Short Sales 101

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Do you really need an agent to assist you in buying a short sale property?

As you've heard, there are savvy active buyers in the real estate market these days -- and every one of them seems to be looking to buy what we call a "distressed property ... either a property in foreclosure or one that might be on it's way, also known as a property that may be sold "short of what is owed" or, a "short sale". If you have the feeling buying a foreclosure is an overwhelming process it need not be with us! We'll show you the facts, and discuss strategies for your purchase; you will see for yourself there are great deals in the market. We can kick some ideas around and see if buying one of these incredible homes is for you.

When a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it's called a short sale. In a nutshell, the lender forgives the remaining balance of the loan. The process of assisting buyers, sellers (a.k.a. borrowers), and lenders through this process is no walk in the park – you would do well to save yourself countless hours by working with a professional Realtor – after all, it's the bank who pays our commission – let us do the heavy lifting for you now. Then you will see how easy we make a complicated transaction for you.

Everyone loses -- or wins

How so? Both the buyer, the seller and the lender tend to "win" and "lose" – either in time or money. If a buyer doesn't have the patience to accommodate the lender's decision-making, they lose by bailing too soon. If the lender does accept a buyer's legitimate offer, they "lose" the difference between what is "owed". And the seller? Sadly, they lose a home they have loved, in many cases for many years.

But let's look at who wins: the seller, of course, because they are out from under a burden they could no longer support, and are free to move on with their life. The lender also wins because they don’t have to hold on to a property that will likely progress to foreclosure, costing even more than the current balance owed. And of course, the savvy buyers win because they pick up a property that has been reduced in price and has, in many cases, been well maintained. Sure, there will be some deferred maintenance – after all, the seller is under financial distress! But, guess what? This helps push the lender to accept the sale.

For the seller or borrower, a short sale is likely to damage their credit -- but not as badly as a foreclosure. They need to understand that they must walk away from their home without a penny from the deal, which may be a challenge for them finding another place to live. On the other hand, they haven’t been paying their mortgage so they’re most likely stockpiling cash – as long as they're still employed.

The buyer gets the property at a reduced price but the property in all likelihood has its share of deferred maintenance problems -- think fixer-upper -- and will need to go through considerable red tape in order to make the deal happen. The red tape is nothing more than the finish line for us!

The lender takes a financial loss but perhaps not as large a loss as it might if it forecloses on the property.

Before you even start considering getting involved in a short sale, there are two situations in which an attempt at a short sale is almost certain to fail:

• The homeowner has not gotten behind in payments -- lenders almost never will accept short sale offers or requests for short sales until the borrower is far behind in payments and a notice of default has been issued.
• Bankruptcy -- If the seller has filed for bankruptcy, forget it. Few, if any, lenders will consider a short sale when the seller has filed for bankruptcy because negotiating a short sale is considered a collection activity and collection activities are prohibited in bankruptcies. However, we can spot homes and deals that make sense, saving you time and frustration.

As a patient buyer, is it worth it to consider buying a short sale property?

Buying a home in a short sale can be a hassle, so why should you consider it? Mainly, it boils down to the bottom line. You will get the property for a substantial discount. Since the lender is eager to continue to get paid back the money it loaned out -- it may also offer favorable financing terms. The bottom line for you is a great home for a great price!

Since the seller plays an active role in the short sale process, you will have their cooperation (and most likely won't need to evict them upon taking possession of the home). This is not always the case with a property that has gone through foreclosure.

This is NOT a Do-it-Yourself Project!

Whether you've become aware of the distressed situation on a property through an agent, a "For Sale By Owner" advertisement or word-of-mouth, this is not a do-it-yourself project. A short sale is one real estate deal where you really need to get our help.

As experienced agents, we know what to look for, and when we talk with the negotiators, we know what they are saying so we really hear and separate the information that can make the difference between wasting time and success. Not all real estate agents know how to handle a short sale, so make sure you consult with us. We’ll demonstrate to you our special training and track record with short sales.

Why Lenders Tend to Accept Your Offer

It might seem counterintuitive for a lender to go along with a short sale. After all, a lender is legally entitled to pursue the full balance of the loan. When a homeowner falls behind on payments, the lender can (and often does) hold the borrower responsible for every penny owed. And yet more and more lenders are willing to consider approving a short sale.

Lenders are painfully aware of just how bad the current foreclosure crisis is. They know the cold reality is that a large number of struggling borrowers will end up losing their homes and often see the advisability in accepting the inevitable and trying to minimize their losses. Yet, some lenders seem to remain in denial. Are they waiting on a big bailout? Is it that their departments are simply too understaffed to handle the requests? In reality, it is often difficult to find out who is the actual investor behind the note!

Foreclosure is an expensive and time-consuming process for a lender. By agreeing to a short sale, the lender wraps up this little mess quickly, and perhaps with less of a loss than it would have incurred with a foreclosure.

Remember, after foreclosing the lender owns the home and has to maintain it, insure it and pay taxes on it. So instead of receiving payments each month, the lender is now forking out money every month. Plus, short sales help the lender look good on paper -- the property never gets listed as an actual foreclosure, which helps the lender's numbers. They see it as the lesser of two evils -- if the numbers make sense for them. That’s our pressure point!

KNOW YOUR END GAME!

Also known as your "exit strategy". What will you do with the property? Is it for your own use and enjoyment? Are you building an investment portfolio for your retirement? Are you entertaining the idea of a "fix 'n flip"? You absolutely must have a clear goal in your purchase, and we’ll help you navigate from there.

STEPS TO MAKE IT HAPPEN:

1. Identify the Target

Locate "pre-foreclosures" in your area. This is done through online databases, public records, etc, or by using an experienced real estate agent as a buyer's agent. Again, let us do the heavy lifting!

Determine how much is owed on the house in relation to its approximate value. If it seems high, it's a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan.

Warning: Many homeowners are desperately trying to hang onto their property. They may be investigating a loan modification and are using a short sale strategy as a stall tactic ... you don't want to get tangled up in someone else's strategy and must know they are serious about selling their property and moving on with their lives.

Another Warning: Lenders will not approve a short sale without an "arms-length" distance between buyer and seller. This means you cannot rescue a relative or business partner from foreclosure, or steal a property at a discounted price to help someone out where they may potentially stay in the home or gain in some fashion. You will sign to this, under threat of perjury, so be careful!

2. Tour the Property

Evaluate its condition and come up with a ball-park estimate of how much it's going to take to repair or renovate. If it needs work, many traditional buyers won't consider it, which is good for you and another pressure point for the lenders.

3. Do Your Research

What is the property worth? What's the profit potential? If you're an investor or are planning to live in the home a short time, you'll want to profit from the deal. No one understands market value more than those of us in the trenches, day in and day out. We’ll assist with your forecasts.

4. Discover All Liens

Identify all liens attached to the property, and what their position is to get repaid. Lenders are developing reputations as either having their heads in the sand and ignoring solutions, or being reasonable and timely with their review and approval process. Again, you don’t want to waste valuable time.

5. Get Your Ducks in a Row

Determine your financing. This is critical. You have to know how you're going to pay for the property. It's important to understand that in a short sale you have to have the ability to move quickly. Once an agreement is worked out, it is common the lender will require closing in as few as 21 days. This is too late to start shopping for a mortgage.

6. Establish Rapport with Lender(s)

Oh boy, contacting the lender is a challenge. Most folks don’t understand that the "lender" actually has many departments that handle various aspects of a distressed property. First there’s the debt collection department who speaks with the borrowers when they’ve fallen behind on their payments.

Another is the department where the property is already owned by the bank and being processed by an asset manager – either in-house or outsourced. The lender may have a loss mitigation department who is actively negotiating a loan modification. And finally, there is typically a department who assists with short sale negotiations. It may not be too surprising to learn that this is a case where the left hand does not know what the right hand is doing, and constant and continual follow-up is required.

Finding the decision maker can be one of the biggest initial challenges. Lenders do not speak to anyone except the borrower or an "authorized" agent who has permission to speak to the lender on their behalf. Because borrowers are in a state of emotional paralysis, they will be unwilling (and rightly so) to divulge private information or authorization for just anyone to speak to the lender on their behalf, and typically have arranged one agent to do so. We work day in and day out with those agents to keep interested buyers abreast of the status of the negotiations.

7. Compile the Offer

Many lenders have an application specifically for a short sale request, and strict guidelines for submitting the short sale package. As a buyer, you'll want to know what step the borrower has reached in completing that package because the lender will not entertain any offers until receipt of the initial package. and prospective buyers have no control over that timeline whatsoever.

8. Submit the Offer

Once the initial short sale package has been compiled and an offer prepared by a buyer, the proposal generally consists of a package of materials including the application and authorization letter plus:

The purchase and sale contract -- signed by you and the seller – to buy the property for a specified price. The lender is not going to entertain tentative offers. You're not going to get the chance to ask the bank, "Would you take X number of dollars?" In most cases this also means posting a sizable amount of money to demonstrate your desire and ability to go through with the transaction if it is accepted. If you can't make a sizable down payment, the lender would have no reason to believe you can do any better than the existing borrower. It's also very important to all parties that the contract be contingent upon all lenders approving the short sale in writing.

Remember: There is NO acceptance in a contract until ALL parties have fully signed the agreements – that includes the current homeowner (borrower), the buyer (you), and the lender (all of them if there is more than one lien on the property).

A hardship letter. It's important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments - - usually 90 days. The lender must be convinced taking a smaller loss now is better than a bigger loss later. To make that case, start with a letter written by the seller giving an overview of the seller's desperate situation. The lender must recognize the seller's inability to pay the loan - - immediately and in the foreseeable future -- and that the situation is irreversible. The seller should supply as much evidence and documentation as possible, such as divorce papers, evidence of job loss, delinquent accounts, utility shutoff notices, car repossession paperwork, last two years tax returns, recent pay stubs and recent bank statements. If the lender thinks the seller has money or assets stashed away, it will never go along with a short sale.

A statement of the property's value. This can be a full appraisal or a "broker's price opinion". The lower the estimate of the property's current market value, the better it will be for you. You want to show the lender that the seller would not be able to get enough for the home via a normal sale to satisfy the loan.

Compile a list of all the negatives and problems of the home that negatively affect the value and make it undesirable to the average buyer and tougher for the lender to resell. The longer a lender must hold onto a property, the more expensive it becomes. If the lender realizes the property will bring them nothing but headaches, it will be more likely to OK a short sale.

Many short sales are turned down because the lender doesn't think the offer is high enough. It’s critical to do this before the lender does their valuation. There are ethical and legitimate ways to get a low valuation and if you show this to the lender to start with, your offer won't look so low, In addition, your offer to the lender can be below the amount of valuation, up to 85 percent in areas that are slow but not terribly distressed and as low as 50 percent in very distressed areas.

Detail the costs and liabilities. You want to show the lender it would be much better off letting you take the property off its hands. If you can convince the lender the home is a money pit, all the better. Take photos of any deferred maintenance, neighborhood blight, or damages and get estimates of the repair costs. Note: This is also a good opportunity for you to take an honest look at the property, and decide if you are willing and able to invest the time and money required to fix it up.

Remember: A short sale is always an as-is sale. The lender is not going to pay for or otherwise be responsible for any repairs. But, for example, if the lender forecloses, there's a good chance it will be forced to make repairs just to get the house resold. That's one of the liabilities the lender may face, and yet another pressure point.

A settlement statement. This statement outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. Often referred to as a net sheet, the information can be entered onto a HUD-1 Settlement Statement to show the final, negative result at closing.

9. Negotiate, Of Course!

It's not uncommon for the lender to reject your offer or to come back with a counteroffer. As with any real estate transaction, you should figure out beforehand what your absolute highest limit is, and don't be afraid to walk away if the lender won't meet your figure.

10. Consummate the Agreement

Once you've reached an agreement that all three parties (you, the seller and the lender) are OK with, get everything in writing and officially open escrow. Make sure the seller understands all of the terms of the deal. Next comes the closing and the property is yours.

EASY, RIGHT?

Okay, so it’s not easy, but it’s definitely do-able when you’re working with the right team. Call now, and we’ll get the plan in place to building your wealth and stability through home ownership.