Many investors are thinking there may be some good buys in short sales...there are...but there are also some important hurdles to be aware of:
1) Just because a Realtor has listed a property and advertised it as a short sale, does not mean it really is...
a) Has the Seller completed a short sale package and received tentative approval from the lender?
b) Is there a second or HELOC and have they been contacted and given approval?
c) Are there any other liens that could encumber the transaction?
2) Are you willing to jump through hoops and wait for up to 180 days?
a) Banks are currently swamped with requests and can take up to 30 days to respond.
b) You may plan to use financing, but the rate/terms you banked on may change radically during the negotiations. I recommend at least 60-day locks.
c) They may drag their feet for 20, 30, 60 days...then say no.
How do you package an offer that banks will accept:
1) Hire a Realtor familiar with short sales.
2) Have him/her prepare your own BPO to support your offer price.
3) If possible offer cash.
4) Limit contingency to the bare minimum to protect you.
5) Submit all documentation together, complete and legible.
Short sales can offer good value, but for the average person looking to buy a Principal residence I would say they are not your best option. Leave them to Investors.
Wednesday, January 9, 2008
Short Sales - Sellers Edition
Determining if you qualify:
Many Sellers are under the false impression that just because they are underwater on their mortgage they can do a short sale.. That is simply NOT true. If you made a bad investment and have the means to cover the loses, the bank will expect you to either keep making payments as prescribed in your mortgage, or cover the losses of the sale through your other assets. Do not expect the bank to take losses while you walk with assets...including IRA, 401K, other properties or tangible assets. You MUST be effectively insolvent to get a bank to agree to a short sale.
How to get started:
Find a Realtor knowledgeable in short sales and have them help you pull together a short sale package. The package will differ from institution to institution.
1) You will need to send a written request and authorization for your Agent/Broker to discuss the loan(s) with the Servicer.
2) You will need to provide a complete accounting of your finances (Income, assets and liabilities) and a letter of hardship detailing why you feel a short sale is appropriate.
3) Your Broker will need to do a BPO.
What will the short mean for you:
1) You will be able to stay in the home during the process.
2) The bank may accept smaller payments during the marketing time.
3) You may be able to negotiate the limitation of derogatory comments on your credit report.
4) Sellers cannot get ANY cash from the proceeds.
What can trip you up:
1) Some Lenders will compare your original loan application to what you claim on your financial disclosure package. If there are discrepancies, they may go after you for loan fraud (Say you did a stated income loan, claiming a $150,000 a year income, but you provide your pay stubs and only show $100,000 in income).
2) The second mortgage. Don't forget about the second or HELOC.
3) Other recorded liens against the property that could encumber the transaction.
4) Buyer patience. The process can take months. Be sure your Buyer has the time and patience to wait it out.
Short sales can be very complex and there is no one formula, as each transaction is its own animal. Do not attempt to do it on your own. You cannot get paid on it anyway, so bring in an experienced Realtor to guide you through. The Bank will pay their commission out of the sale proceeds.
Many Sellers are under the false impression that just because they are underwater on their mortgage they can do a short sale.. That is simply NOT true. If you made a bad investment and have the means to cover the loses, the bank will expect you to either keep making payments as prescribed in your mortgage, or cover the losses of the sale through your other assets. Do not expect the bank to take losses while you walk with assets...including IRA, 401K, other properties or tangible assets. You MUST be effectively insolvent to get a bank to agree to a short sale.
How to get started:
Find a Realtor knowledgeable in short sales and have them help you pull together a short sale package. The package will differ from institution to institution.
1) You will need to send a written request and authorization for your Agent/Broker to discuss the loan(s) with the Servicer.
2) You will need to provide a complete accounting of your finances (Income, assets and liabilities) and a letter of hardship detailing why you feel a short sale is appropriate.
3) Your Broker will need to do a BPO.
What will the short mean for you:
1) You will be able to stay in the home during the process.
2) The bank may accept smaller payments during the marketing time.
3) You may be able to negotiate the limitation of derogatory comments on your credit report.
4) Sellers cannot get ANY cash from the proceeds.
What can trip you up:
1) Some Lenders will compare your original loan application to what you claim on your financial disclosure package. If there are discrepancies, they may go after you for loan fraud (Say you did a stated income loan, claiming a $150,000 a year income, but you provide your pay stubs and only show $100,000 in income).
2) The second mortgage. Don't forget about the second or HELOC.
3) Other recorded liens against the property that could encumber the transaction.
4) Buyer patience. The process can take months. Be sure your Buyer has the time and patience to wait it out.
Short sales can be very complex and there is no one formula, as each transaction is its own animal. Do not attempt to do it on your own. You cannot get paid on it anyway, so bring in an experienced Realtor to guide you through. The Bank will pay their commission out of the sale proceeds.
Short Sales - Q&A
Many people have asked me about short sales lately, so I thought I would put together a quick Q&A:
Q. What is a short sale?
A. A transaction where the proceeds are insufficient to cover all costs and liens.
Q. Can any Seller do a short sale?
A. No. You must prove financial need. The bank must first say OK...then you need to find a Buyer and complete the transaction before the auction date.
Q. Are there restrictions to Buyers making offers?
A. Generally no, but the banks look at many factors, not just offer price.
Q. I saw a listing advertising a short sale, does that mean that a short sale is pre-approved?
A. No. Many Realtors and Sellers do not pre-complete the short sale package and the bank does not have knowledge. Also, even if the bank has indicated they will "review" short offers, does not bind them to accept any offer.
Q. Are short sales always a good buy?
A. No. Many short sales are in that position because the previous Buyer over-paid, or the property has other issues!
Q. Are short sales always difficult?
A. No, but much more intensive than a standard transaction. An experienced Realtor who knows how to present the package on behalf of the Seller can go a long way to make the transaction easier. Also, all banks handle them differently and each one is its own animal.
Q. Are short sales a good idea for the average Buyer?
A. Yes and No. Depends on your appetite for difficulty and how long you are willing to wait. It may take 120 days to complete...or it might get yanked from you at the end.
Q. What is a short sale?
A. A transaction where the proceeds are insufficient to cover all costs and liens.
Q. Can any Seller do a short sale?
A. No. You must prove financial need. The bank must first say OK...then you need to find a Buyer and complete the transaction before the auction date.
Q. Are there restrictions to Buyers making offers?
A. Generally no, but the banks look at many factors, not just offer price.
Q. I saw a listing advertising a short sale, does that mean that a short sale is pre-approved?
A. No. Many Realtors and Sellers do not pre-complete the short sale package and the bank does not have knowledge. Also, even if the bank has indicated they will "review" short offers, does not bind them to accept any offer.
Q. Are short sales always a good buy?
A. No. Many short sales are in that position because the previous Buyer over-paid, or the property has other issues!
Q. Are short sales always difficult?
A. No, but much more intensive than a standard transaction. An experienced Realtor who knows how to present the package on behalf of the Seller can go a long way to make the transaction easier. Also, all banks handle them differently and each one is its own animal.
Q. Are short sales a good idea for the average Buyer?
A. Yes and No. Depends on your appetite for difficulty and how long you are willing to wait. It may take 120 days to complete...or it might get yanked from you at the end.
Buyer forecast for 2008
You are entering a great window that will last at least 18 months. Take advantage of it, but with caution.
1) Sit down with an EXPERIENCED Lender who will clearly and openly disclose all fees and costs. Make sure that the rates and terms that they discuss are based on your FULLY documented income, a RECENT credit score and true cash reserves. Get pre-qualified, and check in with your Lender weekly to ensure that the program you want to use is still offered.
2) If you have challenges that prevent you from getting the best rate/term available on the market I would recommend not buying now, but spending some time cleaning up your credit, building cash reserves and building time of employment. The credit crunch is making it more difficult for challenged borrowers to get decent rate/term. As the fed rolls out new programs and the credit markets ease you will have more options. Plus, you do not need to worry about values going up as you repair your credit.
3) Use an experienced LOCAL Realtor. Their commission is paid by the Seller and their services can save you tens of thousands of dollars. Don't use a buddy or family member out of a sense of obligation. This is a huge financial commitment that you are making and you deserve the best representation you can find.
4) Take your time and view as many homes as you feel necessary to find the home best suited to your needs and budget.
5) Look closely at comparable sales and have your Realtor determine if the sales prices of the comps are real or inflated. Also have the realtor do listing/transactional research on the property. Find out if there is a notice of default, a recently recorded certificate of death, or divorce filling. All factors that could influence Seller motivation.
6) Be aggressively low in your initial offer, but not so low that you turn the Seller off.
7) Ask for a minimum 45 day Escrow, if not 60 day. Loans are taking MUCH longer to process and you may need the time.
8) Fully exorcise your Inspection rights and demand that Sellers make all necessary repairs at Sellers expense.
Finally, during the negotiations if you ever get that gut feeling that you are paying too much, or there is something wrong...STOP. Realtors only get paid when deals close, so they may get pushy to get you to sign and commit. If it doesn't feel right..wait. The home most likely isn't going anywhere, and if it does there are another 100 just like it looking for a Buyer.
1) Sit down with an EXPERIENCED Lender who will clearly and openly disclose all fees and costs. Make sure that the rates and terms that they discuss are based on your FULLY documented income, a RECENT credit score and true cash reserves. Get pre-qualified, and check in with your Lender weekly to ensure that the program you want to use is still offered.
2) If you have challenges that prevent you from getting the best rate/term available on the market I would recommend not buying now, but spending some time cleaning up your credit, building cash reserves and building time of employment. The credit crunch is making it more difficult for challenged borrowers to get decent rate/term. As the fed rolls out new programs and the credit markets ease you will have more options. Plus, you do not need to worry about values going up as you repair your credit.
3) Use an experienced LOCAL Realtor. Their commission is paid by the Seller and their services can save you tens of thousands of dollars. Don't use a buddy or family member out of a sense of obligation. This is a huge financial commitment that you are making and you deserve the best representation you can find.
4) Take your time and view as many homes as you feel necessary to find the home best suited to your needs and budget.
5) Look closely at comparable sales and have your Realtor determine if the sales prices of the comps are real or inflated. Also have the realtor do listing/transactional research on the property. Find out if there is a notice of default, a recently recorded certificate of death, or divorce filling. All factors that could influence Seller motivation.
6) Be aggressively low in your initial offer, but not so low that you turn the Seller off.
7) Ask for a minimum 45 day Escrow, if not 60 day. Loans are taking MUCH longer to process and you may need the time.
8) Fully exorcise your Inspection rights and demand that Sellers make all necessary repairs at Sellers expense.
Finally, during the negotiations if you ever get that gut feeling that you are paying too much, or there is something wrong...STOP. Realtors only get paid when deals close, so they may get pushy to get you to sign and commit. If it doesn't feel right..wait. The home most likely isn't going anywhere, and if it does there are another 100 just like it looking for a Buyer.
Seller Forecast for 2008
Let me start by saying that if you do not have to sell for the next few years...DO NOT.
If you must sell I would recommend the following:
1) Contact a local Real Estate Broker who knows and lives in the community and who plans on staying in the business through the downturn. It may take 12 months or more to sell your home and you do not want your Realtor bailing on you before your house has sold. Do not hire a Realtor because you feel obligated to a family member or friend. Hire a Realtor because they are the best qualified to sell your home.
2) Review your loan docs and all liens against the property. Be sure that your REALISTIC sales price is enough to cover your outstanding mortgage(s), pre-payment penalties if any, taxes or other liens and Escrow/title/ commission costs. If not you may need to consider a short-sale or other means of disposing of the property.
3) The days of selling "As-is" are over. Take care of the deferred maintenance, clean up the landscaping, de-clutter the inside and stage the house.
4) Remove barriers to doing business with you. Make showing the home easy. Have your disclosures filled out and readily available for review.
5) Present yourself as a Qualified Seller.
6) Pick your price carefully. Use only recent comps and expect to get less than that. Buyers do not care about what you "need" to make or "want" to clear. Buyers only care about what they feel the house is worth to them.
7) Respond to ALL offers, no matter how low-ball you feel they are. If you get a live Buyer on the line, do not let them ago until it is clear that what they are offering is truly unrealistic to what the market is doing.
Lastly, monitor your asking price. Make sure that the broader market is not lowering around you, thus making your home seem over-priced. Price is going to be the single biggest driving factor this year. I suggest that you stay ahead of the curve, not chasing it.
If you must sell I would recommend the following:
1) Contact a local Real Estate Broker who knows and lives in the community and who plans on staying in the business through the downturn. It may take 12 months or more to sell your home and you do not want your Realtor bailing on you before your house has sold. Do not hire a Realtor because you feel obligated to a family member or friend. Hire a Realtor because they are the best qualified to sell your home.
2) Review your loan docs and all liens against the property. Be sure that your REALISTIC sales price is enough to cover your outstanding mortgage(s), pre-payment penalties if any, taxes or other liens and Escrow/title/ commission costs. If not you may need to consider a short-sale or other means of disposing of the property.
3) The days of selling "As-is" are over. Take care of the deferred maintenance, clean up the landscaping, de-clutter the inside and stage the house.
4) Remove barriers to doing business with you. Make showing the home easy. Have your disclosures filled out and readily available for review.
5) Present yourself as a Qualified Seller.
6) Pick your price carefully. Use only recent comps and expect to get less than that. Buyers do not care about what you "need" to make or "want" to clear. Buyers only care about what they feel the house is worth to them.
7) Respond to ALL offers, no matter how low-ball you feel they are. If you get a live Buyer on the line, do not let them ago until it is clear that what they are offering is truly unrealistic to what the market is doing.
Lastly, monitor your asking price. Make sure that the broader market is not lowering around you, thus making your home seem over-priced. Price is going to be the single biggest driving factor this year. I suggest that you stay ahead of the curve, not chasing it.
What to Expect in 2008
I wish I could say more of the same (as bad as that was)...but I am afraid it will continue to worsen.
The macro issues facing the broader Real Estate Market continue to worsen:
1) Lending standards continue to tighten, pushing up to 50% of potential Buyers out of the market.
2) Consumer sentiment towards Real Estate continues to decrease, moving many qualified Buyers who, in a normal market, would ordinarily buy to the sidelines.
3) Banks will be Sellers this year...and aggressive Sellers they will be.
Local factors influencing the Happy Valley market include:
1) Inventory of 3 years at current sales levels.
2) Recent closed transactions and the Auction of Beuna Vista homes will provide a new round of comparables that Appraisers MUST use to value property...meaning the amount banks will lend against Happy Valley homes WILL be coming DOWN. I have personally witnessed a very large increase in appraisal reviews by the banks.
3) Very large number of Toxic mortgages resetting this year. The loan to value ratio on most of these mortgages is above 100%. That means that a large number will have to be short-sales or foreclosures. Many homeowners will just chose to walk instead of making escalating payments against a depreciating asset.
4) The very abrupt end to in-flow Buyers from California.
Summary:
I fully expect prices in Happy Valley to continue downward and re-approach 2004 levels. The Spring Selling Season should see a flood of new listings hitting the market, but Buyers will sit on the sidelines and truly dictate the terms of the transactions. As we overshot on the upswing, we will undershoot on the way back down. I fully expect final Seller capitulation by the 4th quarter of 2008 and a bottom in prices the first half of 2009.
The macro issues facing the broader Real Estate Market continue to worsen:
1) Lending standards continue to tighten, pushing up to 50% of potential Buyers out of the market.
2) Consumer sentiment towards Real Estate continues to decrease, moving many qualified Buyers who, in a normal market, would ordinarily buy to the sidelines.
3) Banks will be Sellers this year...and aggressive Sellers they will be.
Local factors influencing the Happy Valley market include:
1) Inventory of 3 years at current sales levels.
2) Recent closed transactions and the Auction of Beuna Vista homes will provide a new round of comparables that Appraisers MUST use to value property...meaning the amount banks will lend against Happy Valley homes WILL be coming DOWN. I have personally witnessed a very large increase in appraisal reviews by the banks.
3) Very large number of Toxic mortgages resetting this year. The loan to value ratio on most of these mortgages is above 100%. That means that a large number will have to be short-sales or foreclosures. Many homeowners will just chose to walk instead of making escalating payments against a depreciating asset.
4) The very abrupt end to in-flow Buyers from California.
Summary:
I fully expect prices in Happy Valley to continue downward and re-approach 2004 levels. The Spring Selling Season should see a flood of new listings hitting the market, but Buyers will sit on the sidelines and truly dictate the terms of the transactions. As we overshot on the upswing, we will undershoot on the way back down. I fully expect final Seller capitulation by the 4th quarter of 2008 and a bottom in prices the first half of 2009.
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