Short Sale Advice

Buyers pursue short sales to get great deals on distressed properties. So when you see a low price listed for a home that you think is too low for the neighborhood, before you jump on that price, ask your agent to call the listing agent to find out if the home is a short sale.

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 think, and very few if any can close in 30 days or less.

Many of my Delaware County PA  home buyers have waited 4 to 6 months to close on a short sale, a lot of times much longer.

What is the definition of  a Short Sale?

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

Be aware that the seller need not be in default,  to have stopped making his  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 a short sale home. 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. It is extremely important that a buyer obtain a home inspection.

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 costs 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.
• Pest inspections 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.

8 ) 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.

Finding Short Sale Listings

Most short sales are listed by real estate agents. You will find these listings on local web sites and in MLS feeds. Some lenders have complained about advertising that identifies the home as a short sale, because the lenders feel it puts them at a disadvantage when it comes to home pricing. They are right. A buyer generally offers less when it’s advertised as a short sale.

If you have access to search terms, first look where the term short sale appears. It might be under “status modifier” or it might be contained in the marketing comments. Choose that field as your search term.

Read the listing carefully. Agents slip in words that identify the listing as a short sale. Look for the following terms:
Subject to bank approval.
Pre-foreclosure
Notice of Default
Give the bank time to respond.
Pre-approved by bank.
Headed for auction

Above all, hire an agent who is well versed in handling short sales and can advise you of the procedures. If you have legal questions, please ask a lawyer for advice and guidance.

Here are some of the common mistakes sellers make with short sales:

Short Sale Mistake #1: Priced Wrong.  Short sale prices remind me of the story of Goldilocks and the Three Bears. Some are too high, some are too low and some are priced just right. Short sales that sell are priced appropriately. The price should be attractive to the following parties:
The Short Sale Bank
The Buyer
The Buyer’s Agent
The Seller
The Buyer’s Lender

Appealing to all five of these entities may seem impossible to do, but it is possible. There is an art to pricing a short sale. I can honestly report that all my short listings in Sacramento — in our soft market — receive multiple offers, and they close.

Short Sale Mistake #2: Inexperienced Listing Agent.  Particularly in falling markets, agents who have little business are attracted to short sales like moths to a flame. Sellers should find out how many short sales a proposed short sale listing agent has actually closed apart from the number of short sales the agent has listed.

If many of the agent’s listings have been on the market for more than 90 days without an offer, something is seriously wrong. Agents who succeed in this business have a minimum of two years of experience negotiating with short sale banks.

Short Sale Mistake #3: Bad Marketing.  Some agents believe pricing alone will sell a short sale, and they persuade sellers to place a ridiculous price tag on the home. Then the agent purposely refuses to adequately market the home. Not only does the price need to be reasonable, but the home deserves the same type of treatment as any other listing.

Short sales should be exposed to the widest possible pool of buyers, which means plastering that listing on all the major web sites, and includes doing direct mail marketing and networking.

Short Sale Mistake #4: Showing Restrictions.  Buyer’s agents, bless their overworked and tired hearts, will sometimes take the path of least resistance. If the listing requires an appointment, a buyer’s agent might pass over that home in favor of a listing without appointment restrictions.

When a buyer’s agent calls to announce a showing, the response should be, “Come on over. We’re ready!” Short sale listings that restrict activity such as no showings on Sunday, for example, may never get shown at all.

Short Sale Mistake #5: No Photographs.  Submitting a listing to MLS without multiple photographs — or worse, no photograph at all — is like slamming the door in the face of buyers. Buyers aren’t likely to return. A listing with missing photographs sends messages that say nobody cares if the home sells and there’s probably something wrong with it.

On some web sites such as Realtor.com, listings with the most photographs are ranked higher, and those without drop to the bottom.

Short Sale Mistake #6: Poor Property Condition.  Short sale homes benefit greatly from home staging. Sellers need to prepare the home for sale and keep it in pristine condition. If beds are unmade, toys are scattered about and the kitchen sink is filled with dishes, buyers can’t see past the mess. Moreover, some buyers are worried that if the home is in disarray during a showing, the sellers may trash it upon vacating.

Short Sale Mistake #7: Uncooperative Sellers.  Sellers need to submit required documentation to the bank in a timely manner. If the package is incomplete, the bank won’t process the file, and that will delay approval.  If a seller refuses to submit personal financial information and a reasonable hardship letter, the seller will not qualify for a short sale.

If you’re looking to buy or sell “short sale” real estate in Broomall, Media and surrounding areas in Pennsylvania and in New Castle County Delaware,  Contact Anthony DiDonato Call 610-659-3999 {Smart Phones Click to Call}