Short Sales 1-2-3

Should I Buy a Short Sale? by Bob Boog

Should I buy a short sale for my family?

Is purchasing a real estate short sale right for you and your family? Some experts say that buying a short sale is the best way to get a great deal on a property. But before you leap blindly into your next real estate purchase, here are some things you ought to know:

The Short Sale Price is Not Guaranteed. People often think that the listed price of a short sale home is going to be the selling price. After all, that’s the case at the supermarket, right? If you want to purchase a bag of chips, the cashier doesn’t tell you that the price will actually be higher, will she? But that’s not what always happens in a short sale. Listing agents often price properties — at ridiculously low prices just to make the phone ring and obtain an offer. Why? Because many lenders will not accept an “incomplete” short-sale package (meaning only the seller financials and no offer). So agents will knowingly “low ball” prices in the newspaper in order to send the short sale package to the bank. So be cautiously optimistic, but don’t be surprised if the lender makes a price adjustment on the approval letter!

Expect the Process to Take Longer Than Usual: Negotiating a short sale should only take a month but depending upon the bank’s caseload it can often takes much longer. An average short-sale in Los Angeles County currently takes about 120 days or longer. So don’t hire a home inspector, pack your bags or stiff your landlord until you have written confirmation that your offer has been approved by the bank. Remember: a short sale requires two approvals. One from the seller and the second approval comes from their lender– or lenders. (plural)

You agree to purchase the house “as is.” Remember, the seller has a financial hardship, so don’t expect the seller to fix the bad plumbing after you get lender approval. Any inspections are usually for your own knowledge and make a nice “Honey-Do” list for later. Of course it’s smart to know what problems if any you are getting into before purchasing and finalizing any real estate deal, so by all means, pay for all applicable inspections. After all, the real reason the seller may be broke is because of all the repairs the house needed. Or maybe they don’t have the money to repair the defective furnace, for example, and you might not know that the furnace is defective without getting the home inspected.
Don’t expect to immediately “flip” the house for a quick profit. Many Internet sales trainers offer ”get-rich-quick” schemes of making big profits by buying and quickly re-selling short sales. Why doesn’t this make sense? After all, if you buy the property at a loss, shouldn’t one expect to be able to resell quickly for a profit? Nope. Because in a declining market, the short- sale that you purchase will soon become the latest sales comp, and drive prices down further. That is, of course, unless your market suddenly goes crazy! Usually, however, the time it takes to make repairs, plus the costs of monthly payments, property taxes and closing costs will eat away your quick-gained profits. Instead of expecting a speedy short-term windfall, look at buying a short-sale for a long haul investment — something to rent out and sell maybe in 15 years or more.
Don’t expect timely updates from real estate agents. Unlike regular real estate transactions where an agent will quickly email you a status update; short sales are subject to and contingent upon other parties. Written approval from the lender, his third-party investors and/or mortgage insurance companies takes time. For this reason, understanding, patience and courtesy are greatly appreciated by agents who have no control over the short-sale process.
Secondary financing may make things dicey. If the seller has a second mortgage, then short-sale packages will need to be coordinated between the two lenders. Each will have to render their approval, and coordinating the two complicates matters.
After getting approval, expect a short escrow. The lender will make you wait far longer than a normal purchase for a decision, then demand to close escrow in 30-days or will expect the buyer to pay a “per-diem” if he exceeds the closing date. Upon getting approval you will be expected to do all inspections and other due diligence items. Once the lender approves the sale it is then time to lock the rate, call the mover and give notice on your apartment.

This is a broad overview, and no two short sale transactions are the same, even with the same lender. If you are in a state where attorneys are used it helps to have an attorney represent you in the purchase with short sale experience, but at the very least make sure they are experienced at real estate.

The long process aside, buying a short sale often can be profitable over the long run as there is often a price discount given to those who are patient and can see the deal through to the end.

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Everyday the newspapers spill more bad news about the real estate industry. Headlines such as “Mortgages 30 days in arrears rise”, “Job scarcity raises foreclosure risk” and “Mortgage delinquencies up” scream at us from glass coin-boxes. Now economists as well as congress and the Obama Administration are all wondering what the next move should be, and since none of them are real estate brokers and have not sold a house recently, please allow me to share three ideas that might help.

Idea One: Penalize lenders who take more than sixty days to approve a short sale. As a real estate broker, I often tell buyers that it may take up to three months to get an answer on a short sale – then another 30 days to close escrow. The truth is, with some lenders, it takes up to one year to get approval and close a deal. I have one transaction right now where the buyer has been waiting since September 2009. This kind of waiting is unacceptable – especially when lenders pride themselves on “Desktop Underwriter” to underwrite a loan in ten minutes or less. A short sale happens when the bank agrees to accept less than what is owed against the home without having to evict an owner or worry about the house being destroyed by vandals. In effect, it offers the market a “soft landing” because buyers are paying current market value for the home when the offer is made. Unfortunately, in a down market, after six months of waiting to see is the bank is accepting the offer, other homes may come on the market that may offer a better value and so many buyers will walk away. Therefore, penalize lenders who take too long. Make them hire more staff. That will help the economy and create more jobs.

Idea Two: Create a unified, logical process for short sale approvals. Currently most banks have different systems when approving a short sale. Most however, will tie-in the purchase price to the buyer’s name. Therefore, if Mr. Jones makes an offer for $50,000 and walks away after waiting for six months, it would be logical to assume that Mr. Smith could step in and pay $50,000 for that same house. Wrong. Instead, what normally happens is that lenders will insist on starting over from scratch – thus the long wait time. Lenders will tell you- each individual approval must be sent for investor approval. As a result, there is a lot of wasted time, money and man-hours. And the house that was approved for $50,000 eventually sells for $35,000 or less.

Idea Three: Implement a new $5,500 federal tax credit for first-time homebuyers. Most real estate pundits agree that the $8,500 federal tax credit that ended on April 31st, helped to stimulate sales. But most economists don’t seem to understand why it worked. In other words, most skeptics would say “The Feds just gave money to someone who was going to buy a home anyway.” Not true. The federal tax credit was a great tool for first-time homebuyers – many of whom have good jobs but can’t seem to save two nickels to save their life. How did the $8,500 tax credit help them? Easy. Any real estate agent worth his salt could sell them a home by suggesting that if they borrowed $8,500 from dad or mom for a few months, their generous donors would be paid back by a check from the US Treasury. A check that usually took about seven weeks to get. Even if mom had to take out a personal loan at her credit union to get the cash, she would do it to help “the kids” buy their first home. It was a win-win-win for everybody.

But a $5,500 federal tax credit – would that really help invigorate the economy? Yes, as long as reforming the short-sale process goes along with it. Why? Because in 90% of short sales, the seller has stopped making his house payment. In other words, today’s never-ending short-sale will be tomorrow’s foreclosure.
More foreclosures are certainly on the horizon, but most buyers would prefer to purchase a short-sale because it often shows pride-of-ownership versus a vacant, half-destroyed bank-owned property. By tackling the short sale problem, penalizing lenders and making short-sales easier to close, along with providing an incentive for purchasers to buy, the administration would benefit both lenders and buyers – and allowing for a softer, short-term recovery of the real estate market.

Bob Boog is the author of Mortgage Modifications Made Easy a $10 guide to help homeowners modify their own home loans successfully. Vist: http://www.free-loan-mod-info.com

Short Sales 1-2-3

Should I Buy a Short Sale?

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