Ron Denhaan, Realtor (949) 290-3263. Orange County real estate specialist.
short sale home

What is a Short Sale?


A short sale is a sale in which the value of the property is less than the current mortgage amount, and the homeowner may no longer able to make the payments due to illness, hardship, or other cause. A lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. Instead of buying from a seller, you are purchasing the property directly from the lender for a discount. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000. You write an offer to the lender for $220,000, which is accepted as full payment for the loan. This is a short sale. Why are they willing to take such a discount? Several reasons. First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it. Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.  

If you would like information on the differences between a Bank Owned sale, Standard sale, and Short Sale, visit my page here.

OC short sale listings are here

At the time of this writing, foreclosures are at an all time high, which basically translates into more opportunities for you. Since foreclosures are increasing, this is the perfect time to jump into this because there will be more and more lenders discounting properties. It is safe to say that most lenders will accept a short sale, however, you may come across one or two lenders who will not discount. If the numbers work out for the lender they will do it.

Don't be scared off by these short sale properties as they may turn out to be a great deal for you. But you need to know a few things before you decide IF you want to pursue a short sale purchase:

  • A seller must disclose if the home is either an existing short sale or likely be one, due to the market value.

  • A short sale MUST be approved by the lender. Even though a seller might accept your offer, it will be subject to approval by the lender

  • The Lender will (likely) send out an appraiser to evaluate the property in light of recent sales - they are looking for market value, too, and you cannot expect a short sale to be a fire sale (i.e., it may NOT be a great deal after all)

  • The Lender must receive hardship letter and other required documents from the seller in order to approve a short sale

  • The Lender will likely have a checklist of requirements and paperwork required for the short sale process

  • The Lender will likely request that the sale be "as is" and due to hardship will probably not approve any credit for repairs

  •  Be prepared for a short sale to take more time (total time may be 60 days +/-) - this is one of the biggest complaints from buyers

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Why can short sales be difficult for buyers?

Short sales can be frustrating for buyers. Because of their complexity, some buyers and selling agents are avoiding them completely, often preferring to deal only with listings that are "equity sellers" (home sellers with an adequate equity position) or bank owned (REO). The main reasons that they cause frustration are:

1) The artificially low list price

2) Competition from other buyers

3) The time it takes to get an answer from the seller and complete the transaction

4) Additional costs such as deficiencies (past due HOA dues, property taxes, etc) and/or payoff to second TD.

5) The fact that lenders play by their own rules

Much of this frustration could be avoided if the buyers agents would property educate their clients on the short sale process to proper expectations.

Why do many short sale listing agents price the homes low?

Simple - to attract offers. When an agent submits the short sale package to the lender (this includes items like the hardship letter, tax returns, bank statements, etc) they must also include a completed purchase offer (Residential Purchase Agreement, or RPA). To expedite this process, many listing agents will simply price the home artificially low, to attract many offers and hopefully start a bidding war. At this point, there is no clear indication of what price the lender will finally approve, but with many offers in hand, the agent will submit the best one and move the process along. At some point, the lender will review the package, perhaps perform an appraisal, or hire an agent to perform a BPO (Broker Price Opinion). The bank or lender may then reveal their approval range. Once this happens, the listing agent will have an "approved short sale".

When an actual price range is known, the listing agent can alert all of the potential buyers and ask for "highest and best offer". If they have multiple offers, they will counter all of them to get the best price possible. This whole process may take weeks to many months to complete. This has created an unfortunate environment for buyers, who are initially enticed by the low list prices. Buyers don't like to pay full list price so their typical opening offer is 5 to 10% below list. Instead, many short sale homes sell for well over list price, because of what might be termed as "offer baiting" or "teaser pricing".

Isn't the technique of listing the homes low, dishonest?

While I don't wish to malign any fellow real estate agents, I do believe that an ethical listing agent should price a short sale home according to legitimate comparables (comps). This might delay offers and bank approval, but it would place the home in a price range that is at least fair. Offers would be more realistic and there wouldn't be as many frustrated buyers who had hoped to purchase the property at a bargain price.

Why do lenders take so long to respond to short sale offers?

The asset management departments of many lenders are understaffed and are drowning in short sales. Offers on short sales go to the bottom of the pile. When an offer rises to the top, it is reviewed by a committee. With their large work load, the lenders frequently neglect to contact listing agents. Instead, listing agents usually have to spend hours on the phone each week trying to reach the manager in charge (a frustrating experience in itself!).

The second reason is that banks and lenders play by their own rules. They are not part of the Department of Real Estate and they don't have a particular code of ethics that they have to abide by (as we Realtors do). Their motivation to process or respond to their short sales varies considerably. Banks and lenders usually wish to avoid the foreclosure process, so I believe that they are more motivated to close a short sale if the homeowner goes into default. Else, they march to their own timetable and they will respond to offers at a time of their choosing. 

How do lenders determine approval price?

Usually through an appraisal of the property. Unfortunately, they often rely on real estate agent BPOs rather than licensed appraisers. Why? Cost of course! They can pay a real estate agent to complete a BPO (Broker Price Opinion) at a cost much lower than the cost of a true appraisal from a licensed appraisal company. The disadvantage of this can be an erratic price opinion, because:

1) They frequently use agents who have no local market expertise.

2) They open the door for a conflict of interest with the agent performing the BPO.

The agent may indeed provide a very fair price opinion. However, BPO agents frequently cover a wide geographical area. Thus, they may lack local market expertise. I have been caught in this myself where I had a short sale listing in an area where I was the local expert. The Broker Price Opinion provided to the lender was ridiculously high for the home and the condition of the property.

Worse, some agents may wish to list the property in the event that it should go back to the bank in foreclosure. The motivation then would be to create an artificially high price opinion. Why? So that it the home doesn't sell successfully as a short sale. If it fails to sell, it may go back to the lender as an REO (Bank owned property). The BPO agent, relying on their connections with lender, may get a nice, new home listing that they can sell for full commission -- a far better payday then the small fee they earn for the BPO.

If a Broker Price Opinion comes in higher than true market value, it further distorts the short sale process. The lender will be lead to believe that offers must be in this price range. This is an outrage to a listing agent who knows the local market, as this now severally hampers their ability to sell the home.

What is best strategy for purchasing short sales?

Start with realistic expectations on pricing -  Many short sales are initially listed with "teaser" pricing. Ask your agent to run comparables for the property so that you will have a reasonable idea of what other, similar properties have actually sold for. This will help you determine whether the short sale listing is priced to market, or is listed with a "teaser" price to attract offers. Armed with this information, determine the maximum amount you would pay for the home and submit this as a "highest and best" offer.

Avoid "low-balling" - Short sale list prices are often meaningless (see above). As such, don't submit a "low-ball" offer, as this is certain to be rejected. Buyers should not try to use the traditional purchase model of offering less than list price on short sales. I typically advise my buyers to offer list price or higher if they want to beat other offers and get their offer accepted. A buyer in doubt will become a believer after they have placed several unsuccessful offers! 

Have home choices - It's a good idea to look at several short sales and have backup homes, in case the offer on the first one doesn't go through. You may also wish to make offers on several homes since the approval process can take weeks.

Try to focus on "approved" short sales - If it is a new short sale, the approval process will undoubtedly take the longest. If the listing agent has classified the property as an "approved" short sale, it may not be formally approved, but the price range that the bank will accept might be known through prior negotiations. If this is the case, submitting your offer at the "approved" price might enable you close on the home quickly. 

Don't make an offers on short sales if you need to move quickly - If you are relocating or need to move into a home quickly, stay away from short sales. The approval process could drag on and you may not be able to open escrow quickly enough to accommodate your move. Focus your home search instead on equity seller properties, or bank and corporate owned home listings.

 


 

Are you interested in a short sale on your home? See my complete page for listing your home as a short sale in lieu of foreclosure. 

 


 

If you would like more information on short sales, bank owned properties, foreclosures, distress properties, homes in default, or good deals in South Orange County, please call me! I will be happy to provide you with a list of Short Sale properties in any area in South Orange County, CA. Call or e-mail me for a list of Short Sales & Bank Owned Properties!

    Ron Denhaan

Ron@rondrealestate.com

Ron Denhaan, Realtor

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