Short Sales Of Distressed Properties

Why not write an offer at 50% below list price for a short sale home?

Mike Horton — Fri, 13 Nov 2009 06:43:00 GMT

OK, you have been looking at homes that are in pre-foreclosure for sale (short sale) and you found one you like. It is in good condition and not a major fix up. Your next step is to write an offer and for arguments sake lets say it is listed for $150,000. Before you write that offer you check out what has sold in the immediate area over the last 3 months and determine the list price is at current market. Now you have to decide what price do you want to offer. Thinking back over what you heard or read in news reports or heard on TV or Radio commercial about making offers on distressed properties you decide lets really discount the price and write your offer for $100,000. The lender (who has final approval) will negotiate right?

In essence, you have put yourself in the worst position you could have. In the current market, lenders know that there are a lot of buyers trying to find homes and they are willing to pay market or close to market because prices are at the bottom. Wait you just heard that the market was still decreasing. Check the market facts not the hype. In Surprise in all zip codes, the market bottomed out in April, May , or June of this year. It came up a few dollars per square foot since then but has remained steady, The number of buyers are keeping homes from further decreasing in price, its a competitive buyers market. As luck would have it, there are enough foreclosures and pre-foreclosures keeping the market prices from raising appreciably. So in effect the market for homes is between two forces holding prices steady. So why should a lender approve a short sale with a deeply discounted offer? They won't, they know they will get a better offer.

What will they do? From my experience there are a couple of reactions. First they come back with a price that is about 10% less than market. That seems to be bottom spot for them. Then they will often ask for a substantial seller contribution in the range of $5,000 to $10,000 cash from the seller at closing. Note that they also will often provide a promissory note option payable over 10 years at 0% interest for twice the amount (looks like a hidden interest to me but that is another topic). So now you have set the tone that says you must meet their new price (this is extent of their negotiation) and the seller has to come up with substantial cash at closing. What are the odds this will happen?

When you go to a seller and ask for a cash contribution, the most common comment I get back is "If I had that kind of money I would not be short selling my home". So where are you now. As the buyer, you can walk away from the deal or your can make the cash contribution. This is where you have to make the decision, could you have made the offer at a price where the lender would have been willing to take it without a cash contribution from the seller? If you did then the money you would have spent would be in the mortgage and not cash out of your pocket. This is a value of money decision. Buying home at super low prices have passed this market unless their is something very wrong the home.

The second response is that tell you it is not enough. Sometimes that continue with additional price guidance and sometimes you have to guess. Believe me that's when your offer drops to the bottom of their pile.

The second issue is that you are competing against other buyers. The listing agent has the responsibility to provide their client with the best opportunity to short sale their home. if a better contract comes in, a listing agent has the right to swap yours out. The listing agent wants the home to sell as quickly as possible. Unless you modify the short sale addendum, an offer can be replaced at the lender anytime prior to receiving a letter of acceptance from the lender. If you are serious buyer, you contract maybe replaced and you may or may not know about it until it to late. The listing agent should let you know when you are no longer in the primary position, but it doesn't always happen.

Your best bet as a serious buyer is to write your offer such that the sellers lender, who must approve the offer price and provide their additional conditions, will see the offer as just meeting its requirements for not asking for seller contributions. Lender negotiators are more likely to review the offer quicker and not find reasons to put it aside for future review and allow you as the buyer to decide the amount of leverage you want in your transaction at the beginning and not under the pressure of losing the home purchase from having to make larger cash contributions then you are comfortable with at closing.

Remember the critical issues. Know your market, know your comps, find out who the lenders are and what are their requirements for an OK, know what additional costs you may have to pick up for the seller, and know what mortgage and cash levels you are comfortable considering. Short sales are very little resemblance to a non-distressed home sale. You are going to need someone who has the experience to provide knowledgeable advice on what is a complicated process.

Short Sale Quirks

Mike Horton — Tue, 10 Nov 2009 04:46:00 GMT

Imagaine you are in the final stages of your short sale negotiation with your lender. You haven't received the final OK, but they have completed and recoreded their price opinions and from their own time line and your experiece, you know the lender is going to give you an agreement letter soon. The buyer is still holding true and the majic day comes. Your seller is happy you contact the buyers agent and he informs you they just bought something else or they have just had a change of heart. A little buyers remorese maybe. Talk about a downer for the seller and listing agent! But is everything lost....nope.

Now is the time to start down the list of backup offers you have been accumulating. As you look at each one your consider them for a couple of factors. First is the asking price the same as the previously approved offer. Then do the seller concessions provide the same or more net return to the lender. Most lenders will have approved the original offer by buyers name, list price, net to the lender and to the 2nd, and accumulated cost to close. Since you have a new buyer the original lender approval will not be valid. Well how bad is that? Depending on the lender, some will just make minor changes to the agreement letter and send it back. But unforturnately that is not the norm. Most lenders will take 2 to 3 weeks or maybe more to send the package back to the investor and have them reevaluate it. If the lender apporves it and sends you a new agreement letter you have been delayed some time but you still have deal.

Does it always happen nice and clean? Not really. Often the price opinion is now past 90 days and they have to order a new one. That will add 2 to 3 weeks to the approval. If they have taken a long time to evaluate the offer, they may also ask for updated financial information. Some lenders have already passed you to a closing agent. The agent that did the origianl evaluation is off to other distressed loans. The list of things that can go wrong from here just builds. It will work out however, but now more time and more patience is needed. So is there a solution? Use a strategy to help prevent the crisis. Help the buyer to make a stronger commitment to the deal. Ask for non-refundable earnest money from the buyer to show commitment all the way through the lender approval process. Buyers are more committed. If they refuse, then the next buyer that comes up that meets the market price and is willing to provide non-refundable earnest money assumes the lead position. The Short Sale addendum in Arizona approves this strategy and realtors should take advantage of it to improve the sellers short sale negotiation with the mortgage lender.

Can your lien holder get a judgement after a short sale?

Mike Horton — Sat, 12 Sep 2009 03:58:00 GMT

Anti deficiency ARS 33-814 provides protection to the borrowers in some cases against a deficiency judgement when their property has gone through a foreclosure or short sale. In many cases, it appears the lenders are recognizing the limitations this statute puts on them to obtain a judgement after the deed transfer takes place. There is nothing that prohibits them from asking for seller contributions as a part of the demand letter stating the conditions that they are willing to accept to release the lien on the property. This applies to any deed of trust lien on the property.

Any lien in anything other than the primary position is wiped out during a foreclosure. In some states which don't have an anti-deficiency statute, the lender can pursue a judgement against the home owner. The Arizona Anti Deficiency statute prevents the lender (primary or otherwise) from seeking a deficiency judgement against the foreclosed property owner if the property is 2.5 acres or less and is used as a single family or single two family dwelling.

This gives the seller some negotiating power by restating seller financial conditions that caused the loss in the first place. You may be able to get terms but from experience there is not alot of wiggle room. You are working with a system that has little regard for the individual problem and is more focused on the overall financial picture over many liens. The servicing groups, lenders and investors have their guidlines and those are not very flexible.

My suggestion for sellers and their Realtor is to work with the buyers and buyers agents to see if there is a way for each party to contribute to the lenders demands. The buyers are typically getting a very good value for their price, so while there is often a lot of grumbling, you can often get additional contributions. A successful negotiation in this area often resides with how well the buyers agent can represent the value of the property, understands the short sale process and sets buyer expecations early in the game that this type of problem may stick its ugly head up. This is very much a team effort to get these negotiations done successfully and being up front with everyone when this problem comes up is critical to success. In some cases the issue becomes highly emotional, so its important that everyone look at this from a value perspective to the buyer and the seller realize that over the long run closing the short sale will have more long term financial advantages over the short term costs.

Most certainly I recommend for buyers and sellers to talk to a real estate attorney who deals in residential issues for more clarification on the Arizona Statutes concerning anti-deficiency.