Real Estate Short Sale Guide

Here are top 11 reasons why home buyers may not want to purchase a real estate short sale:

1) The Sellers Paid Too Much

If the home is worth $100,000 dollars less today than a couple years ago, it doesn’t mean the seller is picking up the equity for free. It means that the seller over paid for the house in a rising real estate market which has now fallen and the seller most likely has no equity.

2) Sellers Borrowed Too Much Money

Bank and Lenders are eager to lend money in a appreciating housing market and will sometimes end up allowing borrowers to over mortgage the home by letting the loan balance exceed the actual value of the property. Appraisals are considered subjective as each evaluation may not yield the same value. Some appraisers are pressured by banks to appraise the home at the amount of home owner wants to borrow.

3) Strict Qualifications

Inexperienced real estate agents may try to push the seller into considering a short sale when the seller does not qualify. Sellers/borrowers must prove their financial hardship and submit evidence to the bank or lender for short sale approval.

4) Properties Sell at Market Value

Lenders are unaware of the value of your home as they will insist on receiving a comparative market analysis (CMA) or broker price opinion (BPO) to understand pricing in your neighborhood. If the lender feels that they can get a better price by taking the property back by going into foreclosure vs. a short sale offer, they will hold out for a higher price. Lenders will accept a short sale when the property is worth the short sale price or “market value”.

5) Property is sold “as is”

If the bank or lender agrees to the short sale, they will request the home is sold “as is” and will refuse to pay for the following:
-Repairs suggested in home inspection
-Pest inspections or work necessary to clear pest issue
-Roof certifications or roof repairs
-Home protection plans for the buyer
-Deferred maintenance

6) Length of Time to Close

Lenders are typically backed up due to the number of short sales and foreclosures crossing their desks. It could take as little as 2 weeks or as long as 2 months to hear an answer on a purchase offer. The short sale time line can take even longer if there are more than one loan on the property.

7) Lenders Can Change Conditions

Some lenders reserve the rights to renegotiate the terms of the short sale at the last minute. If there is a market change, new laws may pass or new information may be presented to the lender. They may attempt to make changes to the contract terms.

Lenders Discount Real Estate Commission

Since lenders are paying for the sale of the property, they will tend to want a discount when it comes to real estate agent commissions. The agent may end up doing two to three times more work than a traditional transaction and won’t be very happy about the change. If you agreed to pay your agent a certain percentage under the buyer broker agreement, you would be held liable for the difference the lender will pay and if your agent refuses that amount. Make sure to talk with your agent.

9) Higher Closing Costs to Buyer

Lenders will rarely pay for any extras on the deal, thus you will have to pay them. There are some cases where the lender will refuse to pay for standard short sale closing costs such as transfer taxes. If you want specific inspections for the property, be prepared to pay for them out-of-pocket.

10) Lose Control of Transaction

If you need to close escrow by a certain date, you may be in for a heartache. The short sale process can be extensive and long as the seller’s lender is the one calling the shots. If you are trying to close escrow at the same time as your escrow closing, it may not happen.

11) Low Seller Motivation

When the seller discovers that a short sale will effect their credit score similarly as a foreclosure, they may have even less incentive to cooperate with a short sale other than peace of mind that the financial nightmare has ended.

So you’ve made an offer (even a full priced offer, gasp!) on a short sale property and received an okay from the lender after the BPO was assessed…but for some silly reason, the PMI company is not cooperating and decided that they will not sign off on the short sale of this property. Now you are wondering if you should give up or look for other options to persuade a deal since you were very close to sealing this it?

If you really want the house, submit the offer again BUT this time around try submitting it at a lower price. It may sound counter productive but it may wake up the PMI company and send a message that you, the short sale buyer, are not going to bend over backwards to give them the price the PMI company wants.

Sometimes this works and you may be able to get the house for an even better deal.

Is it possible to get closing costs included in a short sale deal?

Once a bank has approved a short sale they will be making an effort to get back every penny, thus the chances of closing a deal with closing costs included can be quite small. In today’s market, the approval of closing costs as a cost to the seller is decreasing quite a bit through the housing market since the seller cannot afford the out of pocket expense, the bank is already selling a short sale property less than the mortgage owed, and the logic if the buyer cannot afford the closing costs, then they shouldn’t be buying a home.

Although, if you are determined in trying to get your closing costs covered, the key is to knowing what the BPO (Brokers Price Opinion) is and what the banks are looking for as a return percentage from the BPO. If your purchase price and closing costs keep the bank in the range you may get a contribution. Each bank is different. You can get your closing costs covered if you can convince the bank that it makes sense in the numbers.

Typically, in most cases, closing costs and inspections are paid all by the buyer as most, if not all, short sales are generally sold “as is”. A buyer in today’s market doesn’t get too many of their wants or needs met in a short sale deal, other than arguing for a good purchase price.

What to do when buying a short sale? Well, in many parts of the United States, including California, short sales are quite high in numbers. Due to the idea that short sales can yield a good deal, they’ve become quite popular with buyers but there are some things that all buyers (new and experienced) should be aware of when buying such a home.

-They are not all great deals. The bank wants to make as much money as they can and will approve a price based on market value. You probably may not buy a short sale for less than 10% off any of the comps.
-There is a lot of competition so the asking price may be set low to attract many buyers and encourage higher bidders. Many short sales have seen a dozen or so offers.

The biggest obstacle seen with short sales is timing. Obtaining an approval from the bank can take quite a long time due to the bank waiting out for the best offer or the bank not responding to the listing agents messages. Each bank is different in how they handle the process, so if you’re lucky you may get a bank that is very response.

Here are a few tips when looking to purchase a short sale property to ease the mystery and possibly make the process just a tad easier.

-A seller must disclose if the home is a short sale.
-The short sale must be approved by the bank or lender even if the seller accepts the offer. It is still subject to lender approval.
-Lenders will most likely get a BPO to get an idea on property/market value
-The lender will most likely have a list of requirements and paperwork need to start the short sale process, including a hardship letter to approve the short sale.
-The lender will request the property be sold “as is” and will probably not approve any credits for repairs.
-Short sales typically more time to complete and is probably the number 1 complaint amongst short sale buyers.
-The listing price is set by the agent and seller not the bank. Thus causing issues with pricing and possibly denial of offers if the price doesn’t match the lenders target. Sometimes the lenders lack of price awareness can lead to the process taking much longer than anticipated.
-If there are multiple loans on the property, it can definitely lengthen the process as more than one bank has to agree on the sale price.
-Lowball offers tend to generate a slow or no response at all from the bank or lender.
-Some banks are looking for the strongest offers while other banks are looking for the strongest buyers. The bank has all the power in approving the sale. You may be able to get a deeper discount with an all cash offer.

If you plan on making an offer on a short sale:

-Make sure to the the offer contingent on the short sale being approved by the bank or lender.
-There is an addendum form that your agent can attach to the purchase agreement that outlines short sale contingency terms
-There is a high chance that there are multiple offers on the property.
-It’s highly recommended to conduct a home inspection even though the home is being purchased “as is”. You still want to know how many repairs are possibly needed and weigh out the costs.
-If the seller has filed for bankruptcy, few lenders will consider a short sale because negotiating a short sale is considered a collection activity which are prohibited in bankruptcies.
-Some lenders will not accept short sale offers unless the borrower has demonstrated they cannot make payments by defaulting or falling behind on payments and a notice of default has been issued.

Short sales have the possibility to give a buyer an opportunity to save big, but be watchful of the comparables and make sure you don’t overpay. Remember the banks do not want to hold onto the property and want to get rid of it, in a way that makes sense to them financially.

In a short sale, the bank or lender(s) is agreeing to take less than the amount owed on the loan(s). For this reason, buying a short sale property is a bit more difficult than a traditional sale due the number of parties involved to close the sale and depending on the lenders final say and approval on the short sale property.

Lenders want to minimize their monetary losses, and the bigger the lender the chances of the greater the amount of properties to foreclose on and the higher risk of losses.

For many short sale offers, the time it takes to close on the deal can be quite an obstacle. Real estate agents will price the properties well below market value to get offers, but that doesn’t necessarily mean it is a price that the lender agrees with. Many short sales fail to close, so it’s important to offer a price that is competitive for the lender up front. Usually if the price is too low, the bank or lender will ignore the offer.

Determining a Short Sale Offer

To determine the Fair Market Value (FMV) use comparable properties in similar neighborhoods or close proximity to determine a value. A real estate agent has access to the MLS (Multiple Listing Service) and will be able to create a CMA (Comparative Market Analysis). The sold time frame should be within 6 to 12 months when pulling properties in the surrounding areas (stay within 2 mile radius).

Can You Have a Short Sale Time Contingency?

Unfortunately, your time contingency will most likely expire before the bank even gets around to approving it. Most of the time the bank will not pay attention to the time contingency outlined in the purchase agreement. If you really desire the property, then all you can do is wait till you hear a response as your offer is not binding until the bank has approved the offer.

Real Estate Short Sale BPO

The bank will request a BPO (Broker Price Opinion) to get an idea of how much the property is worth. If the BPO comes in too high, the bank will decline the sale as they may think they can foreclose on the property and get more money. If the BPO is around the price that you offered, then they will feel more compelled to approve the short sale offer.

Banks will sell as low as 90% of the appraised value on a short sale. Don’t be surprised if it takes 3 to 4 weeks to get a response on your offer if you are the first offer on the property and a BPO hasn’t been offered.

How Long Will It Take for the Bank to Respond

It depends on the lender involved. Countrywide will do things different than Wells Fargo, and so on. The process starts with the lender receiving the first offer and the homeowner’s short sale package which includes the sellers finances, information from the Realtor, bank records and a hardship letter. Since the lender has the final say, they will decide to either accept, counter or reject the offer.

Does Having an FHA Loan Make a Difference on Getting Lender Approval

In this market it most definitely does. Since FHA loans have stricter guidelines on the condition of the home when purchased in a short sale, many lenders are choosing to stay away from these loans and are moving in favor towards accepting conventional loan offers. Even if they are for less money. This will play a factor in your offer being approved.

Should you be concerned if you are buying a real estate short sale? No, but you should stay well informed when going through a process like this with a seller who is experiencing financial hardship.

If followed closely as a traditional sale, the short sale buyer with a 15 day contingency after the opening of escrow. During this time an inspection should be ordered to clear up any uncertainties about the property before the buyer signs off on the contingencies.

Although with any sale, you cannot be absolutely sure the property will remain in the same condition it was in when it was inspected. Especially with short sales, you are not quite sure how the homeowner will leave the house. Although, they could be held for liable for any damage, so make sure to take photos of the property during inspection. The bank is in no way liable for anything, as most times the house is sold “as is”. It is really between the buyer and the seller, although the seller may not have any money to fix anything in the house.

FHA Loans and Short Sales

FHA loans have strict guidelines on the condition of the property being purchased. So, in short sale situations, having the home in good condition is quite important and many times lenders are willing to make necessary repairs to get the home sold. Situations vary from lender to lender, but key elements like electrical, roofing, heating and air, plumbing and appliances need to be in working order. FHA would require that these repairs be made prior to closing.

In FHA situations, your best best is to work with a lender familiar with FHA guidelines and restrict your home search to homes that have less problems. FHA appraisals could break a deal, and for that reason conventional loans and cash are seen as a better bet for pre-approvals.

Current buyers looking for real estate need to be aware of the atypical process for real estate short sales vs. traditional sales. Short sale transactions behave differently and the short sale time line can be extensive or short, depending on how fast the seller’s agent and the lender who owns the loan acts on your seller approved short sale offer.

Short sales have been on the rise for the past year and are continuing to increase. Due to the better streamlined way of handling these transactions, lenders and banks are doing a better job of running short sale offers through the approval process.

The short sale approval offer acceptance works a little bit different than a traditional sale, in which the seller isn’t the last signer to make the contract binding between the seller and buyer. Once the seller has signed the final offer, that offer is sent to the mortgage lender(s) to be approved. There is a clause within the short sale addendum that states multiple offers can be submitted to the lender(s) for final approval. In some cases, this may cause the lender to delay in the short sale approval. Thus, in short sales, it is quite important to keep in the buyers mind that the offer made should be a strong offer since more offers will be submitted on the table and possibly over a month. The lenders realize with low offers (less than the listing price) may not cut it and the lender may instead “wait and see what happens” to get the highest and best offer. To get a short sale property that you thoroughly love, the best and highest offer must be submitted – whether it be more down on earnest, or a higher down payment, shorter escrow or higher offer price. Banks take a long time to respond to short sales and when they do take the time to respond, they will respond once. If another offer must be approved after the first approval, the bank could take another month or so to approve that price.