The Real Kirkland

Kirkland, WA

Let’s Talk Short Sales 

One of the most abundant types of property listings on the market today are the ever bittersweet and mysterious  short sale homes. Love ‘em because their great deals or hate ‘em because they are lowering the property values in your neighborhood, they make up approximately 17% of all homes on the market today nationwide. They are statistically more prevalent in the outskirts of more major metro areas and more than 60% on the market in King County are priced under $350k. Short sales are essentially homes where the seller is asking to bank to agree to accept a lesser pay-off than what the seller actually owes. It may be that the bank forgives the differential of the debt owed vs, the net proceeds completely or that they issue a pay-off and then lien the seller for the remainder of what they owe. Either way, the seller’s credit will be affected for any late payments and possibly re-negotiating that debt. These homes have not gone back to the bank yet and the sellers are still on title, distinguishing them from a bank owned foreclosure.

People love them some short sales. All over the news, bookstores, radio, and at the water cooler, people all know of some unbelievable foreclosure on their street or neighborhood that is a sweet deal. Short sales that do sell actually tend to close for less than market value. They can be a fantastic way to obtain a home with upside potential and maybe a little instant equity. They are vast and many on the market today. Agents are eager to get them off of their hands. Many agents are “going with the new flow” and rather than busting in this market, they’re making lucrative careers by specializing in short sale listings and negotiations.

So what’s the catch? Because there’s always a catch, right?  Or is it natural that sellers had it so good for so long with easy multiple offers, escalation clauses, and sky-high asking prices, that it’s simply the buyers “turn” to have it so good? Short sales can be a great treasure for some very patient buyers but you have to know what you’re diving into before investing the time and and a great amount of energy. 

 What You Should Know about Short Sales:

Listing Price:

One of the most confusing things about short sale listings is this: the price it is listed for on the market is NOT the price you may always expect to buy the home for. The listed price on the market is the price the sellers are HOPING to negotiate to sell for with the bank because all short sales are subject to final lien holder approval. So for example: If I owe $250k on my home but list it on the market today for $200k because that’s what market value is, I still cannot guarantee a buyer, who wants to buy, a sale for $200k. They may offer $200k and I may agree to it, but the bank may come back and say “yes, that’s fine”, “no, but here’s our counter”, “no, we’ll take it back into our inventory and foreclose if you can’t make payments”, or give no timely response at all.  Buyers get very excited when they see the price of a short sale home dropping every few weeks, but what many don’t realize is that means absolutely nothing. That new, lower price is absolutely obsolete because it is not currently sellable at that price without bank approval.  And depending on how that home was financed and who the investor on the loan is, Fannie Mae and Freddie Mac guidelines only allow lenders to accept a certian percentage of loss before they are forced to take it into inventory rather than short sale. What is the formula? They’ll never tell. It’s a mystery.

The ONLY time that a short sale can guarantee a buyer a purchase price in line with what it’s listed for  is if the sellers have already obtained a bank approval and have it in hand.  And this can be a challenge because you cannot get a bank approval without a signed purchase and  sale agreement. So this very fact makes the entire short sale pricing and approval process a catch 22. 

Making the Offer:

Always bring your highest and best offer no matter what because most of the time you only get one shot. And in the months of waiting that it may take to get an approval, you can almost count on there being other, competing offers submitted.  And the seller may submit other offers that come in. They know that any other offers submitted may give them a better shot of getting out of their home. 

 Keep Looking and Have a Plan “B”:

Short sales are low probability transactions. Even if your offer was the only offer, there’s nothing to guarantee that the bank would accept it or counter it. In King County alone there are over 1,100  single family residence short sale properties with an accepted offer, but only about 120 short sale properties closed in September (numbers from NWMLS sources, but not compiled or guaranteed by the NWMLS.) That isn’t because the banks are ramping up. It’s because a lot simply never close. So be sure to keep an eye on your short sale home but don’t stop looking in the meantime until you receive a bank approval.

Note: Always make sure that your agent has included a clause on your offer that allows you to rescind your offer prior to receiving bank approval in case you find another home while you’re waiting.  

Sold AS-IS, WHERE-IS:

Most bank owned homes and short sales are at least cosmetic fixers. I would estimate that in the SS homes I see, most need a minimum of $5k of work done before they are in sanitary, move-in condition. It may be that your home is structurally damaged enough that you would qualify for the FHA 203K or rehab loan which would include your repairs in a buyer’s loan, but more than likely the cost of repairs will come out of the buyer’s pocket. That is because 98% of all homes sold where the bank is involved, the home will be sold as is, where is. Sure, there are some exceptions where you will get a lenient, more attentive bank that realizes making a few repairs is more lucrative than taking the home back into their inventory or they realize that no one can obtain a loan without a certain item being fixed, but for the most part, it’s all up to the buyer.        

Who You Need to Hire:

Short sales and banks in general are tricky these days even for specialists. Before you jump in, you definitely want a SS specialist in your court. An agent or third party negotiator can definitely expedite the SS approval process. But beware: many agents and third party negotiators misrepresent their abilities and so you really need to make sure to do your homework and questions their achievements. If it doesn’t look good, use the agent for your basic representation and hire a qualified negotiator for the actual short sale. It may cost about 1% more, but typically the agents will split the cost for you out of the commissions. The banking industry today is complex and ever changing and requires someone with inside expertise and tenacity. PLEASE CONTACT ME FOR REFERRALS. I have several reputable parties I would be happy to refer you to for representation with a short sale. They may cost you slightly more, or not, but a competent attorney, agent, or negotiator is always worth it.

There is no one way to do a short sale and the bank can do whatever it wants. Anything that gets them the highest price is fair game for them. Though I have seen, through the listing agent, to get first consideration if an offer is first in and accepted, but it depends how strong the relationship is between the bank and the listing agent. Easier done on a bank owned than a short sale.

Note: In some cases, it may be mandated that the buyer is responsible for paying a short sale negotiation fee at closing. Some banks require a 3rd party negotiator or attorney that will charge  .5 – 1.0 %  fee, based on the cost of the home,  at closing. This fee will be added on top of your other closing costs. Not all short sales require this fee, but approximately 25% do. You will have to double check with your agent if the short sale you are considering demands this fee because the fee is not generally disclosed up front to buyers.

Waiting Out the Approval From the Bank

To be dealing with foreclosures and short sales, you have to have the patience of a saint! Not only do different banks have different protocols in regards to reviewing and accepting offers, but EVERYTHING, even your signed agreement with the sellers, is subject to  bank approval and their own time frames. Your offer filtering through the various levels of a bank’s bureaucracy, especially if you had a sub-prime loan or your bank was recently sold, may take months to a full year, if it get s accepted or countered at all. So be very patient and continue to look at other properties in the meantime.

A short sale is a process. The first step is to submit a short sale package, including financial information, a hardship letter explaining why the owner can no longer make the mortgage payments. Usually approval of a short sale requires weeks or months because the case manager is working with perhaps 200-300 cases, so they just work on the first case that comes up. Until the lender approves the short sale in writing there is no sale.

In most cases there are two lien holders, the first, or primary mortgage, and the second, which may or may not be a Home Equity Line of Credit. BOTH need to approve of the short sale, which is a loss to their investors. We are seeing cases where the first or second mortgage agrees, but the other wants more money than they are being offered, stalling the efforts and ultimately killing the sale. 

Timing for Tax Credit:

At this moment, the ship has sailed to meet the $8,000 tax credit deadline. It typically takes about 90-180 days to receive lender approval and close on a short sale home. Sometimes longer. As of right now we have less than 60 days to guarantee a buyer can take advantage of that credit if the government chooses not to extend the deadline. You can still make offers on short sales, but you will likely not get the tax credit, unless the government extends the November 31^st,2009 deadline. 

All Things Considered…

 Short sales and foreclosures can be the way to go if you’re willing to wait it out for the perfect home, but you may want your agent to try searching for homes that are “approved short sales” or “bank/corporate owned” or just simply a regular, old fashioned sale between buyer and seller. If you’re primarily looking for a bargain, I would suggest bank owned properties, where the bank has already foreclosed and put the house on the market. Most of those are at least cosmetic fixers, but if you can handle that, you might get an even better buy than a short sale. You will, however, have more need to have an attorney review the bank documents. Some bank’s documents are surprisingly poorly drawn and contradictory.

I think a lot of people don’t realize how competitive a short sale can be. A lot of buyers are getting beat up trying to chase a bargain. I personally have seen reasonable, capable people on the level of a nuclear meltdown over the levels of frustration and angst this can cause. Crying, demanding, literally on their last thread of patience. One person told me it was more frustrating than her divorce! It’s reminiscent of the competition we had several years ago where good homes were getting multiple offers, only worse. I have seen many of my clients give up on chasing short sales for this very reason.

Nothing gets me more than when a buyers tells me they want a short sale because they have heard it’s the best way to get a deal. That can be true, but not necessarily. Have your agent familiarize you with the local short sale market to determine if it truly makes the most financial sense. And the truth is, it you just want a GOOD DEAL, no matter what it is, right?

Jennifer Nilssen with TEC Real Estate can be reached directly at 206-853-1491 or at jen@tecrealestate.com. Her website can be accessed at www.livekirklandwa.com .