from Estate Properties
A short sale specialist on your side
Marla McWilliams-Lopez of Estate Properties specializes in selling bank owned & short sale properties. Short sales can be frustrating due to delays that are simply the nature of short sales and out of everyone's control. With an experienced agent on your side, the frustrations can be diminished through consistent and concise communications.
What IS a Short Sale?
A short sale simply means the Seller of the property owes their lienholder(s) more than they can sell the property for under the current market conditions. Often times, the seller has more than one lien, a first Trust Deed and a second Trust Deed. Sometimes, even a third lien or judgement against the property.
The term “short sale” comes from the Seller needing to ask their bank to “short” the amount to be paid off when transferring the property.
The most important thing to remember when buying a short sale is: The Seller’s lender has no obligation whatsoever to allow a short sale. The Seller and the Seller’s agent are going to the bank ‘on bended knees’ asking for the bank to accept an amount less than owed on the property. Because of the number of foreclosures over the past several years, banks/lenders are often accepting short sales, but again, they have NO obligation to accept/approve a short sale.
Remember, you may have an 'accepted offer' between buyer & seller, but that is contingent upon the seller's bank giving final WRITTEN approval they will release the lien for less than is owed. Also, the seller's bank (lender/lien holder) is NOT a party to the transaction. The sale is between owner (seller) and buyer, yet the seller cannot sell his property for less than is owed on it. Catch 22? Yes. However, the lenders are now allowing sellers, in some cases, to pay off their house for less than owed.
Factors where the seller's lien holder will allow a short sale:
1) Seller must prove a financial hardship.
2) Seller must sell the property at current market value.
3) Seller's agent must have a good team of short sale expert's in place.
A short sale becomes more difficult when there are multiple liens, as the seller and seller’s agent must not only ask the 1st TD to take less than is owed, but then the 1st and the 2nd must come to an agreement on what amount the 2nd will accept to remove their lien on the property, allowing it to close. People often confuse foreclosures with short sales.
In a foreclosure, the 2nd TD is left holding the bag, and usually receives $0. In a short sale, ALL liens must be satisfied (or "shorted") in order to close the deal, as the seller stills owns the property. These negotiations require an agent that is versed in closing short sales, as the timelines and contacts are critical in getting the short sale through to a successful close. Remember, not all short sales close, even if the buyer & seller have an fully executed Purchase & Sale Agreement.
Something else that many people aren’t always aware of. Because the seller’s bank is not obligated to accept a short sale, and can simply opt to take the home back through the foreclosure process (which can be several months, if not years).
Seller's bank will require tax returns, P&L's, bank statements, etc. from the seller. This financial picture must reflect a ‘hardship’. Meaning the seller, must be able to prove they simply can’t make the payment anymore.
Sadly, I’ve seen several transactions fall through with a willing (& able) buyer and a willing seller (accepted agreement in writing), and the seller’s bank turns it down because the seller has the financial means to continue making their payments. The seller simply WANTS to sell and move on (for a number of reasons....growing family, shrinking family, divorce, job change), however, they owe more than their house is worth. They’re stuck! Back in the 90’s, many sellers were in this position, most simply stayed in their homes and stuck it out, others lost their homes to foreclosure. Short sales were practically unheard of at that time. Our financial crisis of 2008 changed all that.
Always inquire to see if a Notice of Default has been filed against the seller. When a homeowner is late on their mortgage, the bank sends them a Notice of Default (NOD), and starts the process of foreclosure. The NOD gives the owner several months (usually six) to bring the loan current. The NOD is listed several times with the local newspaper and sent to the homeowner, as well as any other lien holders on the property. If the property owner is unable or unwilling to bring the loan current, after six months, the bank sets a "trustee sale date" and again notifies all owners and other lien holders.
The "trustee sale date" is the vehicle which the bank uses in which to take the home back thru foreclosure.
Buying a short sale can be risky. Risky in regards to the loss of your time looking for alternative properties. That’s where dealing with a seasoned short sale agent is essential. You’ll want to protect yourself regarding the ability to pull out of the agreement should a better property come along while you’re in the several month ‘waiting game’.
Until the bank gives final written approval, you have no guarantee you can buy this home. Therefore, you must do two things:
1. Request your Earnest Money be held in the Broker's file and not cashed until final bank approval. Otherwise, your money can be tied up for many months. This needs to be in your original purchase & sale agreement and agreed upon by both buyer and seller.
2.Protect yourself by requesting on a short sale addendum that you, as the buyer, can pull out of the agreement any time prior to bank final approval.
The beauty of this is that while you’re waiting the two, three, four, sometimes six and seven months for final bank approval, you can continue to look for houses that might better suit your needs. Today, the average time for bank approval (or disapproval) is approximately 3 to 4 months. Don’t forget, after that long waiting period, the bank can still deny the short sale....simply saying, Nope! Sorry! Remember, they are NOT a party to the transaction (it's between Buyer & Seller), and they don't have to play by anyone's rules! The Seller is asking the bank to take LESS than is owed on their mortgage.
Recently, I had an elated seller and thrilled buyer both sign the Purchase & Sale Agreement. We’re two months into the escrow. In fact, the buyer was so anxious to get this property, he insisted the Earnest Money be cashed and held in escrow (which doesn’t make the potential for acceptance any greater). Then one day, the seller’s bank tells us after reviewing over 100 pages of the seller’s financials they will not approve the short sale, as the seller has the means to continue making payments, even though he was in default. The deal went south, several months later the house went into foreclosure.
During this time, the house went into disrepair, so when the bank finally received the house back in foreclosure, it took them another few months to repair the property, then on to a Realtor to list it. The buyer moved on and found another property they did LOVE even better, and that house ended up selling for close to the same price as the short sale. Sometimes you’ll see it sell as an REO for 10% less than the short sale was attempting to sell for and sometimes at 5%, 10% or even 15% higher. It makes no financial sense!
WHY you say? There have been well over 5,000,000 distressed properties in the US in the last several years. Banks are simply OVERWHELMED. They have had to hire thousands of employees just to handle short sales. Imagine this, you're a bank and you have SO MANY people coming to you asking to pay of their loan for LESS THAN IS OWED, and you've got to HIRE people just to handle this. The average "short sale negotiator" has 250 files on their desk (that's 250 properties), and they are hired by the banks out of high school, in many cases. Very few of them have higher education and most have no real estate experience.
This means the house you're trying to buy (in a short sale) -- or seller is trying to sell, is just a line item, held by an employee with hundreds of other houses all over the nation......and people WONDER why they take so long.
Let's add yet another reason short sales are wrought with delays. All the documents from the Seller (finances, hardship letters, etc.) are uploaded to a computer 'system' specially for short sales the Seller's bank has created.
Now, the seller's agent uploads 100's of pages of Seller docs. Once the docs are "uploaded into the system", the bank says we must wait for a response. They usually say "it takes 48 hours to hit our system". What? I say, go stand by the fax machine! Apparently, there is no fax machine, but a large cyber fax receiving thousands and thousands of short sale requests from all over the country.
This delay happens EVERY TIME documents are uploaded. Often, they receive the docs after 48 to 72 hours, and tell us, we only received 90 of the 98 pages.
Time to UPLOAD again, and wait again! Seriously. A book could be written about the incredible inefficiency in this system, but remember, the bank is NOT a party to this real estate transaction (legally, or on paper), and they are simply being asked to receive less money than is owed to them on this loan in order to release their lien. The Seller's bank/lender is under no obligation to participate. If the Seller doesn't pay his mortgage, the bank can simply foreclose on the property. The bank is doing the seller "a favor", so to speak in granting a short sale, IF they do!
Remember, that short sale "negotiator" will likely never step foot in the state your house is in!? It is simply a file on their desk, along with hundreds of others.
Short Sale pricing and Short Sale negotiators
The biggest difference in dealing with a short sale and a traditional sale is with a traditional sale, the moment the buyer AND seller sign the Purchase & Sale Agreement, you (the buyer) are buying that house, so long as you can qualify for the loan. In other words, the seller cannot back out of the deal!
With a short sale, you’ll sign several addendums and disclosures that clearly state this transaction is dependent on the “3rd party approval”. Third party meaning someone that is not a principal in this transaction, in this case, the leinholder. The lender, although they must approve receiving less on mortgage, is not a party to the transaction. It is an agreement between buyer & seller. Yet, seller doesn’t hold the ability to sell their property for less than is owed. This is where the bank’s approval is necessary.
Three steps in getting a short sale through:
First (& super easy!) - Getting the seller to sign the Purchase & Sale Agreement. Heck, no problem! The seller’s net $$ is the same no matter what - ZERO! They simply want to be done with the property. This is the easy part. Don’t get too excited here (as you CAN in a traditional sale).
Second - Getting the lender(s) to approve the agreed upon purchase price. A little more difficult, but if it’s close to market value, this could take only a few weeks or less. Below we’ll touch on the process in which the lender uses to determine value.
Third - Here is the most time consuming. This is where the lender needs to give written approval of the short sale. This is done by a mysterious person above the short sale negotiator, and often, group of ‘persons’ (investors).
Important to remember, the first two steps are generally fairly easy and happen within a couple of weeks to a month or so, but it’s that third phase that can take months.
To establish a market price, the lender (3rd party) sends out a real estate Broker to do a Broker Price Opinion (BPO). Estate Properties has done several bank requested BPO's. This is similar to an appraisal, and requires indepth research regarding market conditions, neighborhood rental ratios, comparable sales, etc. The lender will decide if they will take the “short amount” after they review the BPO. If they don’t like their ‘net amount’ after sale expenses, they will counter the offer, at which time, the buyer can accept the counter, reject the counter, or attempt to counter the bank.
In countering the bank, your agent will need to justify your price with true comparable sales in the area with that similar price. Estate Properties is often successful in negotiating a lower price than the bank wanted by supplying the comps. It does usually add about 30 days or more to the mix, but all part of the *fun* of a short sale. Patience! :-)
When it comes to short sale attempts and subsequent foreclosures, there are no consistent patterns, as you’re dealing with negotiators that are housed in large call centers, will never ever view the property in person, much less step foot in the state where the property is located.
Remember, in the last four years (2009, 2010, 2011, 2012) there have been over five million REO's in the United States, hence, the lenders are simply overwhelmed! So often, the right hand doesn’t know what the left hand is doing.
Yes, you’re in love with THIS house. Don’t limit your options, continue to look so that you can confirm this is the right house and be able to jump on something better should it arrise.
Getting an approved/accepted offer
Once a Buyer & Seller have their accepted offer (remember, that’s the EZ part!), it is “uploaded” into a computer program that eventually makes it to the “short sale negotiator” on the other end of the computer. Remember, he/she is juggling in excess of 250 files, therefore, has 100's of emails each day regarding 100's of negotiations.
So, let’s assume the Buyer has made it past step one (seller accepted) and even step two (bank said OK to the purchase price), going forward onto step three is the lengthy process.
Sadly, there isn’t really any specific reason for the length of this process other than the shear overwhelmed-ness (is that a word?) of the lenders.
Be sure that your agent gives you a weekly update. When I’m working a short sale, the buyer will get a weekly update from me explaining where the lender is in the process. Often, it’s not much info, but the important thing is making that weekly contact with the lender.
Just to make matters a bit more complicated, the property may go into foreclosure proceedings during your short sale. If the seller stops making their mortgage payments, their lender must proceed with the steps towards foreclosure.
The first step would be notifications "to the world". The lienholder will post a sign on the door of the property, they will notifiy by certified mail all people on title and place notifications in the LEGAL section of the newspaper.
There is usually a 6 month period from the time of the notification until the actual foreclosure takes place.
A short sale 'usually' delays or postpones the foreclosure proceeding. Your agent will keep you up to date on this.
The inspection period
Even though most short sales are sold “as is” just due to the fact the seller has no funds to make any repairs, inspections are still an important part of the process. A major problem could be discovered with the property that would make it a “deal killer” for a buyer, and they can walk at this point.
Also, this report becomes a comprehensive 'punch list' for the Buyer to repair/fix once they own the property. Some findings are minor repairs that, if, left unattended could become major problems. Good information for a buyer.
VERY important that your agent write on your contract that the inspection period BEGINS only at banks written approval. Otherwise, the buyer will need to have their inspection in the early phases of the deal, requiring outlay of several hundred dollars on a property they are not guaranteed they’ll be buying. Protect yourself financially in this manner.
Closing the escrow
One day you get the great news, the short sale is accepted! That usually comes in the form of an email or web based communication.
Then, you usually need to await that final “piece of paper”, the written bank approval on bank letterhead. This document is a necessary piece of paper the escrow company must have in order to close the transaction. The Seller's agent (if they're good), will require the bank waive any deficiency judgements against seller (I always require it for my sellers!). This isn't always reflected on the approval letter. Seller's agent (again....IF they're good!) will return that letter to the seller's bank and request the verbaige to protect the seller of any deficiency. This may add another week or two delay to the transaction. Patience my friend! This is where those who wait reap great benefits.
In a normal sale, the escrow company calls for a payoff statement from all lien holders. The approval letter is the same thing, it’s a short sale “payoff”, so to speak, specifying all the details of disbursement of the Buyer's proceeds to the various banks, closing fees, etc. There is no cost to the Seller, unless their bank asks them to contribute some funds, and in this case, we're back to the negotiating drawing board.
Once the seller and title company have the "ACCURATE" written approval letter on bank letterhead, the buyer quickly performs their inspection and should the Buyer decide the property is right for them “as is”, we move on towards closing.
The lender continues to work the loan process, sending out the appraiser, etc. moving towards closing as a normal sale at this juncture. Time to celebrate!!
Hopefully, this knowledge up front will make the potential delays that one may incur easier to handle. Nothing good in life is easy, and if a short sale property is meant for you and your family, then it WILL happen!
I’m a strong believer in real estate, “If it’s meant to be, it will happen for you!”
Word of caution in buying a short sale
Understand that the process is wrought with "ups & downs" and your agent will be dealiing with a short sale negotiator that is really simply a person in a call center reviewing an onscreen "file".
Here's a recent scenerio of how disconnected the banks are from the actual short sale. I recently closed a waterfront short sale. It took 10 months. A week AFTER the property closed, all funds were disbursed, and the Seller moved out, and Buyer moved in...... The Seller received a notice from the bank telling him his "loan modification" on the house was approved, and providing him with payment coupons!!!!
So, please know that very odd things can and will happen during the short sale process. Most importantly, work with an expert who has had ample experience in closing short sales!
Here's to HAPPY BUYING and successful closings!
For any additional questions regarding the process of purchasing a short sale, please contact Marla via email at firstname.lastname@example.org, text or call 208 676 8933.
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