Thom explains just why he tells his buyers that short sales are most often very bad deals, if they are even legitimate deals at all!
It seems that three years ago no one had ever even heard of a short sale. Now we just wish we hadn’t EVER heard of them. Short sales are the bane of the home buying market at this moment. Most buyers really don’t understand why they are so bad, so difficult, and in the end, so infuriating. I have been involved in many, from both sides. And while I am whining about them as a buyer’s agent, I can tell you it is actually much worse to be on the listing side, at least for the agent. From the customer’s perspective, it is generally worse on the buyer’s side. This is because if you are the seller, you already know you made a very bad mistake, and you are prepared for lots of unpleasantness in trying to unwind that awful thing.
But if you are the buyer, you ostensibly haven’t screwed up, and are just trying to buy that cute house with the low price. But what you don’t know in these situations will damn near kill you. In the early days, let’s say in late 2007 and early 2008 when shorts were beginning to rise locally (I am told by those in other areas Bend has been in the very forefront of short sales, as we fell so hard, so fast, the Vegas of the NW, so many have learned from our mistakes), we eagerly took our clients to them, as none of us really understood them either. Then came the hair ripping, the screaming, the crying, and the slew of buyers running for the hills, convinced the banks were evil and liars (I am not so sure they got it wrong there), and that the whole deck was stacked against them.
So if you are a home buyer, and you are looking in an area such as Bend, Florida, Vegas, Phoenix, or California’s Inland Empire, where prices are down 50% or worse from their highs, please, for your own sake, listen up.
First of all, the price you see on a short sale may or may not be legitimate, in fact, most often it is not. “But it’s on the paper”, you say. Yes, but it means nothing. A short sale is generally begun when a homeowner misses 2 payments. The bank won’t even let a seller consider a short unless they have satisfied that little detail. Then, the Realtor comes in, gets the bank information, and most often begins the short WITHOUT ANY communication from the bank as to how much they want to get out of the property. This is not the Realtor’s fault, because most lenders will not accept any communication from the Realtor UNTIL an offer is made. Therefore, the Realtor has to get an offer before he/she knows how much the house can really sell for. So, in order to show good faith to the bank that we attempted to get their money out of the deal, we generally start them at the break even price, where the bank will get all of their money back. Then, the price is lowered, often by 5%, each week or two, until an offer comes in.
So what generally occurs is that the house sits on the market for months as the price comes down, and that period is longer when there has been a huge drop from the boom prices, simply because the market is 50% or so below that price at the current moment. Finally, the price begins to look attractive to buyers, and an offer comes in. Then the Realtor is often allowed to speak to a negotiator at the bank. This negotiator is for the Seller, as, remember, the bank is not the owner of the home until foreclosure, and the seller still owns the house, so all negotiations on how much they will take to let the seller out of their obligation to pay the money back take place between seller and bank, not the buyer. So, the buyer sits, and sits, and waits for someone to get back to them while the lender’s negotiator negotiates with their board, their sub-lenders who really own the note, and the seller. What sometimes occurs in our market is that the bank finally comes back and says,”we won’t take that much, you have to offer more than the asking price”. So, that’s what I mean by the price often being illegitimate, as it means nothing at all until the bank says it does. And in cases where they are writing down over more than 35%, my experience says they won’t do it, and would rather foreclose. Now, this is where the price DOES get legit, as the Realtor is forced to raise it, and puts it back in the ACTIVE MLS category. These are your best bet if you want to look at shorts. I just closed one, in fact, where the previous deal fell apart, leaving a pre-accepted bank price for us to jump in and take advantage of. These are a needle in a haystack, but your Realtor can help.
2) SELLER CONTRIBUTIONS? Fahgeddaboutit.-
The majority of offers these days include what are known as seller contributions. This simply means the seller is kicking money in towards the buyer’s closing costs or down payment. As houses now require larger downs to buy, it makes sense that the buyer is putting the squeeze on the seller to help the sale come to fruition. But in a short sale, the seller is losing his or her house and accepting the mantle of years of bad credit. To even get a short sale to happen, they have to prove to the bank that they are essentially broke. Do you think they can, or will, kick in cash to help you make a purchase? Would that make any sense at all?
No, of course it wouldn’t. And, as you can’t negotiate with the bank (remember, they only deal with the seller and have no legal basis or right to negotiate with the buyer as they don’t own the house . . . yet), they also won’t help you. So contributions are exceptionally rare with shorts, and if you need one, don’t waste your time looking at them.
So the buyer has made an offer, and is smiling thinking they are going to get this great house cheap. But not so fast. It often takes 1-4 months for the bank to figure out what the heck is going on, and it may take them that long to get back to you. You need to know this going in. Furthermore, there may be other interests involved. These include second mortgages, Home Equity Lines of Credit (HELOCs), and the worst, Private Mortgage Insurance (PMI). Now, your chances of actually getting a short sale with only ONE lender is somewhere around 25% at last check. Those chances drop significantly with each party attached to the debt. The First Mortgage has the power here, as they can legally take the whole offer and leave the sub-creditors with nothing, but of course then they really can’t do it as the sub lenders will foreclose. SO, all lenders and insurers must sign off on the deal, and IF this ever happens it will take a long, long time. There are bureaucracies in each, and therefore the slow wheels in those institutions have to deal with the slow wheels at the others, negotiations go back and forth between loss mitigation departments at each, and it just grinds to a halt. Frankly, these banks believe they have better things to do, and much of the time in these instances would simply rather foreclose than go through the mess of dealing with your offer.
My own advice would be to never get involved with a short sale if it has PMI involved, as there is very little chance it will ever happen. I also counsel against getting involved with short sales that have a second or a HELOC involved, as they also have maybe a ten percent chance of going through. Meanwhile you are wasting your time and missing good Bank Owned REO’s and traditional sales that may actually be purchaseable. Which leaves us with the single lender short sales. These are your best bet. There are certain banks which have a good track record of closing these, and others which are the kiss of death. I am not going to tell you which unless you are my client, due to legal issues, but it you have an honest buyer’s agent who didn’t just fall off the turnip truck, they should be able to as well.
3) IT AIN’T OVER UNTIL THE FAT LENDER SINGS-
But you’ve made an offer, and you are prepared to wait until something happens. Optimistic, are you? Well hold on, Kemosabe, this ride gets rougher. Now, if you make an offer on a traditional sale, or on an REO, once it is looked at by the seller and approved, which should only take a few days at worst, it is marked PENDING in the MLS system, and no one can offer on it again until the offer falls out of contract. But with a short sale, the ground is shaky as Jello, and because there really isn’t a deal until a third party lender signs off, it is marked CONTINGENT, which might just as well say “WE HAVE AN OFFER BUT IT PROBABLY AIN’T GOING TO HAPPEN- GIVE US A BETTER ONE!” Yes, “your” house stays on the market during the month or more of negotiations, and another buyer can come in behind you and get in line with a better offer (generally you are still first to get a shot these days, as banks only want to look at one offer at a time, but you know the listing agent is going to tell them that they have a better one waiting behind you . . .). Which means, you might fall in love with it, as clients of mine have in the past, and over months develop a real love for it, only to lose it at the last minute. Not a recipe for stability, is it?
4) REMEMBER AIG?
Another dynamic in place with short sales is that these lenders are insured against foreclosure risk, but often not against short sale risk. So, if they foreclose, some of that loss is made up by an insurer. If they sell a short, they often have to write it all off. This just makes negotiating the short sale even less attractive to them.
5) THIS IS/WAS SOMEONE’S HOME!
When I take young couples and families through short sales, people get bummed out. When you walk through a short sale, the pictures are still up, the kids’ toys are scattered all around, and the kitchen table has recently been used. And as you inevitably look at these things, you realize these are people just like you, who had dreams of a better life, but theirs were destroyed by the housing crisis. These people are losing their home, a home they probably love. A home they might have hoped to raise their kids in, watch one of them get married in, have family gatherings and holidays in. But now their dreams are dashed, and you really can feel the despair and sadness in these homes. Clients have walked out just crestfallen after looking at a great home, only because it hits home what is REALLY going on here. If you’re an altruistic type, a sweetheart, short sales aren’t for you, either.
In my book, there are only certain short sales worth looking at, and they represent maybe 20% of those on the market. Here are your criteria for a Short Sale you may actually be able to buy:
A- Look for a short sale with ONLY ONE LENDER! More than that and your chances drop dramatically.
B- THAT LENDER BETTER BE A GOOD ONE! There are good banks, and bad banks. The worst in terms of getting these closed was once the industry darling. I think you can guess that one. I wouldn’t get involved with them, they supposedly close only single digits percentage-wise. And that monster that swallowed a big NW bank is not much better. You’ll do better with small banks. They need the money. The big guys are too cash rich these days to care. Caveat- Wells Fargo has proven to be very good and conscientious about closing these, one reason I have switched to them for my own banking needs.
C- Better yet, find one that HAS ALREADY HAD A SALE FAIL AFTER MONTHS ON THE MARKET. This one may have the rarest of items- a legitimate price.
D- BE PATIENT! Constantly emailing or calling your Realtor won’t help. All he/she’ll do is call the other Realtor, and get the “I haven’t heard anything and they won’t talk to me” line we always get. If you are getting involved with a short, that’s your choice, and you must be prepared to wait and be ignored.
E- BE REALISTIC! If the price looks too good to be true, it almost always is. And don’t go looking at short sales if you need to close a house in the next two months or so, chances are it won’t happen, and then you will have only yourself to blame, NOT your Realtor (unless that Realtor hasn’t told you all of this, and in that case, you have my permission to yell at them).
F- Looking for the perfect home? Is the most important thing to you getting the right house? THEN DON’T EVEN LOOK AT THEM! Short Sales are for the buyer who wants to get the best price and doesn’t care if it is an ugly process after which they might never even get the house. They are not for people who are at all emotional about their home purchase. These are brutal, ugly, faceless deals, and if you are looking for the perfect place for your family or get emotional about homes, do yourself a favor, look only at REO bank owned homes, and at traditional sales. You will thank yourself, and so will your Realtor!