BEWARE of SHORT SALES!
by Rick Fortson

ATTENTION: IF you are serious about purchasing a home in this market, you absolutely MUST read this!

Everyone wants a "DEAL". Who doesn't? We are in a "deal driven market" today. You cannot avoid all the Short Sales out there! They're EVERYWHERE! They can be tempting, because the prices are so LOW...BUT who came up with that price? It was a desperate seller or an inexperienced Realtor! What's more is, listing agents have learned NOT to mention the home being a Short Sale in the Remarks, so you cannot always tell IF they are or not? Most of the time, they hide that fact in the hidden "agent remarks" section that only we Realtors can see.

PLEASE NOTE: This is the most important letter I will ever send you!

People are constantly asking me the difference between "Bank Owned Foreclosure" properties and "Short Sale" properties, so I thought I would explain them EACH. Below are just some of the differences between the two. Bank OWNED Foreclosure properties COULD be a good deal, depending on several things? However, Short Sales are almost ALWAYS a nightmare, and 90% of them NEVER close, which is no deal at all!

SHORT SALE:  To put it simply, this is when the mortgage amount exceeds the home's Fair Market Value. In other words, the seller owes more than a buyer will pay for the home. Just like it sounds, the owner is "short" the amount of money that they need to pay off in full any mortgages, tax liens, construction trades, etc on the home. The owner is either already in default on the loan, or knows they soon will be, and instead of "walking away" from the house and facing a foreclosure on their credit rating for 7 years, they fill out some paperwork, and hire an attorney to go to the mortgage holder(s) and try to negotiate the amount owed. Banks very rarely agree to settle for less than the original amount owed. In fact, according to recent sources, nearly 90% never close, due to various reasons, and end up in Foreclosure anyway.  It seems like banks only “pretend” to want to negotiate a short sale with a seller. What they really want to do is take the house back in Foreclosure, because they will loose less money. One rule of thumb is, the BIGGER the bank holding the bad loan, the longer it will take to hear from them.  Taking from 3-9 months just for the bank to respond to your offer is not uncommon. It is impossible to plan your loan, lock your low interest rate, moving date, etc because it is totally out of your control, and you are dependant on unknowable variables. There are SO many variables and factors involved, that it makes each Short Sale different from the others.

Some of the variables include, but are not limited to:
1) What Bank is holding the seller’s 1^st mortgage that’s in default? (The larger the bank, the slower the process)
2) How much does the seller in default owe (the bigger the loss he wants the bank to consider, the longer it will take)
3) When did they start the process vs. listing the home? (When they applied for help vs when you saw the home matters)
4) Has the 1^st mortgage lean holder ordered a BPO yet? (Broker Price Opinion) If the Bank has set the price, it may take less time than if a Realtor or Home Owner came up with the listing price.
5) Has the bank accepted a settlement price yet with the homeowner? (This is called an Approved Short Sale, and is by FAR the better of the two)
6) Who came up with the listing price? (most of the time, if it settles at all (90% don’t) the bank ends up wanting a higher price than the agent and owner have it listed for! No one likes the idea of paying over list price)
7) Will it pass your lender’s Appraisal Inspection (separate from Home Inspection) This has to do with condition of the property, not it's Fair Market Value.
8) Does the LISTING agent have experience in dealing with Short Sales?
9) Is the SELLER (homeowner) being represented by an Attorney that has Experience in Short Sales?
10) Does the Bank (seller #2) holding the bad loan have an Attorney that has Short Sale Experience?
11) How many Lien Holders are on the property? (The more lien holders there are, the longer the process will take)
12) Can they provide Clear Title, or are you at future risk of Mechanic Lien Holders knocking on your door? (this includes paying off the 1^st mortgage, and 2^nd mortgages, lines of credit, tax liens, mechanics leans, etc, etc.
13) Will the listing agent work with just one offer at a time? Some agents will submit just the FIRST contract that is written to the bank, and treat all other following offers as “back up” offers. However, some agents let the offer pile up, and submits them all, causing a multiple offer situation. This is never good for a buyer.

One of the MANY problems and pitfalls with Short Sales, is the banks do not have a process in place for dealing with the millions of short sales around the country.

CON: Just like Bank Owned Foreclosed homes, they usually require repairs, and because they too are ALWAYS sold in "AS-IS" condition, the seller (bank) will not make any necessary repairs that may be required with the buyer's Lender. Even if the buyers are willing to do the work themselves, the condition of the property may not pass an Appraisal Inspection, which is separate from a buyer's home inspection. If a buyer's only mortgage option is an FHA loan, then their offer will most likely NOT be considered, because the bank owner knows it will not pass the FHA appraisal inspection. Conventional mortgage appraiser may not pass either, but are more lenient on the appraisal and condition of the property.

CON: The worst aspect of buying a Pre-Foreclosure/Short Sale is the lack of response from the Bank and overall POOR communication! Typically there is ZERO response for the first 2-3 months after contract is agreed upon with the home owner! An offer made will sit on a desk for weeks and months, while (some) banks wait for multiple offers to be made and reviewed. Obviously, a buyer should avoid multiple offers at ALL COSTS, because they are no longer trying to negotiate the best price, but rather trying to out bid one or more buyers. Contracts are agreed on with the homeowner, and are subject to “3^rd party bank approval”. So it does not matter if you and the seller agree to a price, it is subject to change or rejection at a future date (emphasis on future).

I had a case in 2008 where my clients made an offer on a Short Sale home, which already had one standing offer waiting to be considered. Several other offers were made prior to the bank reviewing any of the offers. Although it turned out that they remained the highest offer and ultimately got the house, it took many months, and their interest rate went up 5/8 of a point while waiting, which in terms of the monthly payment amount, was equal to them having paid $25,000 MORE for the home than if they could have locked their rate when the offer was made. Your lender will NOT lock your interest rate UNTIL the BANK signs the contract, without exception. So in that respect, it becomes a high-risk gamble that rates won't go up during the months you wait for the bank to first verbally accept the contract, and then later sign the contract. Even after the bank gives a "verbal acceptance" it could take weeks for them to actually sign the offer, all the while you are unable to lock your interest rate, and in this economy, there is a fear of raising rates to offset inflation.

CON: Because the average time between offer and the closing date could be anywhere from 3-6+ months (some longer), a buyer needing to close quicker cannot consider waiting. In my example above, my clients later admitted that while they had the time to wait, and that they thought they could be patient, it was an experience they would never repeat! (I can have them call you if you like?)

CON: Some Short Sales require Earnest money deposits, and some do not.  If they DO require earnest money (usually certified checks) it could tie up your funds, which could prevent the buyer from acting quickly to secure another property that may come along while they wait.

CON: Again, Banks do not typically make counter offers. They either accept or reject the offer. The buyer must therefore re-submit a new offer to be considered, thus starting the waiting process all over again! This increases the risk of another offer being made while you wait.

CON: In the unlikely event that a bank will consider FHA financing, the buyer needs to factor in at least 5% to 10% of the total sale price for any repairs needed to the home, which obviously eats into potential profits.

CON: When Realtors list a home that is a Short Sale, they do NOT know what the bank settlement amount will be yet, and therefore often put a listing price on the home that is LESS than the bank will accept. In other words, the bank may settle with the owner in default for $270,000 when the home is only listed at $250,000. So for example, when a home listed at $249,900 the bank may actually want MORE than listing price. Agents also price them low in the MLS in order to attract multiple offers, with the hope that 1 out of 20 contracts may work out? Another pricing strategy agents use is to temporarily over-price the home for say, $349,000. They know it may take months for the bank to respond, because they are very early in the bank settlement process, so they start the price HIGH, and then start drastically reducing the price, so that in a matter of weeks, it appears to have been reduced HUGE amounts, when in reality, it should have started at the lower price. This creates a false bargain appearance.

BANK OWNED FORECLOSURES: Just like they sound, the property is already taken back from the mortgage holder due to a default in loan payments. After a home owner stops making payments, the process usually takes about 6-9 months of litigation, at which time the property declines in value due to lack of maintenance and/or malicious vandalism from the owner.

PRO: Banks usually respond to an offer within a few business days (not months), but only during business hours, and never on a weekend or holiday. In past stronger seller markets, it could sometimes mean that if you wrote an offer on a Saturday, there could be more offers by the time the bank saw yours during the next business week.

PRO: Banks are not trying to make a profit, they are trying to cut their looses. Therefore, one can be fairly confident that when a bank gives its final offer, it truly is their bottom line. It's a non-emotional file in a drawer to them.

PRO: Homes are sold below market value in an attempt to reduce financial losses, encourage offers and reduce marketing time.

CON: Foreclosed homes usually require repairs, and because they are ALWAYS sold "AS-IS", the seller (bank) will not make any necessary repairs that may be required with the buyer's FHA mortgage. Even if the buyers are willing to do the work themselves, the condition of the property may not pass an FHA Appraisal Inspection, which is separate from a buyer's home inspection. Therefore, if a buyer's only mortgage option is to go FHA, then their offer will most likely NOT be considered, because the bank owner knows it will not pass the FHA appraisal inspection.

CON: Banks typically do not make a counter offer. They either accept or reject the offer. The buyer must therefore re-submit a new offer to be considered, thus starting the waiting process all over again! This increases the risk of other offers being made while the buyer waits.

THE BOTTOM LINE: Bank owned Foreclosures are ALWAYS the better of the two, but again IF FHA is the buyer's ONLY mortgage option, then it is very unlikely for FHA offer to be accepted due to needed repairs and as-is condition explained above.

However, due to the over-supply of homes, and all the foreclosure and short sales on the market, existing homeowners are forced to compete with the low priced foreclosures. So there is a large number of truly good deals WITHOUT all the risks and headaches involved with Foreclosure and Short Sale properties!!!

I hope this has helped you start to understand Short Sales and Foreclosures? Please call me today with further questions?