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SHORT SALE SPECIALIST
Brenda Ricchi, EPro
Realtor
WHY SHOULD I BUY A SHORT SALE AND WHAT’S INVOLVED IN DOING IT?
As a Buyer in today’s Real Estate Market you may have opportunity to consider purchase of a property “Subject to Third Party (Lender) Approval”—a “Short Sale.” Or you may be a Realtor representing a Buyer in such a transaction.
In your search for a home or rental property, online and out in the neighborhoods, you’ve no doubt noticed that many properties, perhaps even a majority of all “Active Listings,”are “Distress Sales.”
There are completed foreclosures, called “REOs” (Real Estate Owned by Lenders) and Short Sales. These properties are “liquidations,” discount-priced for rapid sale usually within 30 days. They’re likely to therefore be the most attractively-priced properties for sale in their neighborhoods.
The speculative bubble that grew from easy money, loose lending practices, overbuilding, and years of rampant speculation drove home prices to unsustainably high levels.
These distress sales result from the ensuing price collapse attendant to the bursting of that bubble. This “wipeouts” of leveraged equity is causing homeowners, lenders, and mortgage insurers who completed transactions during the height of the bubble to suffer billions of dollars in losses as the distressed goods are sold off at distress prices to clear inventory.
The decline in residential real estate prices in the bust has caused many homeowners’ equity to turn negative. They’re “upside down.” They owe more on their mortgages than their properties would fetch at sale.
Where a homeowner’s capacity to pay the mortgage has been compromised by death, disability, job loss, divorce, transfer or other hardship, the homeowner is forced to sell, or face foreclosure.
A sale in advance of foreclosure in which more is owed than the proceeds from sale is called a “short sale,” in that the lender receives less than full payment of the amount owed.
As in a foreclosure, the lender bears the majority of the financial loss.
Some homeowners are proactively de-leveraging their indebtedness and taking any loss themselves. This type of negative equity sale is called a “Short Payoff.”
It is all simply a natural consequence of an overheated market. But the magnitude of loss and financial chaos ensuing is colossal as attested by the size of the “bailout” or rescue plans afoot on a national level. Recognition of the negative equity and matching indebtedness to fair market value is part of what’s needed to rationalize the credit and housing markets.
Foreclosure is a disaster for everyone, homeowner and lender alike, and a major contributor process to the losses being taken by lenders.
Foreclosed properties, REOs—have often become neglected, suffered damage or vandalism, or been stripped of appliances. They may be dirty, dilapidated or in disrepair following upon the financial and psychological ruination suffered through by the former homeowner.
On average, the net financial loss suffered by the lender in going all the way through foreclosure is significantly greater than it would be were the home sold prior to foreclosure by the homeowner. There is no sense going to foreclosure when the property could be sold.
So the term “Short Sale” is used to describe a sale where the debt owing against a property combined with the costs of its sale exceeds the property’s market value. Upon sale, the lender accepts net proceeds of sale as full and final settlement of the mortgage, and releases its lien. The amount of debt in excess of proceeds from sale is called the “Deficiency.”
In a Short Payoff, the lender accepts proceeds of sale, and releases its lien, but the Homeowner pays some or all of the Deficiency under lenient terms and goes forward with a greatly reduced and modified debt.
As a purchaser of a short sale, you stand to acquire a property that most likely is in better overall condition than a REO, at a very good price.
The REO has already been through the months-long legal process through which the lender dispossesses the former owner / borrower of its collateral—the property.
The short sale has not yet been through the detailed process in which the lender approves the release of its lien on the collateral for its loan and accepts the proceeds of your purchase as full settlement for the property. The lender is dealing separately with its borrower, either forgiving the “deficiency” in whole or in part, or taking back a note for it.
Its actions involve consideration of the underlying hardship, if any. The lender examines the income and expenses of the borrower, his assets and liabilities, his tax position—his ability or inability to repay the deficiency.
The “Loss Mitigation Department” personnel making this examination report to the lender’s management, its insurers, its regulators, and its investors, all of whom have a stake in the outcome of the “negotiation.”
Ultimately, the lender makes a business judgment about whether the potential loss is recoverable in whole or part, or not. It then approves the short sale and issues an approval letter directing the specifics agreed to for settlement of the transaction.
Compared to the process of foreclosure, this process is less cumbersome and time-consuming. If you’re purchasing a REO property, the legal process is already completed. You may proceed to settlement quickly.
But with a short sale, the relatively less complex process of negotiating the specific short sale begins with your contract offer! You may only proceed to settlement upon completion of the negotiation.
Negotiating the transaction takes from sixty (60) to one hundred twenty (120) days. Some transactions take less time. Others take more. But that period may serve as a guideline.
Realtors do not handle the process of foreclosure since that precedes their listing of a REO for sale as a Listing Agent, or their representation of a Buyer in purchase of a REO. So Agents are unfamiliar with the tedious process of reaching REO status. Naturally, they wish to simply purchase or sell a property, without the associated legal headaches.
Most Realtors justifiably then regard short sales as highly problematic in that the headaches and delays involved in unwinding the seller’s loan come with the transaction. As Agents, or Buyers, we would naturally prefer a speedier and less cumbersome transaction.
However, as a buyer, or Buyers Agent, you MUST be prepared to await the process in a short sale transaction. If you cannot wait through this period, then a short sale is not for you! Another approach may be to check short sales under contract in the MLS. Given the short amount of patience most buyers have, you may be able to step in as a "backup contract" and settle on a property shortly thereafter, a previous buyer having done the "waiting" for you!
Your reward is that your property will be acquired at a price competitive with what you’d pay for a REO in the same neighborhood, but most likely your new home will be in much better condition!
Short sales are priced by a knowledgeable Listing Agent at “Fair Market Value” for liquidation within 30 days. This is done by checking comparable completed sales (Sold's”) that have settled in the preceding 90-180 days. In a declining market, the Lister will price the property just below the relative price level of these recent sales. If current “Active” comparable's are lower than the solds, the price discount may be greater.
The Buyers Agent should be highly aware of this pricing method. He or she can easily check it. A Listing Agent may price in around a 3% cushion for negotiation. But generally, the Buyer should NOT make a lowball offer on a properly-priced short sale. The numbers won’t work, and the offer will be rejected.
The reason that the numbers will not work on a low offer is that the lender expects that the sale will take place at “Fair Market Value.” It wants to receive what the market will bear for its collateral. And the personnel working the deal must justify that value in their reporting process. When the buyer’s offer is submitted with the short sale package, the bank will order a “second opinion” on the price to assure itself that the valuation is fair.
It orders either an appraisal or one or more “Broker Price Opinions” (BPOs) from other Realtors not involved in the transaction, or both. It compares these price recommendations to the contract price. Were a “lowball” offer to be accepted, it would surely be countered or rejected.
In that many Buyers are financing their purchase with FHA or VA loans, these buyers may need to receive closing cost concessions to cover part or all of the costs associated with their loans. If that is the case, generally the closing costs sought should be added to the offer price.
As an example, if a short sale property is properly priced at $200,000 and an FHA financed buyer wishes to purchase and receive a 3% closing cost concession, then the offer should be structured at an offer price of $206,000 with 3% back. The “Net” to the lender will still be $200,000 less its other costs like commissions to the Agents. “Net” is what the lender is interested in receiving.
If you are in a competitive situation where there are multiple offers, the offer with the strongest buyer and the highest net is most likely to prevail. Remember in all cases that the property must appraise at the price offered, so overbidding is counterproductive.
Since completion of a short sale through to closing is a detailed and complex process, here are some additional questions to be considered in undertaking such a transaction:
Is the Listing Agent knowledgeable and experienced in handling short sales? Will they get me through the deal?
How was the property priced?
Given the importance of the “second opinion” appraisal or BPO in supporting the price that you are offering as a “fair price,” how is the Lister making sure that the BPO Agent or Appraiser has relevant and accurate information and knowledge of the transaction, the circumstances, and specific pricing?
If a short sale "under contract," how long has it been under contract? Is the buyer conventional, VA, or FHA?
Is closing cost assistance available?
Which lender or lenders are involved? Is there more than one loan? (If there is a second mortgage, that lien must be cleared as well.) Take a look in the MLS at the previous purchase of the property by the seller. What did they pay for the property? That will give you a notion of the indebtedness being liquidated.
What is the approach to handling the second?
Is “Pre-Settlement Occupancy” available? If not, when will the owner or tenant be moving out?
Has a Title Search been done or will it be done early enough in the process to assure that there are no last minute surprises like undisclosed liens that must be cleared which would delay settlement?
How “late” is the seller? Is the property facing near-term foreclosure?
Is the situation a “Hardship” or is it a “Short Payoff?”
If your offer is “Ratified,” is the Lister putting the property into “Contract” status on the MLS? Are “Backup Offers” welcome?
About how I approach short sales:
Brenda Ricchi—“The Personal REO & Short Sale Specialist” views negotiating a Short Sale as an art requiring utmost patience. I have been working for Banks and Mitigation Services the last 6-8 months pricing homes in Bank Price Opinions (BPOs) so I am aware of what the banks see and don’t want to see in an offer and an appraisal. With all due respect, the lenders are for good reasons and bad ones, very bureaucratic. They do not return calls or respond to faxes in a timely manner. They are insistent, even in the direst circumstances, upon use of their forms and procedures, even when it is clearly not in their best interest, or yours. They lose files. Their personnel turn over frequently. Sometimes you start completely over.
Since it is necessary to have a written bona fide Offer to Purchase in order to submit a completed “Short Sale Package” to initiate the Short Sale process, we often submit an Investor Offer right away to expedite the process. Such an offer may be necessary in particular to bring about delay or stoppage of the foreclosure process.
Investor Offers are “wholesale” offers. The Investor is hoping to get the lender to sell below market value. This seldom happens. But if it does, the Investor can re-sell to another buyer at a profit. (This only works in conventionally-financed deals.)
I am responsible for informing the selling Real Estate Agent and Buyer about how the short sale is progressing. Communication is critical to keeping everything in place through the process to a successful closing.
IN THE MEANTIME, WHILE YOUR PURCHASE IS BEING NEGOTIATED, WHAT SHOULD YOU DO?
Go ahead and get your financing in order. Get the underwriting process completed such that you are ready to settle immediately upon receipt of approval, pending only your home inspection and your lender’s appraisal.
Have your Agent communicate with the Listing Agent to set up your settlement. Let them know who the Settlement Company is and specific contact information. Have your lender send your loan package over to the Settlement Company.
When the “Approval Letter” is received, you will be able to quickly and efficiently settle and complete the transaction. You will have successfully handled a short sale! You will have acquired an attractive property at an excellent price, and will likely be positioned for quiet enjoyment of your new home for years to come.
Given the current discounts to market value, and your attractive purchase price, you may also be well positioned to enjoy appreciation on your property when the market returns to normalcy in the future.
It is my privilege to serve you now, and we deeply appreciate the opportunity and your business. Thank you and very best luck!
Brenda Ricchi, EPro
Realtor
Charles Rutenberg Realty
941-531-3636