Helen Chong, BROKER, GRI, CDPE®, e-PRO®, SFR
With limited inventory in the market, most of the properties that are for sale are marked as a “short sale”. But what does that mean? Short Sales happen when the seller owes more than what the property is worth. In order to sell the property, the seller will need to get the lender’s approval to accept a price that is lower than the mortgage. So here’s how the process works:
The seller will need to list the property on the market (specifically Multiple Listing Service) with a Realtor® because most lenders want to see that the property was marketed to the retail market. Once the listing agent receives offers on the property, they will present them to the seller who will decide which one to accept. With the accepted offer, the seller provides all their financial paperwork to the realtor® or a short sale negotiator (hopefully this person is a short sale expert, like a CDPE®!) so they can submit the entire “short sale package” to the lender. It is very important to make sure the listing agent or the short sale negotiator who deals with the bank knows what they are doing. Without a complete package submission, it will only delay the approval from an already dreadful process. Once a complete package has been submitted, it will take 2 weeks (rarely that quick) to 6 months to get a response from the lender. During this time, the lender will send out a BPO (Broker’s Pricing Opinion) agent to provide them an estimated market value of the property. Based on this value, the lenders will approach their investors (e.g. FNMA, Freddie Mac…etc.) and get their approval. The investors then deduct all the expenses (seller’s closing cost, title and escrow fee…etc) and determine a final value that they are willing to accept. The investors convey the approval/denial to the lender, and the lender provides final written approval/denial to the listing agent and seller. The seller then reviews the approval, and he/she may want to go back and renegotiate some of the terms on the approval. In the end, the seller has the right to cancel the sale if the seller cannot reach an agreement with the bank on the approval terms. I don’t mean to discourage the buyers, most often or not, the seller would rather do the short sale to avoid foreclosure. With such a long and dreadful process, many buyers continue to search for other properties while waiting for the lender’s approval. The buyers may end up backing out because they have found another property during those long months of waiting. Good news is, the lender’s response rate is getting faster these days as the government has imposed incentives for the lender to expedite the process (e.g. HAFA programs).
So what do you need to consider and what can you expect when you are buying a short sale property? These are some of the questions that you should ask.
1) How many mortgages are on the property and are they from different lenders? Your agent should be able to tell you which banks are working faster than others so you have an idea of what time-frame you may be dealing with.
2) Are there any other liens on the property? i.e. Tax liens, mechanics liens, HOA liens…etc. HOA liens are very common and many lenders refuse to pay these liens from the offer price. As a result, if the seller has absolutely no money, the buyer may have to come up with cash to pay for the HOA lien. The negotiator will also need to negotiate with the HOA to get the lien amount reduced, but HOA attorneys are very difficult to negotiate with as they can still file a judgment against the seller. In a situation where the buyer is being uncooperative even though the lender approves the short sale, the seller still has the last say in whether or not to sell the property. Even if you have to contribute to paying off the liens, it can still end up being a good deal.
Some good tips:
1) If you truly like the property, you have to convey your strong desire to the listing agent. This is because too many buyers back out when they receive an approval. Listing agents would much rather accept a lower price if they believe the buyer is serious and willing to wait for the approval.
2) Just like any other offers, listing agents, sellers, and lenders prefer buyers with a strong financing history. That being said, cash offers are preferred over conventional financing, which is preferred over FHA financing…etc.
3) Unfortunately, it’s more difficult to re-negotiate a lower price after the lender provides an approval, even though you may find more problems with the property. In situations where lenders do agree to adjust the price, you may have to wait another full approval cycle.
4) Do not pay anything on behalf of the seller outside of the escrow. Everything has to be disclosed to the lenders on the HUD statement. The seller is not allowed to receive any personal benefits from the short sale transaction, eg. cash rebate. Be sure to keep this an arm’s length transaction!
5) If you are an investor buying a short sale property but not occupying it, be sure to know whether the property is in a pre-foreclosure stage when you submit an offer. By law, you have to use the Notice of Default (NOD) RPA to write up an offer, as the law sees that the seller may be in too much distress to sell the property during this time. The NOD RPA gives the seller 5 business days to think it over at which point they can cancel the accepted offer. If you don’t use this form, you are in violation of the law and it is considered a felony!
Helen Chong, is a Certified Distressed Property Expert (CDPE®) who can be reached if you have any further questions about selling or buying a short sale property.