While performing a computer search on the MLS for a buyer last week I came up with 200 properties within the search parameters. After the ones “subject to lender approval” were filtered out there were only 50 left. So within this buyer’s market niche a staggering 75% of the listings were short sales!
Avoid the landmines?
Many agents urge buyers to avoid short sale properties for several reasons:
- Few of them close escrow
- The buyer’s agent has little control over the process; much depends on the abilities of the listing agent to negotiate with the lender(s)
- Much is beyond the control of anyone
- Approvals can take several months with many twists and turns along the way
- Lots of confusion is created over multilple offers, buyer’s that “walk” during the approval process, back-up offers and “highest and best” offers.
It’s “wild west” out there on these transactions. Five different listing agents handle them in five different ways. Five different lenders handle them in ten different ways! (The left hand doesn’t know what the right hand is doing!) No two deals are quite alike. But there are good buys on short sales and when they comprise the majority of the market they need to be considered as an option.
Playing the game
There are some great buys to be had on short sales for those who understand the process and are willing to play the game. It takes a strong stomach and lots of patience. Here is the game:
In order for a listing agent to begin the process of getting lender approval(s) for a short sale there must be an offer. Thus, these listings are often priced unrealistically low to generate an immediate offer so a “package” can be submitted to get the lengthy process started.
A “package” consists of:
- All the seller’s financial documentation (often more than is required to get a loan in the first place) including bank statements, tax returns, financial statements, pay stubs, etc.
- The details and terms of the offer
- A Broker Price Opinion (BPO) which is less formal than a full appraisal but contains details on the market conditions, “comps” and all matters affecting value including proerty condition
- Precise accounting of all the selling costs and the estimated net proceeds to the lender(s)
- A valid hardship letter. This would include reasons such as job loss, death, divorce and medical expenses. ( “My property is worth less than what I paid for it” is not a valid hardship! )
It is important for the buyer’s agent to learn as much as possible about the completeness of the “package” because an incomplete one will send the file to the bottom of the lender’s pile from whence it may never emerge!
The offers
It seems foolish to submit an offer that the lender will ultimately reject for being too low but often it serves to distill the actual price that the lender will take. Lender’s do not formally make a “counteroffer”; they will verbalize a net amount they will accept and then it is up to the buyer to adjust the offer accordingly. (Regardless of the selling price, sellers in a short sale walk away with nothing so they are usually not too concerned about the selling price.)
The MLS rules require that any listing with an offer in hand that is “subject to approval by lender” be continued as an active listing. Once the lender provides a formal approval the listing status is changed to pending. Almost all the short sale listings have an offer and “package” submitted for lender approval. They appear as active listings but many cannot be shown, many say “no more offers” or “back-up offers only”. Many sellers do not want the inconvenience of showing their house after the initial exposure to the market.
One listing states, “Experienced short sale agent. We work with just one offer”.
Another agent submits all offers to the bank. Still another states, “Your offer is greatly appreciated. If there are multiple offers we cannot tell you what they are. Please keep in mind that many of the older offers are no longer interested as the approval process takes approximately 3 months from package submission. We submit one offer to the lender(s) as they do not wish to be inundated with multiple offers. Once we receive short sale approval, we will send out an email requesting your highest and best offer. The seller will then decide which offer they will accept. No offers will be signed until then." Personally, I like the last approach.
The wait
By the time an approval comes down the pike, the buyer has often lost interest and moved on to another property. But now the listing agent can advertise an “approved” short sale and fresh buyers can have a reasonable expectation of closing quickly as long as they are willing to pay the “approved” price. Until recently, market value has often declined during the three or four month approval process, new offers come in below the approved price and trigger another round of the game. Now, all the seller’s financial data is outdated and must be resubmitted, the lender may have to order a new BPO for the file, etc. Sometimes these transactions go through this cycle for a year! ( We ought to call them "long sales" instead of short sales! )
The approval
When the approval letter finally gets issued, the time frame to close is often very fast and the approval is only good if closing can be completed before a specific date. Otherwise the whole deal may unravel. And at this point the transaction must go through the same process as a "normal" deal with all the usual inspections and contingencies before closing.
Shopping for a short sale is fine for someone who does not have to work with a short time frame. But sometimes when an approval comes and the buyer has walked, a fresh buyer can step in and close quickly. Short sale listings must each be evaluated on their own merits: What is the seller’s circumstance? Is there a bonafide hardship? How does the package look? Is the listing agent experienced in short sales? Are there one or two lenders to negotiate with? Who are they? Are there any obscure leins or judgements? Is bankruptcy in the picture? What stage of the approval process is it in?
It is an advantage to be the first offer in on a short sale. Even if the lender holds out for a better price, you may be given the chance to adjust your offer to the exclusion of other offers that may be higher. The listing agent does not have a fiduciary relationship with the lender and just wants to get the deal closed for the seller. If an offer in hand can accomplish that and introducing another (possibly higher) offer at that stage would only muddy the process, the offer in hand will prevail.
