Why You're Frustrated Trying to Buy a Short Sale

I’ll explain the steps involved in buying a short sale property, but first let me define a few terms.

A “short sale” means that if the owner sells the property, there won’t be enough money to pay the bank what is owed. The owner is “short”.

The “borrower”, the “owner”, and the “seller” are all the same person.

The “bank”, also known as the “lender”, does not own the property. Even so, for the owner to be able to sell the property he needs the bank’s agreement to discount what is owed.

The “package” is the documentation that must be sent to the bank so they can decide whether or not to accept a short sale and at what price.

The “agent” is the real estate professional that the owner hires to market the property and represent him during the short sale process.

Now here’s how it works. The seller and his agent decide to attempt a short sale. There is no guarantee that a short sale will work, since the bank may or may not go along with it. While experience tells us which circumstances have the best chances of success, the rules are constantly changing so no one can predict the outcome with certainty.

The agent’s first job is to create the package. This involves, among other things, hardship documentation, a Broker’s Price Opinion, photos, and most importantly an OFFER. The bank will misplace (this is code for shred) any incomplete package, so there is no point in submitting a package without an offer.

How does the agent generate an offer quickly? By listing the property at an unreasonably low price. The owner will net zero from the sale, so the price doesn’t matter to him. The agent’s first priority at this point is only to generate an offer, any offer. In fact, the agent might know some investors who will throw a lowball offer at anything, and in this case you see the listing hit the MLS with an accepted offer on day one. “Accepted offer” means the seller has signed it, but remember the seller is powerless to sell the property unless the bank goes along.

So now the waiting begins. It takes the bank 3 to 4 months to decide if they will allow a short sale, and at what price they will do it. During this time the property is still listed on the MLS as “Active”, since the bank has not approved the short sale yet. This is why you see listings at very low prices that have been on the market for 100 days. You’re wondering “what’s wrong with this property?” Nothing is wrong, it’s a crazy low price on a short sale and the seller is waiting on an answer from the bank.

During this waiting time the seller is either allowing showings or not. If the seller allows showings, you can make an offer which will be considered a “backup offer”. As you might imagine, in several month’s time it’s common for many backup offers to come in.

Once the seller has enough backup offers, he may decide that it’s nutty to keep having people come through the house, since they have plenty of offers and they aren’t even sure that a short sale will work. So why bother? If the seller comes to this conclusion, the listing will still be active in the MLS and yet you can’t see it or make an offer on it.

Bear in mind that none of this information is stated in the listing description that you see on the Internet. You might not know that it’s a short sale, or where it is in the process, all you see is a house at what looks to be a great price.

When the bank completes their own appraisals and due diligence, they will answer the seller. There might be all kinds of negotiating at this point between bank and seller, as to what the bank will accept as a loan payoff and what responsibilities the seller has. The seller might have to come up with some money or give the bank a promissory note. If the bank and the seller can’t come to terms, there will not be a short sale.

But let’s assume the bank and the sellers agree on what has to happen for a short sale to take place. The bank at this point will state at what price they will do a short sale. We then call this an “approved short sale” meaning that the bank has approved it. The price is probably NOT what the agent has in the listing, it’s usually more and it might even be significantly more.

At this point the person who made the original offer usually walks away. The price is not what he was hoping for. The bank might then ask the agent to see the backup offers and decide to accept or send a counter offer to one of them. They might ask everyone to submit their “highest and best” offer within 24 or 48 hours. At this point the agent might put the new price into the MLS and say the short sale has been approved and generate some new offers. There are no rules to this game; it goes however the bank wants to play it. They call the shots, because without their approval, no sale will take place.

So if you’re still interested 3 to 4 months after you made your offer, and if you’re willing to up your offer so that it’s the highest and best, then congratulations! You succeeded in purchasing a short sale property!

Downsizing

The current economic climate has caused many people to re-think their priorities in life. Or stated more correctly, many people re-thinking their priorities has caused the current economic climate. This dramatic shift in motivation lies at the root of all that we see happening, and the reason stimulus won’t work is because people don’t want to be stimulated.

In real estate this dramatic sea change in thinking from expansion to contraction is showing up as the desire to have your housing work for you rather than you work for your housing. Some of my clients are re-examining the drive to constantly strive for more and better homes, especially as it gets harder to work longer hours as we age, and we are no longer certain that we’ll make more money next year than we did this year. And even if we did manage to make more, we won’t get to keep any more as taxes are certain to increase in the future.

So how do we get housing to work for us rather than vice-versa? It starts with an honest assessment of what we need and want in our lives. What if by downsizing to a less expensive but equally comfortable home gets you out of debt so you don’t have to work so hard just to maintain? What if you could free up equity and buy some investments that produce “mailbox money”, meaning checks that show up in the mail without you having to work for them?

It looks like this – you have a large house that you don’t really need anymore because the kids have moved out. You have empty bedrooms that you never use. You’re in one of the upper tier price points that have declined in value a bit, but not as much as the entry level market that has been hard hit by foreclosures. You’re getting closer to retirement, but you’ve watched your retirement funds in the stock market drop. You could stay where you are and continue to make the big mortgage payments, but you’d rather not. Why not trade that house for a more affordable one and free up capital for investing in cash flowing assets?

What if you downsized and reduced your monthly expenses? If we’re in the eye of the economic storm and there’s more to come, you will be better able to stand. And if happy days are returning soon, then you will be making good money while your expenses are lower, and so you’ll be able to replenish that retirement account. You win either way.

It seems I’m running into more people who are thinking along these lines, which makes sense in light of the social mood shift. It is exactly this shift which tells me the economy is not ready to return to the go-go days of expansion. We have much more de-leveraging ahead.

So how about you? Are you getting closer to the edge where if things don’t turn around soon you’ll be in trouble? Or maybe you’re doing alright but you’re just tired of working so hard? Why not be proactive and make some wise choices while you still have options? That’s called living life by design and not by default. You call the shots.

Depending on your situation, you could reduce your debt, eliminate your debt, purchase cash-flowing rental property or some combination. For example, if your home is worth $950K and you owe $300K on it, you could sell it, buy a house for $500K cash, and buy two rental homes in Hemet for $75K each that rent for $850 per month each. So you’ve eliminated a $2500 a month mortgage payment, reduced your real estate taxes by $500 a month, and increased your income by around $1200 a month. That’s $50K a year you don’t have to make. That could be the difference between working and retiring, or living well on only one income.

So what’s really important to you and what are your priorities? Spending more time with the kids or grandkids? Is there a ministry or worthy cause you’d love to devote more time or money to if only you could? Perhaps you have the means already. Maybe you could free up time and money by restructuring what assets you already have. We can all learn to be better stewards of what God has blessed us with.

Your whole life can change with some strategic moves. If you’re stuck in a rut of working to pay the bank and not getting anywhere, I can help you get unstuck. Feel free to call me any time.