Short Sale Basics
The Good, The Bad and The Ugly Reviewing my web statistics one of the pages that gets the most hits is the Short Sales page so I thought that it was time to cover the basics about short sales, The Good, The Bad and The Ugly. Short Sales 101
Short Sale – When the lender is willing to accept less than the total amount owed on a loan. A property owner working with their lender is required to provide a ‘Hardship Letter’ along with the required ‘Short Sale Request’ forms. Based on the information provided the lender may or may not agree to accept a short sale. Many short sales are pre-foreclosures as the owner may have stopped making payments. The lender may or may not assign a negotiator at this time.
The Good
Short sales are generally a good buy. I say generally because it depends on the loan amount. During the height of the market many people refinanced property at the inflated market value and now they owe more than the fair market value of the property. Depending on the mortgage amount and the fair market value the short sale, after the bidding (see The Ugly), may not be any better of a deal than another comparable property on the market. Know the comps!
The Bad
Short sale listing prices are not sale prices. They are more like teaser prices. The purpose for this is to generate interest and entice buyers. When a property owner has fulfilled all of the lender requirements for a short sale the property is marketed as a short sale with a listing price that is probably lower than any other comparable property. The listing price is not what the lender has agreed to accept for the property to cover the loan. At this point the lender has only agreed to consider accepting less than the loan amount but has not yet determined the amount. Many short sales are purchased above the listing price.
The Ugly
If you decide to make an offer on a short sale you MUST know the loan amount. Not that your offer needs to be equal to the loan amount but for your own benefit you need to know where the ceiling is because it may be close to or even higher than other comparable properties on the market. Lenders typically want up to 70% of the loan if it is within the fair market value of the property. You should also know if there are any liens on the property, due diligence, like in any real estate transaction makes for a knowledgeable and informed decision. The lender usually will not pay the standard seller closing cost so the buyer will incur additional closing costs. The lender normally will pay the commission, and possibly the owner’s title insurance but will not pay document stamps on the deed.
The short sale process is similar to a silent auction. The lender actually does nothing until an offer is presented. Multiple offers can be submitted to the lender during the process, so yours may be one of many. You are actually bidding on the property. After an offer (bid) is submitted the lender will order an appraisal. Once the appraisal is done and entered into their system the offer(s) and appraisal wait on the powers that be, whether by committee or some other decision making process, to review the package. During this time there is no communication from the lender to the parties, in fact trying to reach a negotiator or anyone that can discuss the transaction is nearly impossible. It’s a waiting game, the black hole of short sales. And while you are waiting other offers can be submitted. And the lender may order a BPO, Broker Price Opinion, as to the fair market value of the property. At some point the lender will respond back and may accept one of the offers or reject all offers and declare the minimum amount they will accept. Now it is time to bid again. Keep in mind that if there are multiple buyer bids the property will probably sell for over the lender minimum as each buyer tries to outbid the others. The best advice for bidding is to base it on previous sales, current listings and the maximum price you will pay to purchase the property. Consider what it will cost to purchase a similar property if you do not win the bid.
Every short sale, much like every real estate transaction, is different. The lender’s objective is to get the most dollars for the outstanding loan, nothing more, and nothing less. They are not out to give the buyer a good deal on a property. Some lenders will exhaust the bidding process before making a decision. This tends to frustrate buyers when they are informed that they have been outbid and need to submit yet another counter offer to stay in the game, and a game it is.
I have seen some short sales take up to four months to complete, I have seen buyers withdraw offers and walk away from short sales, and I have seen short sales fall apart at the last minute. My Opinion
The lenders are not helping themselves by not acting on these short sales in a timely manner. They are part of the problem why we are where we are today and they continue to aggravate the situation. Oh, yes they are busy with all of the short sales and foreclosures but good grief find a better solution, one that works. If you have the patience and like to play the game you may end up on top of a good buy but be prepared because anything is possible. My recommendation is to forget short sales totally and look at the REO’s (Real Estate Owned) or foreclosures. These are properties that the lender already owns and has listed for what they deem they will sell for. Rarely are there bidding wars on foreclosures because they are more like a regular listing. I’m Just Saying… Origin of "I'm Just Saying..."
Although the saying has been around for a long time I give credit for my understanding and use of it to my sister-in-law. During many discussions we fail to agree with each other on many points. We would come to an impasse where she was not going to convince me of her opinion and I was not going to convince her of mine. At that point she would utter the words “I’m Just Saying…” and neutralize the discussion. She recognized that she was not going to change my opinion and I was not going to change hers. It’s not that she was right or that I was right, but that we both respected what the other was saying even though we didn’t agree. I use it in everyday life. Listen and you will probably hear someone else use it. Try it yourself and see if it doesn’t make a difference. I’m Just Saying…
Note: I have had many hits on my web site searching for the origin of "I'm just saying" so I have done some searching myself and here are some sites I have found regarding the phrase.
The Phrase Finder
PainintheEnglish.com
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