ve seen an ‘ALL-CASH’ offer get accepted by a lien-holder that was nearly 50% below the asking price for an unfinished new construction property that was in the later stages of construction. In retrospect, the lien-holder would’ve considered the fact that if they foreclosed the property and took it back in their inventory, they will have a hard time selling it in the open market; since, this property cannot be financed conventionally. --- It would have to be only either a cash buyer or a buyer who can qualify for a conventional Rehab Loan (which is very rare in this market) who will end up buying a property as such.
I’ve also listed a short sale property that was bid up by several buyers $20K above our listed asking price.
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~~~ The following section is taken from one of my previous posts. ~~~
If you are contemplating about getting involved in a short sale transaction, I strongly advise you to seek the services of an experienced Short Sale Specialist.
It is but a sad truth that there are a lot of Agents out there perpetuating to be short sale specialists yet have nothing to show for in way of closed short sale transactions. Having successfully closed several short sales transactions, I’ve frequently interacted with “know it all” Real Estate Agents claiming to have closed “lots” of short sales; yet their actions stray very far from those of an experienced short sale specialist’. In a sense, their own actions give away their ignorance and lack of experience regarding the subject.
Here’s the real kicker: Whenever a Real Estate Agent claims that he/she has closed lots of short sales, yet therein exists a big disparity between their actions and claim, I make a point to go to the MLS and check their previous closed transactions. All too often, I find that they have NOT closed one single short sale transaction. Or if they did, they’ve hired a 3rd party negotiator to negotiate their transaction for them.
Personally, I’d rather have an Agent approach me with full honesty even if it means revealing the fact they don’t have an inkling of how a short sale process goes. The success of a Short sale relies on the concerted efforts of all the parties involved. Otherwise, the experience would be compared to a “back-seat driver” telling you how to drive when that very person has never actually driven in their lifetime.
All I’m saying is that, make sure you hire an Agent who has actually been in the front-lines negotiating with the lenders; someone who actually knows how to put together a short sale packet; someone who actually knows the triggers and the elements needed in a hardship letter; someone who knows how to interact with the BPO Agent/Bank’s Appraiser.
As a consumer, you have the right to ask for references and proofs: Ask for MLS print-outs of their closed short sale listings; make sure it does say short sale somewhere in the ‘Marketing or Agent Remarks’ section. Ask for HUD1 of those transactions as secondary proofs.
In the short sale business, you don’t want to hire an Agent because he/she’s your friend or relative, or because you were referred to them. Whether you are a seller or a buyer, you’d want to hire an Agent that has the credentials of a Short Sale Specialist, but more importantly who can give you printed and tangible proofs of short sale listings negotiated and closed. Otherwise, you’ll be in for a very unpleasant experience.
HIRING AN IN-EXPERIENCED BUYER’S AGENT TO REPRESENT YOU IN A SHORT SALE COULD COST YOU PRECIOUS TIME & MONEY. AND YOU COULD MISS OUT ON A PROPERTY ALTOGETHER IF YOUR AGENT DOES NOT KNOW HOW TO WRITE YOUR OFFER PROPERLY AND TO SET YOUR EXPECTATIONS IN THE RIGHT DIRECTION. If you’re having a hard time finding a good short sale and foreclosure specialist, visit www.RainCityBargainHomes.com and I guarantee that you will be helped by me personally or another experienced short sale and foreclosure specialist.
Bear in mind that Short Sale Listing Agents DO NOT like to waste their time (or anyone’s time) arguing with a buyer’s agent who is clueless about the subject matter. Besides, nobody likes to work with a ‘know-it-all’ buyer’s agent pretending to be a short sale expert when every question that comes out of their mouth and their very actions scream, “I’m clueless! I’m a dummy! I’m pretending to be an expert in the subject matter.”
THE BUYER’S AGENT:
1.) Be honest about your experience on the subject. Trust me, books, classes and trainings do not fully prepare anyone for a short sale transaction. ONLY real experience does… So, don’t make false claims about your short sale experience. Besides, closed short sale transactions are verifiable in the MLS data base. --- If you are lacking experience in the subject matter, disclose it to the Listing Agent. You’ll find that most Listing Agents will advise you on what you need to do or how to write your offer, if you just ask for help.
Making false claims about your experience and expertise is in itself a fraud!
Remember, the Listing Agent wants the property sold just as badly as you’d want to make a sale. There are pertinent information that the Listing Agent will need to verify about your buyer. Be ready to cooperate and disclose factual information. Not doing so is a waste of your time, including yourself and your buyer.
If the Listing Agent informs you that your Buyer is NOT the right buyer for the subject property, or if the Listing Agent informs you that there is a better/stronger buyer on the table, DO NOT take it personally. It’s just business! --- Keep in mind that the Listing Agent is choosing the Buyer based on what he deems best qualified to go all the way to closing. In most cases, the Listing Agent will offer your buyers the ‘back-up buyer position.’
2.) If your buyer really likes the property, encourage your buyer to take the ‘back-up buyer position.’ A sad but true to my experience, most short sales DO NOT close with the very first buyer. It’s usually the second or third buyer who ends up going all the way to the closing table.
3.) DO NOT show any short sale properties listed well above your buyer’s loan pre-approval amount. --- Short sale properties are listed anywhere from 5% - 15% below market already. Writing a low ball offer will most likely be rejected by the underlying lien-holder. Help your buyer perceive value by making your own comprehensive valuation of the subject property. If your offer is too low, the underlying lien-holder will most likely disapprove the offer and come back with a higher sales price. In this situation, it is most likely that your buyer will walk away from the deal. Hence, you’ll have a disappointed buyer and you would’ve wasted everyone’s time.
UNLESS you have an ‘all-cash’ offer, I do not recommend low-balling a short sale property. (There are other exceptions to this rule, however.)
True experience: A buyer’s agent called me about one of my short sale listings. The subject property was listed at $280K. This buyer’s agent told me that her buyer is only qualified for $250K for an FHA loan but is interested in the property, and wondered if I think the bank will take $250K for an offer. --- I almost choked trying to hold back myself not to burst into laughter. I pretty much just informed her that they should move on to another property as I wouldn’t think that underlying lien-holder will take such a low-ball offer with an FHA financing contingency. In my experience, if I can NOT find comparable properties to support such a low offer, I don’t see how I can negotiate with the bank to take such a low offer.
From the bank’s perspective: NO COMPS & NO SUPPORTING EVIDENCE = NO DEAL!
In my perspective: NO DEAL = WASTED TIME & MONEY.
4.) If your buyer needs to move within the following 3 months, they may not be the best candidate buyer for a short sale property. --- I recommend that you advise them to seek temporary residence or negotiate a month-to-month lease with their current landlord. Prepare to wait for up to 6 months (9 months in the worst case for me) for short sale processing depending on the underlying lien-holder.
5.) Perhaps this would be the most important thing of all: Be nice and be polite to the Listing Agent. The Listing Agent is under a lot of pressure. Any added pressure and lack of cooperation from the Buyer’s Agent just doesn’t help the cause.
Once again, a successful short sale requires the cooperation of all the parties involved in the transaction.
NET RESULT: Lien-holders (Banks) spend an average of $50K to foreclose on a property. Plus, the holding costs impose the potential of a huge added expense if the bank cannot get rid of the property immediately after taking the property back as an REO (Real Estate Owned).
Per statistics, a successful short sale transaction nets the underlying lien-holder an average of 30% more as opposed to the amount the lien-holder nets in a foreclosed property. Regardless, of the seller’s motivation to sell, a short sale is a ‘win-win’ financial decision for all the parties involved. --- Sellers save their credit. Buyers gets a substantial discount, and lien-holders net more money.
It’s just better economics to save our thriving economy!
For the meantime, if you have any urgent concerns or questions, please e-mail me at realestate@carlodelizo.com or call me at (425)444-1010. Take care.
MISSION STATEMENT: Our goal is to procure maximum equity for our Buyers and Investors by searching for the best home bargains. Our area of expertise includes Foreclosures, REO or Bank-owned homes, Short Sales or Pre-foreclosures and Fire Sales. BY BRINGING THE BEST DEALS TO OUR BUYERS & CONNECTING THEM WITH SELLERS WHO ARE IN DIRE NEED TO SELL, WE ALL BECOME A PART OF THE SOLUTION.
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