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Short Sales Q&A | For Buyers

December 12, 2009

Short Sale Questions 

Buyers . . . Reap . . . Create Reward from the Benefit of a Short Sale

Before buying a property marketed in a “short sale” context, consider the following:

Q. How much less should I offer on a property once I learn that the real estate agent has “labeled it to fellow agents” as a possible short sale, even though the bank hasn’t yet classified the property in such a fashion?
A. For the same reason that it most likely is not in the best interest of a lender or the ultimate sales price of a property when it is marketed as being “under duress,” it oftentimes is to the significant benefit of the buyer when a property is being labeled as a potential short sale.

Any offer on any property in any marketplace should be made only after the buyer satisfies the need to thoroughly research what properties are selling for, how long properties are taking to sell, which way prices are trending, and to the degree possible, what pressures to sell might be facing the owner(s) of the property in question.

Along with this approach to a proper pricing/offer strategy, it is recommended that the buyer be as aggressive as possible and anticipate an inevitable negotiating process. To that end, if a property is labeled as a potential short sale that might enjoy a stronger negotiating position, that will be reflected in your offer. At the same time, it is unwise to risk a great sales price (especially when one is seeking the lifestyle benefits of a particular home for sale) by pushing too hard and too unrealistically.

It is recommended that when packaging the offer for a property that is being advertised as representing challenging circumstances, that the buyer make his/her case by understanding the position of the lender regarding a short sale outcome versus foreclosure or bankruptcy. The key is to not appear exploitive, but rather to appear as one who is willing to make a prudent decision, even while most others remain on the sidelines.

Q. Do some real estate agents make it a practice of building in preprogrammed or time-interval-based price reductions, and if so, can I assume that the longer I wait, the greater the discount I will enjoy?
A. Some agents do build in strategic price reductions to come at specific intervals and they see it as their earnest attempt to help their homeowner-client win the race against a foreclosure.

Other agents, however, view this systematic concession as a lazy method that doesn’t require aggressive marketing (which is self serving to the agent who does not want to risk losing a sale before a foreclosure), even if it means contributing to the downward spiral of home values. If possible, buyers should try to determine if a particular real estate agent makes it a practice to systematically include interval-based price reductions when considering how to best “time” their offer, so it coincides with the agent’s willingness to concede to a lower price as a foregone conclusion.

Q. As the contract is subject to third-party approval, who is the seller of the property and with whom am I doing business?
A. You and the agent representing you are doing business first with the home seller and marketing agent regarding your offer, but must realize that ultimately the business decision will be made by the lender(s), although the home seller does not have to agree with the lender’s terms for the short sale approval.

Q. How can I, as a buyer, best determine whether or not the seller of a so-called short sale property significantly overpaid when they purchased the property?
A. Each property-although conveniently considered a comparable to other properties-is truly distinctive, and therefore, all pricing is subjective. Consequently, in order to best understand the relative value of a property and whether or not somebody overpaid or underpaid requires marketplace sophistication and savvy. The necessary marketplace information that is required to make the determination of what a property should have been bought for requires more than Internet-based research and statistics, but a thorough understanding and appreciation of the physical, exterior and interior condition and esthetics of a large number of properties that fall within the same range as the property being considered for purchase. As experienced real estate agents specializing in these types of sales we can help buyers save tens, if not, hundreds of thousands of dollars by assisting them in determining how to best buy property in a financially challenged marketplace.

Q. Since short sale properties are expected to be purchased in as-is condition, given the lack of financial interest of a home seller regarding the outcome of their property, and considering the potential adverse physical effect that these circumstances have on the value of the property, what should my offer include to protect me from any adverse conditions which may be turned up during the inspection process?
A. Any buyer for any property should be willing to pay for all relevant and necessary inspections and appraisals of the property, and have a pre-closing walk-through contingency as part of the sales agreement.

You should consider making any offer subject to the existing lender’s acceptance to include not only a general home inspection contingency, but also, where applicable, satisfactory inspection reports for lead-based paint, natural hazard disclosure, pest/insect report, underground storage tank, septic/sewer inspection, well water and seller (conditions) disclosures. All of these contingencies should be in addition to the typical mortgage, appraisal and title contingencies.

Q. How should a buyer negotiate with a lender on a short sale property when the lender typically is not subject to property condition disclosures and the seller, given their financial situation, may not be a viable party regarding future recourse?
A. Buyers, especially with certain types of homes (e.g., age and condition), should most definitely include disclosure concerns as they prepare and present their offer to the lender and as an overall part of their overall negotiating strategy.

Q. How can I find out about subordinate liens or other claims to the property, and how will this impact my negotiations and the time necessary to close?
A. Ask your agent to have a title search conducted; it will include all the necessary information regarding lien holders. This should guide you regarding the estimated time it will take before a closing might be possible. Further research into the short sale practices of each lien holder, and the institutions they represent, might also reveal their relative willingness to accept lower offers. It is also recommended that the buyer title the property with title insurance, although without a strategy to remove all liens, no closing will be possible.

Q. Please explain what options, other than a short sale, the primary lien holder has with regard to the disposition of this property.
A. The other options include deed in lieu, loan modification, forbearance and foreclosure.

Q. When is a short sale the bank’s better option, with regard to the disposition of the loan on this property?
A. When a lender deems that all other options are either too costly or carry with them a high level of financial uncertainty, the short sale represents closure and finality.

Lenders also often favor short sale resolutions because they are not in the business of, nor do they have expertise regarding, managing or owning properties. Moreover, short sales are typically less expensive for the lender than the foreclosure process.

Q. Where do you see my opportunity to reap a reward in the purchase of a property that is hopeful of a short sale resolution?
A. When your offer represents a quicker, cleaner and clearer financial outcome to the lender than the other options available to them.

Q. Under what circumstances would the bank reject or not consider my offer to purchase a short sale property?
A. The offer will not be accepted when it is considered to be either too low or not in the best interest of the lender. Mortgage preapproval, if possible by the lender, or a full-cash offer can eliminate the lender’s concerns regarding last-minute credit issues. A high loan-to-value ratio will also offer the seller/lender a higher level of comfort, especially if their institution will be the mortgagee for the transaction.

Q. Strategically speaking, what can I do to best ensure the bank’s acceptance of my offer to purchase the property?
A. From the lender’s perspective, the greatest qualities of the short sale resolution are closure and finality. By accepting your offer, even if the price is lower than market value, due to the situation, the lender can close the file and move on. To best ensure a smooth transaction, do not muddy the waters with contingencies and time frames inconsistent with conventional closing times. The lender will likely need to take time to deliberate prior to accepting an offer. Once the offer is accepted, anticipate that the lender will want to close within 30 days. Consider including language in your proposal and contract that provides the lender with the time they need to review the offer and reach a decision. Then include an iron clad means of closing (i.e., paying for the property on your part). When you remove obstacles in any real estate transaction, you pave the way to a smoother closing.

Q. With regard to price, what would you recommend to best ensure that the bank accepts my offer, and at the lowest possible price?
A. By the time you come to realize that a given offer on a given property makes sense for you, either as a personal or as a business investment, you should have completed a significant amount of research. Your research, or the research of your highly skilled and specialized real estate agent, should be able to help you arrive at a point where you have a rationally supportable negotiating range in mind, based upon market conditions, market prices, the investment you’ll be making and the return you are anticipating. We recommend that you consult with your real estate agent on how to best present your pricing rationale within the lender’s context. If you are going to make an offer because it is a good investment in today’s market and your offer is too low, the lender will likely reject the offer so they can gauge your perspective as a prospect.

Share your reasoning with the lender so they can see your perspective as a buyer or as an investor. Creditworthiness notwithstanding, when the lender/seller understands your rationale they will also understand why they should not likely be able to anticipate a better competitive offer. When their other, more ambiguous options are not financially viable (e.g., foreclosure, bankruptcy, deed-in-lieu), and when your offer makes sense, you will have the best opportunity to have your offer accepted at the lowest possible price.

Q. What is the bank’s decision-making process in the consideration of my offer to purchase, and how long should I expect this to take?
A. The decision-making process varies, based on the institution. Here again, a highly skilled real estate agent experienced in this area can offer specific details regarding the details of the process in your situation.

The lender/bank needs a rationale to justify any write-downs/write-offs. This can often be subject to internal lender protocols, and this can add time to the approval process. The lender will need to rely upon appraisals and broker price opinions that they will most likely order themselves. Both can be developed quickly. Some lenders will have a monthly meeting in which they review proposals. If a short sale package/kit is incomplete, expect it to be rejected or returned to you for clarification or review. This can delay your process up to one month or more.

Lenders will generally need to negotiate to obtain releases from secondary lien holders. Anticipate that the time required for this process and subsequent negotiations have the potential to become protracted.

Anticipate that a “simple” title search should be expected to take approximately three to five days.

Remember, each lender has established their own rules for their short sale process, including what percentage of a debt-to-balance (ratio) payoff they will accept. The lender should also be expected to have internal guidelines for how much commission they will pay for real estate brokerage services and for attorney fees.

Q. What is an REO property?
A. The letters “REO,” stand for real estate owned. These are properties owned by a lender, in most cases a bank, and become classified as REO typically after an unsuccessful foreclosure auction when the title to the property reverts back to the lender. Some banks, given the number of properties they now own, have established their own REO departments. In many cases, leading real estate agents have developed relationships to create opportunities for buyers and investors. Buyers/investors can also contact the REO departments of lending institutions to learn about available properties or visit various bank-created websites, which list their bank-owned or REO properties for sale.

Q. In general, would a buyer benefit more from buying a bank-owned (or REO property) or a short sale property?
A. There is no general rule that can, with any degree of certainty, state which category of real estate buying results in a more favorable outcome for a buyer. It is important, however, that buyers understand that lenders are extremely motivated to sell when they own the property (REO). As a buyer, it is also easier to identify the true condition of an REO as the property should be vacant.

Banks do not want to own properties and have a great incentive to not only sell their properties, but will actually offer credits to buyers, in some cases, if the buyer agrees to fix defects or perform renovations on the property.

Short sales offer many advantages as well as evidenced throughout this information; but again, it is very difficult for anyone to categorically assert that either foreclosures or short sales represent the best opportunity for a buyer.

Q. What is the estimated time between the acceptance of my offer and the closing on a short sale?
A. There are no norms with which we can guide you. Each jurisdiction has required time frames for notification of the intent to foreclose and for the various steps in the process. Once again, we recommend that you work with qualified, licensed professionals, including attorneys with local experience in your market, for specific guidance in this are. As a generality, however, it is not uncommon for a lender to consider a short sale proposal for approximately 60 to 120 days and anticipate closing 30 days after they accept your offer.

Q. Is it worth the wait?
A. In many cases, yes, it is worth the wait, but this depends upon each person(s) circumstances.

Q. What is the benefit of buying a short sale property as opposed to buying a conventional property?
A. For the buyer, it is a better or lower price, resulting from a stronger negotiating position; for the seller/lender, it is the opposite.

Q. How do I learn about the relevant local real estate market during the last year or so, and how can I get predictive data regarding estimates of future prices?
A. Contact a real estate agent and ask them to provide all past and present pricing data, absorption rate data (where available) and all other contextually relevant information they can make available to you.

Q. Can I benefit from buying a property that was marketed as a distressed or short sale property, and then turn right around and sell (flip) it for more by removing this stigmatized label?
A. When real estate prices were escalating rapidly, properties were being purchased and refinanced as the market continued to rise. This practice created equity leveraged by credit debt. Fearing a reversal of this trend and the resulting under-collateralized loans that would inevitably follow, the Federal Housing Administration (FHA) implemented “anti-flipping” regulations as a condition of the loan, which, under specific circumstances, require the owner to hold the property for a fixed amount of time prior to selling it once again. As of right now, these regulations have been temporarily waived. Check with qualified counsel for details on how this may or may not affect your investment decisions.

Benefiting from the purchase and subsequent sale of a distressed or short sale property would depend more upon what your purchase price was than on how the property was labeled. However, because the property was “labeled” and viewed by the marketplace as being a “distressed” property, it may have very well led to a much lower price when you bought it. Fully consider the tax implications as well.

Ask your CPA about the $250,000 home sale exclusion. In the case of an owner-occupied residence, under the current IRS regulations, you would have to live in the property for two out of the first five years of ownership to qualify for the $250,000 home sale exclusion. We highly recommend that you consult with qualified licensed professionals prior to making such purchasing or investment decisions.

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