While the thought of buying a short sale can often lead to home buyers having dizzying thoughts of getting their dream home for pennies on the dollar, there are also some downsides to purchasing a short sale that should be considered.
Homes Usually Don’t’ Sell for What they Are Advertised For – They Sell Closer to Market Value.
In these cases, the list price is often set by the seller and their agent, not the bank. The agent and seller often create a very low asking price in order to attract buyers. The bank is normally unaware of the asking price; however, the bank has the final say in what an acceptable offer will be.
Keep in mind, if a short sale is priced correctly according to local market value, it is not uncommon to sell for the full list price OR MORE due to a bidding war between suitors.
If the loan is owned by a Non-Fannie Mae or Freddie Mac lender that participates in the new federal HAFA program that went into effect April 5, 2010, a seller who is facing foreseeable foreclosure can have the lender give preapproved short sales terms before the property is listed for sale on the market. These terms include the Minimum Acceptable Net Proceeds (MANP) the bank must receive in order for it to approve the short sale.
In order to calculate the Minimum Acceptable Net Proceeds (MANP) the Non-Fannie Mae or Freddie Mac lender will accept, they normally hire a realtor to conduct an independent valuation of the homes worth, usually a broker's price opinion (BPO). The lender does not have to price the property at the estimated market value per the BPO or offer a discount, however a sale price must be established and that price must be revealed to the property owner. If a buyer then matches or exceeds the stated sale price the lender must agree to a sale within 10 days.
Fannie Mae and Freddie Mac came out with their own versions of the HAFA program and implemented them on June 23, 2010. One problem with their version is the loan servicer is prohibited from telling the seller, buyer and Realtor what the Minimum Acceptable Net Proceeds amount is. As a result, it’s a guessing game so when submitting a contract, all a buyer can do is hope the offer meets the Minimum Acceptable Net Proceeds (MANP).
One problem many sellers are facing is BPO’s used by the banks to set the list price are often inaccurate and reflect an inflated value. Even though many agents try to send in comparables of homes sold on the market in the last 12 months to prove the BPO is inaccurate, most times the banks do not listen and change the list price. If a lender believes a better price can be obtained by foreclosing/reselling a property than accepting a short sale offer, the lender may hold out for a higher offer. Unfortunately, in most cases, a higher offer is not submitted and the house goes to foreclosure.
In general, Short sales have a better offer of being accepted if the offer is for at least 85% of the BPO value.
Lowball Offers Get a Slow or No Response
When lowball offers stream into the bank they are often scoffed at and rejected, giving the prospected buyers little or no feedback. Surprisingly, it may also take painstakingly long to hear back even on good offers due to the high volume of transactions lenders are inundated with these days. Lenders will normally not accept a short sale offer if it is more than 20% below the fair market value of the house.
The Home May Not Be a Bargain
In many cases, short sales are a good value for the money, however, it is important to look at the big picture.
Consider this example—an older 1940’s house that requires approx $40K in renovations to update it. It was bought in 2006 for $475,000. It's now on the market as a short sale for $320,000. Comps are in the $250,000 range. It makes no sense whatsoever for someone to pursue that purchasing this property as a short sale given its condition, the cost to update it and the fact that current comps are less than the shorts sales asking price.
Not all lenders are participating in the new Making Homes Affordable government initiatives to help homeowners avoid foreclosure
If you are considering making an offer on a short sale, it is important to know who owns the loan and who the loan servicer is because this will determine what rules/guidelines will need to be followed when submitting/negotiating the offer and the time frames you can expect for the bank to approve/deny the offer. For example, under HAFA guidelines, the lender has to either approve or deny a short sale offer within 10 days of it being submitted to the bank. For lenders who don’t participate in HAFA, the wait can take 6 months or more. Click here for a list of participating lenders.
Short Sales Require a Huge Amount of Patience and There is No Guarantee the Sale Will Get Approved.
It can take many months for a bank to approve/deny a short sale. In some cases where a lowball offer is submitted, it is not uncommon for that offer to sit on someone’s desks for months with no response at all from the lender until they finally deny it in the end. It is hoped that with the new HAFA rules which require a 10 day response from a lender once a short sale offer has been submitted, this problem will be eliminated.
However, it is also important to remember that this rule only applies to lenders that participate with HAFA and not all do. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender and get their approval.
Short Sale with Only One Lien Holder Are Easier to Get Approved than if There Are Multiple Lien Holders
If the seller has more than one lien holder (ie their primary mortgage lender and a different lender who holds either a second mortgage, home equity loan/HELOC, it is a lot more difficult to get the short sale approved as the short sale package must be submitted to ALL lien holders and ALL lien holders must approve the short sale in order for the property to be sold.
The primary mortgage lender will always be in ‘first position’ meaning first in the right to collect from short sale proceedings. The second lender will always be in second position, unless the first is willing to subordinate their position which is unlikely to happen.
In most instances, the first negotiation by the listing agent is to offer the second lender a small amount, say $1,000. This is a very small amount compared to what is usually owed, however, if the second lender refuses and does not approve the short sale, it may ultimately get nothing as if the home goes to foreclosure, only the primary mortgage lender gets anything as all junior liens are wiped out.
At times like these, it seems the junior lender is simply cutting off their nose to spite their face and it makes no sense at all, however, many of them do it. But this is where the first lender can give up a little more to make the deal work. As most lenders in first position are happy to receive at least 90%, see if the agent representing you can negotiate to make sure a reasonable sum is offered to the second lien holder.
Homes Sell "As Is".
Banks want to avoid liability and will often demand that the buyer submit an offer with an AS-IS addendum basically stating that the buyer assumes all risk associated with the condition of the property from the time of the offer acceptance. Buyers will have the right to inspect the property, however, repairs are seldom done but some lenders will give a repair credit and the buyer would be responsible for making the necessary repairs.
Lenders will also typically refuse to pay for a home warranty for the buyer.
Some Banks Want the Strongest Buyers, Some Want the Strongest Offers
The bank has all the power in approving short sales. The bank can pick the most appealing buyer, which may mean different things to different banks. Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment. Many buyers want to know if they will get a deeper discount for an all cash offer. This is very hard to predict and one will never really know until they make an offer.
Don’t Put All Your Hopes on Just One Property
Short sales aren’t necessarily "short." It can sometimes be a very long process. Don’t get your hopes up for just one property, keep your options open and continue to actively look at multiple properties. Buyers must remain optimistic, the right property will come along. In most areas it is completely legal and risk-free to have multiple offers out at any given time with the proper contingencies in the offers that the potential buyers can back out at any time prior to the offer being approved by the bank and get their earnest money back.
Lenders Can Change Conditions
Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.
Lenders Discount Commission
Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. Moreover, agents end up doing two to three times the work of a conventional transaction and don't appreciate getting paid less to do more work. If you have agreed to pay your agent a certain percentage under a buyer broker agreement, you could be liable for the difference between what the lender will pay and what your contract stipulates, if your agent refuses to waive the difference.
Higher Buyer Closing Costs
In a transaction for a non-distressed property, it is not uncommon for the seller to pay for some of the buyers closing costs. Some lenders will not pay for any of the buyer closing costs; in some cases they will pay some but only after they have been negotiated.
Difficulty Timing Closing to Coincide with Sale of Existing Home
If you are trying to close escrow concurrently with the sale of your home, it might not happen. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender.
The Deal Can Fall Through At Any Time
It is possible for a short sale to fall through at any time. It is possible the homeowner can reinstate the loan by paying off the amount owed in full. The homeowner could declare bankruptcy which could end the short sale deal.
When the Short Sale is Approved, You Must Close On Time
During a short sale there is no leniency with the closing escrow date as there often is in a traditional sale. During a short sale, exceptions are rarely made and the buyer must close on time. Because of this, it is important to take care of all loan paperwork immediately after opening escrow. I’d advise buyers to be extra prepared and try to have the loan finalized a few days in advance of the closing date. If there is going to be an issue that will prevent closing on time, a request for an extension will need to be made immediately. If the request is made early enough, many banks will grant an extension but don’t just assume it will happen.
Short sales can be a great opportunity to find your new home at a competitive price. A Short sale could also be a major headache that lasts for months. It is important to have a good understanding of the factors that lead to a successful short sale to make it an enjoyable and profitable experience.
What is an SFR?
The complex details involved with short sales and foreclosures are unique calls for specialized expertise. Contact an agent such as myself that has earned the Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors and who is committed to guiding you through the process, setting realistic expectations, and streamlining your path to homeownership. Call me anytime at (910) 787-2160 to set up a free, personal consultation.
If you are considering buying a short sale or foreclosure, there could be drawbacks that I, as a real estate agent, cannot advise you on. For your protection, I suggest that all borrowers:
- Obtain legal advice from a competent real estate lawyer to discuss title issues, changes to land use, sellers right to redemption and a host of other issues.
- Call an accountant or CPA to discuss short sale and foreclosure tax ramifications
