Handling a Short Sale
Things to watch for when making a short sale offer
(extremely boring reading unless you’re actually considering buying a home!)
What is a short sale?
A short sale occurs anytime a home seller owes more on the house than they’re able to sell it for and they are unable (or unwilling) to come up with the difference. Key Factor: in order to get the deal done, a negotiation needs to occur with the seller’s bank rather than just with the seller.
Who handles the negotiation?
The negotiation occurs between the seller and the lender. The seller often uses the services of their real estate agent or another third party to handle some portion of the negotiations for them. Key Factor: Since the buyer is uninvolved in the negotiations, they are at the mercy of the listing agent’s diligence in handling the negotiations. It is important to get an idea how comfortable the listing agent is with handling short sale transactions, and how familiar they are with the process.
Are there degrees of complexity to this type of transaction?
Yes. Many factors can contribute to the complexity of the negotiations. This largely depends on the history of the property and the financial condition of the seller. The easiest type of short sale transactions are those where there is just one loan and the home was owner occupied. The timeline can be extended if there are multiple loans on the property, many people have two home loans on one house. With two loans (referred to as a “first” and a “second” loan) it is not unusual for the second loan to settle for as little as 10% of the loan amount, but it all depends on how the bank evaluates the value, the second won’t settle for that little if the value of the property is such that a higher amount is justified.
Super complex short sales can occur if the seller is in extreme financial hardship. For example if there are substantial unpaid credit card bills, these amounts can be attached to the house as additional liens. Each lien holder in this case needs to be dealt with. There can also be judgments from attorneys and other liens that need to be negotiated. If the value of the property is such that more than a few of these liens cannot be paid in full, closing such a transaction through a short sale can be very difficult. There is a good chance this property will one day become bank owned, and all these additional liens will no longer be attached to the property.
Here are some basic categories of short sales:
a. First position, purchase money loan – This is the ideal situation for a seller, these are normally non-recourse loans in Oregon, so the bank cannot pursue the borrower for a deficiency. This is more complicated if there is mortgage insurance, sometimes the mortgage insurance company isn’t very willing to take the loss, and they can be more difficult to work with.
b. Second loans, especially equity lines of credit – Often the bank feels as though you spent the money on consumer goods, even if this isn’t true. These can be more challenging to negotiate a full satisfaction. The difference between good negotiating and accepting the bank’s settlement can really impact the sellers future if they have this type of loan.
c. Investment property loans – Rents have dropped in many areas, some investors who are over-encumbered on their rental properties have fallen behind on the loan payments. Investment property loans are recourse loans. These can be challenging loans to negotiate, depending on the banks involved, and it is critical to have experts working on your behalf.
What is an expected timeline
This varies from bank to bank, but a typical timeline would be 90 -120 days to bank approval. Sometimes, the bank says it will go fast and it doesn’t take too long, maybe 60 days. Other times, the bank says it will take a long time and they do it quickly. Still other times, the bank says it will take forever and it does take forever. If you want to get a house through the short sale process you need to be patient.
Occasionally I see “approved” short sale, what is that?
It means the bank has approved a price at which a sale can close quickly. Your agent will need to check with the listing agent to find out just what that price is, it may not be the list price. This is becoming less common.
I need to sell my house before I can get qualified for a loan to purchase, what should I do?
You should consider selling your house first, especially if you’re open to buying a short sale property. Even if you choose a home in which the seller has equity, you’ll be taken more seriously if you’ve sold your current home.
Things to Watch For
Real Estate changes rapidly, here are a few things to watch out for in today’s market
1. Overpromising agents – Are they really going to do what they say?
2. Low cash offers – This may sound like a good strategy, but for nearly all banks the bottom line is really what matters. Approved financing with a minimal down payment is nearly always just as good as a cash offer. Many buyers believe they may be able to get an extreme discount with a cash offer, but this is rarely the case.
3. Non-standard forms – These need to be reviewed by an attorney. Standard real estate forms have been agonized over by many attorneys, it is best to stay with that when possible.
4. Conflicts of interest – Does the listing agent have an affiliation with the short sale negotiator? You need someone who is looking out for you, not someone whose negotiations will lead to unexpected negative consequences down the road.
5. Your agent is affiliated with a mainstream real estate company – With this, your agent is much more likely to be informed on the latest changes in the distressed property market and will have the resources to deal with the situation should something unforeseen arise. Also, your agent is more likely to have connections with many other successful, full time agents, increasing the likelihood your home will sell in a timely manner. This is important because your agent will be able to better troubleshoot challenging situations and decide on the best solution minimizing delays.
The Next Step
You have some good information, now what?
The best next step is to meet with me and put together a plan. First, I will set you up with a good lender. The lender will work with you to determine a budget for your home purchase and you’ll come away with a price range within which you can look.
Next, sit down with your agent and decide what homes you like best within that price range. Decide on criteria for your next house so not only will you probably do your own online looking, but your agent can as well. During the meeting you can look to see how many of the homes you’re interested in are short sales, bank owned, or auction houses, and you can do some quick research together to decide what the situation is with each one of them. That way when you actually go look at homes you can weigh the potential troubles of each home with how much you like the homes, and decide which properties to make offers on after taking all these factors into account.
--Ward Spears
(503) 522-8269
© Copyright 2011 Ward Spears | Principal Broker | Re/Max Equity Group
