With the recent Foreclosure Freeze, as a result of the “Robo-Signing” scandals, it is anticipated that Short Sales will become increasingly more popular. Much of this is just speculation, as experts are guessing that a bank will have increased incentive to work out a short sale, rather than have to deal with the costly foreclosure process.
A lot of expense is incurred by the bank going through a foreclosure proceeding. It is estimated that it can be as expensive as 40% of the loan value. I believe this to be an extreme example; however, in many cases it can easily grow in excess of $40,000. It’s not as simple as just kicking someone out, and taking the home back to sell it. There are the legal fees, for one. Anyone that’s dealt with an attorney for anything – even a phone call – can understand how quickly this number can grow. However, a foreclosure is considered a “distressed property” for good reason. More often than not, the property is in serious disrepair. In some situations, homeowners have destroyed the interior of the home – going as far as removing the copper plumbing and wiring in order to sell for cash. So, when the bank takes the home back (after incurring the hard costs of the foreclosure process) they have a real estate professional complete a BPO (Broker Price Opinion). This is similar to an appraisal – however, in the case of a foreclosure, an “As-Is” value is given in addition to a Repair Estimate and Future Value (once repairs are completed). The bank then needs to determine what the return is for those repairs, and decide if it’s worth doing. Then, they have the “Marketing Expense” to get the home sold… So, I don’t know if the experts are right here – since it seems like they should have already had enough motivation to work out short sales in lieu of foreclosure. Only time will tell.
If you’re a buyer in the market, and you’re considering submitting an offer on a short sale – be informed before you do! To start with the simplest detail – What is a short sale? A short sale is when the home is sold for less than the payoff balance of the liens against the property. The bank is agreeing to take a lower amount than what’s owed – commonplace today since many properties have come down significantly in value from their peaks of 2006.
The Short Sale Process – A Buyer’s Perspective
1. Submit the Offer
2. Lender orders a BPO/Appraisal
3. Lender reviews offer
4. Negotiator assigned to file
5. Offer is accepted or rejected
Now, some people would attach time frames to these steps – however, nailing down a timeline for a short sale is about as easy as herding cats. So, why purchase a short sale? Well, simply put, you can get a deal if you act quickly, and wait patiently. To get a deal on a short sale, you really need to “Hurry Up and Wait.”
Short sales are not for everyone. Who shouldn’t buy a short sale? What are some considerations every buyer should evaluate with their agent?
What is your motivating factor? Do you need to be in the home by a certain date? If so, as I mentioned before, these are so hard to pinpoint, it’s likely not in your best interest to pursue. You will likely incur some sort of expenses related to the timing of the transaction – such as interim housing, storage fees, etc.
NO GUARANTEE BANK WILL ACCEPT HOME AS SHORT SALE
A little rule of thumb I received from a negotiator is that Fannie Mae (FNMA) – a major investor in the secondary market – will typically accept a $60k loss and 85% of the property value. So, a home that has a payoff of $125k and is currently worth $100k could be had for $85k (85% and $40k loss); however, a $400k valued home that has a mortgage of $450k may or may not be had for $385k – even though it’s about as good as the offer will get. I have come to the conclusion that just because the deal makes sound business sense, it doesn’t mean the bank will accept it.
NOT ALWAYS A BARGAIN – OFTEN AS-IS
Have you ever seen the movie “Money Pit”? That could be what you’re getting into. Often times, the bank will not permit repairs or repair credits as part of the offer. Again, just because it makes business sense to the rest of us – you’re dealing with the red tape of a large institution, and while a $200k purchase may be the largest of your lifetime, it means nothing to a bank.
LENDER WILL REJECT LOW OFFERS AND/OR CHANGE CONDITIONS
The lender – from a desk across the country – believes they know more about the property value than anyone else. They’re not familiar with individual markets and the economic factors within that specific marketplace, and they can deem an offer too low… “just because”. Additionally, they can change the conditions of the sale. For example, a buyer that needs 6% seller’s assistance to close on the property will likely see that changed to 3% – because they “just don’t allow for 6%”. However, they will typically allow you to reduce the purchase price by 3% – in other words, the end doesn’t justify the means, the means justify the end… confused? If so, then you’re getting it…
INCREASE TO CLOSING COSTS
Banks will not typically pay transfer tax (1%), notary fees, overnight fees, or wire fees. That doesn’t mean they just go away… it means the buyer has to pay them. This is something that won’t be known until the bank reviews the file.
Buying a home can be an overwhelming process – no matter how many times you’ve done it. Loss of control in this situation, combined with an “unmotivated seller” can just be too much for some to take. Add to this that you’re going to need to come up with a little more money out of pocket, it just isn’t for everyone.
The biggest thing is the seller – they can get nothing from a short sale. So, there is no motivation on their end to make this happen, other than being somewhat socially responsible for their debt, and trying to do things the right way…
I would recommend that a buyer of a short sale be:
Have Financing Lined Up
Submit an offer with no contingencies
Has verified that all liens on the property are being disclosed
Finally, be prepared for out of pocket expenses to make the home “livable” for your family. Stay away from high risk loan programs, and if paying cash, make sure you have the proof of funds. Consider the resale value of the property – emotions can kill profit quickly. Have an exit strategy to avoid being financially burdened by this from the start. Always get a home inspection. This could be the best $300-$500 you will spend. Even if the contract isn’t contingent on a home inspection, that doesn’t mean you can’t conduct one.