HOW TO BE SUCCESSFUL IN PURCHASING A HOME THAT IS A SHORT SALE
Mr. Seller goes to his mortgage company(s) and says, “I want to sell, but I don’t have any equity and the house is worth less than the amount I owe you. I need to sell anyway because based on my current circumstances, continuing to keep the home is a serious hardship and I can't hold on, so what do I need to do to get out?”
What the Seller has just done is to ask his lienholders to take a loss when his property is sold, this is called a SHORT SALE. Mortgage companies/lienholders don’t like to take losses (an understatement) and they are going to be resistant to this request from Mr. Seller. However, the current "perfect storm" of poor market conditions has forced them into a position where they may agree to Mr. Seller's short sale as long as it is going to be more favorable to them than going to foreclosure - in time, trouble or money lost.
But, (and there is a big, whopping BUT ...) the mortgage companies reserve the right to approve EVERY term, condition and cost of the sale. So not only are we in a Buyer's Market with lots of inventory to choose from, we have a seller who is virtually powerless in the transaction.
ARE THESE NOT THE PERFECT CONDITIONS FOR BEING A BUYER?!!!
There is another short-seller we should discuss, the reluctant seller. While Mr. Seller above is so very motivated, let’s take the case of the family that is forced to sell thanks to their loan being one of those adjustable rate or combination loans that has adjusted and is now beyond the point of their ability to pay. They have to sell, they are going through the short sale process, but they really aren’t motivated. Why? Because they have to move. And where are they going to move? Depending on their situation their credit may be less than stellar because of late payments and the short sale itself may show as a delinquency on their credit report. Who will rent to them?
Let’s say you get into a home to view it and you love it and want to put in an offer. You can do very well by buying a short sale house, but there are some things you need to know about this process. This is the point at which you need to put aside everything you have learned about the sequence of how a home is sold. Here's how you should go about it:
1. GET TO KNOW ALL YOU CAN ABOUT THE HOME.
You are advised by your buyer's agent that this home, typical of most short sales, is being sold "As Is" (see my blog post, "What does 'As Is' Mean?", for more detailed information on this legal term). The seller might provide you with a seller's disclosure of property condition if you're lucky, but that's about all you'll get. They may or may not have pulled permits for upgrades or work done on the house - you'll need to investigate. They definitely will not negotiate issues you uncover during a home/pest/lead paint/radon/mold/septic inspection. Do you spend money to have inspections done or wait for the bank's response? My advice, wait, but be prepared to move forward very quickly once you hear back from the bank.
Also if the property is a condominium or governed by a home owner’s association, your bank/mortgage company will most likely require a full set of condominium documents, meeting minutes, recorded deeds, occupancy rates, tenancy ratios, and more (what's called a Full Review). The condominium association can and will charge you money for this. Your mortgage is contingent upon receipt of this, but it's going to cost you around $400 for copying charges. What do you do? My advice is to ask your mortgage broker, but don't do anything to jeopardize your pre-approval/commitment.
You have decided to submit your offer and now the wait is on…
2. PATIENCE IS A VIRTUE, GET READY TO HURRY UP AND WAIT.
A short sale is the sale of a parcel of real estate that is short of the equity needed to sell it and pay off all liens। It is not short “time-wise”. You should plan on at least 120 days from your offer, but the amount of time can vary widely depending on the lenders, and if anyone says you will hear back in "x" number of days, you can't believe them.
What happens during the wait? Well, besides Mr. Seller getting anxious waiting for his departure, the short sale file/package/request gets in line in the lender’s short sale department (also called the Loss Mitigation Department). This line is long, sometimes very long.
So, what happens during the wait is just that….the wait. Oh, the agent for the seller will be in contact as needed to re-fax lost documents, explain their research, answer questions about the local market, re-fax lost documents, etc. But you, the buyer…you just wait. It’s like the military … hurry up and wait. Or better yet it's like the hospital ... wake up and take this sleeping pill.
Many sellers’ agents do not give your buyer agent status updates on what’s happening while you wait…you just wait. When I represent the seller, I email the buyer agent every week to say what I know, even if it's nothing, just to make sure that you, the buyer, are still there and somewhat paying attention. But as your buyer agent, there's nothing I can do ... if there were, rest assured, I'd be doing it.
Oh, as the buyer’s agent I know what’s going on….the paperwork is collected, the file is assigned to a “negotiator” who “negotiates” the short sale with the seller’s agent/attorney, and once the negotiator has the file’s required documents (exactly what that is varies by the lender) complete, it has to be signed off by their “team leader” or upper management, or a committee of managers. I check with the seller's agent regularly to ask what is happening but again, often there is nothing happening, just waiting….
3. KNOW YOU MAY GET "BUMPED".
Here is the big elephant in the room: you have no guaranteed place “in line.” If this short sale’s turn in the line comes up on the 80th day after submission, and someone else submits an offer slightly better than yours on day 79, you will be bumped! It is not impossible that a seller’s agent will work with offers one at a time until an acceptance is granted and you won’t get bumped, but this is a rare occasion, hasn't ever happened to me yet. It's not fair, it's not right, but it is reality. This is because the lienholders are losing money and need the most they can get, and it is the seller’s agent’s fiduciary responsibility to get the highest and best price for their sellers.
4. AFTER A LONG WAIT YOU MAY BE DISAPPOINTED.
If you are willing to be patient, knowing that you could get bumped, and you're convinced you want to purchase a home that is a short sale, I might advise you to submit multiple offers on multiple short sales. You may get the one you kind of like, and not the one you love, which might be a disappointment. You might not get any one at all, which can be very disappointing. The question then is, how well do you handle disappointment? Can you accept the lost short sale?
5. YOU JUST MIGHT GET A GREAT HOME AT AN EXCELLENT PRICE THAT MAY MAKE YOU SOME GOOD MONEY SOME DAY WHEN YOU SELL.
So why would anyone consider buying a home that is subject to a short sale?
Quite simply - price! If a seller is not going to make any money on the sale of their home anyway, you can imagine they are much more flexible on terms and price of the sale of their home. If you are the only person making an offer on the home, the bank will need to take the offer seriously, even if you offer significantly less than the asking price for the house. In many Massachusetts neighborhoods, short sales represent some of the best deals around.
There is no reason to be afraid of a home that will be subject to a short sale. In fact they may be some of the best values out there. Just be prepared for a longer timeline, a little more hassle and be sure to use an attorney, mortgage company and if I may be so bold, real estate agent with some experience in short sales. You may just find that incredible hidden gem at a bargain basement price.
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Friday, December 26, 2008
Short Sales for Buyers
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