It is common here…and becoming more common in other states. What? Short sales.
So first, let me start by stating the common definition of a “short sale”. The situation is this. Someone (we will call them the “owner”) purchased a home and financed it through a bank (we will call them the “lender”). Or, another possibility is that the owners took out a home equity line of credit (referred to as a HELOC) The sellers likely lived there for a time and thought all was well. Until our market went SOUTH and they either lost a job…took a decrease in pay…or had some other life altering situation that caused them to have to move.
At this point the owner realizes they have to sell their home. This is an emotional time for them. Then…they call their favorite Realtor in to talk about the sale. This is the point that it becomes clear just how dire their situation really had become. They owe considerably more than the house is worth. The answer? Ask the bank to take less than what is owed and allow the sale. This is now a “short sale listing”.
Anyone who has been through this process can tell you the potential pitfalls. For one…the bank may NOT approve the short sale. If you have more than one loan the second lien holder may not agree to release the lien. If you are past due on your HOA (Home Owners Association) dues…it can be a real issue getting them to release the lien…and the banks (lenders) do not typically want to payoff these types of liens to allow the sale.
Any good listing agent is going to INSIST that the sellers go to an attorney AND a tax advisor PRIOR to listing their home to discuss THEIR SPECIFIC SITUATION! This is one step you do NOT want to skip. Every deal is different and every seller has potential future risk based on the decisions they make on how to get out of their home. Short sale or foreclosure? That is NOT a question for your Realtor. It is a LEGAL question for your attorney. Will you have to pay taxes on the deficiency? Again…not a question for your Realtor. Ask your CPA or other tax advisor. (I have a list of attorneys and tax advisors if you need a referral)
So keep in mind the lender in first position is the one we have to work with to get the transaction to proceed. They agree to take less than what they are owed…and they MAY agree to give part of their proceeds from the sale to the “junior” lien holders. They also absorb all of the seller’s costs such as escrow fees, recording fees and Realtor’s service fees (commissions). Other fees that may typically be a seller’s fee, such as title insurance, they may or may not agree to pay.
Which brings up another point. How does this logistically work? Well…the owner lists the home with an EXPERIENCED short sale agent (hopefully experienced!)…and obtains an offer to purchase. Then the offer is submitted to the lien holder(s) for approval. Sounds simple…right. NOT! I like to refer to it as “reverse qualifying”. The seller (most often) has to prove to the bank that they are no longer able to afford the payment to remain in the home. The bank wants to be advised of the “hardship” such as job loss, income reduction, divorce or job relocation. Just because you owe more than your house is worth is not usually enough of a reason for the bank to allow a short sale. Now…having said that…I have seen banks accept short sale offers when the sellers had assets. But as of this writing, that is the exception…not the rule. (edited August 2011…I am seeing MANY more banks accept short sales for people who DO NOT HAVE a “hardship”. If the numbers make sense to the bank they are accepting short payoffs, in some cases, even if the seller CAN afford to stay in the home. Almost always worth a try!)
So the bank gets the offer and reviews it. Again. Sounds simple…and NOT! 😉 They can take FOREVER. The longest one I have personally been involved with I was representing the buyer and it took 14 months! Patient guy huh! 🙂
OK…back on track…the bank reviews the offer and typically orders a BPO (Broker Price Opinion). They then decide what they will accept and what THEY will pay to the “junior” lien holders. For example, the first lien holder may offer the second $3000 from their proceeds to agree to sign off and let the deal close. AND they may have to offer the HOA a payoff as well. But it has been my experience that the do not want to pay the HOA anything at all. So what does this mean? The sellers and buyers have to come up with a solution to get the HOA fees paid. This can kill the deal…BUT if it is a really good buy for the potential buyers…they might want to participate in paying the past due fees to make the transaction close so they can get into the home they want.
When the first lien holder has reviewed all of the documentation and the BPO, they then indicate if they will accept the offer…or counter with a sales price they will accept. This is presented to the buyers and sellers and hopefully all can come to an agreement. At this point the lender issues an Approval Letter.
This is where is can get interesting. The lenders have become VERY sneaky about slipping things into the approval letters. One of the most common occurrences is that they attempt to get the sellers to sign a personal promissory note for the deficiency. I suggest that if the sellers have ANY questions about the wording of the approval letter(s) they have them reviewed by the attorney they originally consulted with.
OK. So let’s assume we have made it through the entire process and we have a deal. This is the time it really just turns into a typical transaction. Buyer’s do their inspections (with the expectation that no repairs will be made) and the buyer’s new lender starts the process of originating their new loan.
But…what if there are property conditions that the NEW lender will not accept in order to finance…like termites for example? Well…back to the negotiations with the seller’s lender. Sometimes they will agree to assist in getting things repaired…and sometimes they will not.
It’s a good idea to make sure your Realtor has a pretty good idea what kind of property conditions cause issues and they can be addressed prior to starting to show the home to avoid last minute problems.
As far as the buyer PITFALLS are concerned…they biggest one is the wait. And even worse…the wait only to find out the bank will not take the offer and having to start the process all over again. I have found that most buyers will live through the process once….but if it does not happen they choose to NOT look at short sales when they go back to shopping. The bad part for the buyers and the buyer’s agent is that they have NO control over anything. All they can do is wait and hope the listing agent is doing their job. Which means calling the lender OFTEN and negotiating HARD to get an approval everyone can live with.
Another buyer potential PITFALL is that the seller is obligated to make NO repairs…so the home transfers “as-is”. The buyer is allowed to have inspections to discover condition…but most often (and per the short sale and as-is addendums which are part of the contract) there will be no repairs made by the seller.
Ok…that was the LONG part of this writing…the Pitfalls…but….
For the seller it is a good chance to damage their credit LESS than if they let the bank foreclose on their home. They will be able to purchase a home again more quickly and do less overall damage to their credit.
Another “perk” for the sellers is that this process can take A LONG TIME. If they choose to, they can remain in the home during the process.
And likely the biggest PERK is for the buyer. We have seen some super deals in the way of short sales. If the buyers are patient and can wait out the process…they may end up with a great house at a great price!
So in conclusion, as the old saying goes, ‘It is what it is”! If you are a buyer in this market and you are in no rush…then purchasing a short sale may just be the place to get your DREAM HOME at a price you can afford!
If you are looking for a GREAT agent to help with your real estate needs please e-mail me atAdele@GreaterPhoenixHomes.com or give me a call at 602-504-3898 or 888-897-7821 x 114. Plus, I have a GREAT search tool on my web site that gives you the ability to search the entire MLS…just like agents do. Very COOL! Go to Metro Phoenix Homes and check it out! YOU can create and save as many searches as you would like.