FAQ continued ...
More Frequently Asked Questions:
- About Short Sales or Pre Foreclosures
Just what is a Short Sale anyway?
Simply said, a Short Sale implies that the seller is offering their property for sale at a price that will leave their lender short. In another words, they are offering their home or condo for sale at a price which will not be sufficient to pay their lender the full amount owed on their mortgage. In many cases, there may even be a second mortgage involved or other debt such as the popular home equity loans which may not be re-paid at all in a short sale scenario, because obviously when the proceeds of the sale will not be sufficient to pay the 1st lender, there is nothing left to pay the 2nd lender. So the first lender is left short and the 2nd lender if any, may be left in the cold with nothing.
Sounds like a great opportunity for a buyer, doesn’t it? But it is far more difficult to succeed with the purchase of a so called Short Sale than it may seem and in many cases maybe impossible. Basically, the owner who is selling their home, is hoping their lender will forgive them the debt which is owed on their home or at least part of it, but how many short sales do you ever see advertised as a “lender approved” short sale?
You see, the seller in most of these cases, doesn’t care if the home sells for as little as ten dollars, because they have no expectations of making a penny from the sale, since they simply want the home sold and to get out from under the debt. It doesn’t really matter at what low ball price the seller may offer, because unless the lender agrees, it’s all a waste of time.
Ultimately however, if the home is foreclosed upon, the lender will certainly be left short in the end and the costs involved in the foreclosure process for a lender can be staggering too, not to mention the costs of maintaining the property once foreclosed upon, so in reality, the lenders do have an opportunity to reduce their losses through a short sale in most cases.
But, if you think it may be tedious and time consuming to obtain a mortgage in the first place, just imagine trying to get out of one. Of course a seller wants to avoid foreclosure and potential bankruptcy, but a lender does too and after all, lenders are not in the charity business. First of all, to entice a lender to agree to a short sale, generally the lender must be convinced that a foreclosure is imminent (how many payments is the owner behind, what are their income sources, assets, etc. ) and not only does the lender have to weigh the facts as to whether or not foreclosure is really imminent, but whether or not a short sale will yield them a better outcome in the end.
Keep in mind, it may still be in a lenders best interest, to foreclose on a property versus accepting short sale terms, especially if the lender believes the outcomes will yield them little difference, but more importantly, because lenders don’t want to encourage short sales either and if it was easy, nearly everyone might want to sell their home if they only had to pay back half of what they owed on their mortgage as an arbitrary example.
As an active real estate agent, what concerns me most, is the number of so called short sales I see advertised in the market place today. I wouldn’t mind if each of these were lender approved short sales, but most are not. These non-lender approved short sale listings are pulling the whole market down around them when they are advertised at such low prices. It’s just the reverse of traditional marketing of homes and condos for sale, where a buyer might expect a listing price (asking price) to be discounted or at least negotiable, because with a short sale, the advertised prices are often so low, it is more likely a buyer may have to pay much more to be successful (remember, the lender has to approve a short sale or as you may notice among the remarks in many real estate listings, a disclaimer stating the sale requires 3rd party approval, etc. )
There can be other less obvious differences too between buying some short sale properties and a comparable resale property, such as closing costs in some cases, which could add significant costs to the price you may actually pay in the end. You may for example see a remark or disclaimer among the remarks of an advertised short sale stating that the advertised price may not cover the sellers closing costs but keep in mind, the customary practice here is for sellers to pay taxes on the transfer of the deed and owner's title insurance costs as examples, which alone may amount to thousands of dollars (about $3000 or more for a $250K property or you can just double these costs for a $500K property, etc. ) While closing costs may be negotiable, costs such as these as I just mentioned, are customarily paid by the seller, so when you see a remark stating the price may not cover closing costs, ask yourself, just what does that mean and seek out the answers? Does the seller (and/or lender) expect you to not only pay your own closing costs, but their closing costs too or does this mean the seller expects to add their closing costs to the price of the property? If the seller has agreed to pay a real estate brokerage a commission, does the seller (or lender) expect you the buyer to pay those costs too or want to negotiate those costs?
So, be forewarned before you ever make an offer on a short sale property or pre-foreclosure sale, because you may not only find out that you can’t buy the property for the advertised price, but it may take you up to two months or more just to find out. To be sure, if you have the time, cash and/or good credit, you can succeed, but then again, some lucky people win the lottery too!
There are also many lender owned properties now for sale which are often referred to as “REO” properties (an acronym used to describe Real Estate Owned by a lender) typically acquired through the foreclosure process, which at least provide the opportunity to make an offer, without the prospect of waiting months to find out if a lender will agree to the sale, but even so, the process can still be slow and once again, don’t be surprised when you see some REO properties actually sell for a price higher than the advertised asking price.
Generally speaking, you may also find that REO properties may not show well, sometimes having even be stripped of appliances, fixtures, etc. and in some cases having some damage too, but there are also many that do show reasonably well, depending on the condition the prior owners left the property in and how long the lender may have left the property sitting vacant too. Remember with short sales, the owner has an incentive to keep the property looking nice and well maintained, because after all their goal is to find a buyer, as opposed to an owner who has been foreclosed upon and may not care in what condition the property is left in once the lender takes possession.
Unfortunately, there are Short Sale properties and REO properties available in nearly every neighborhood now and across all price ranges too, but even worse is the effect these sales with the low advertised prices are having on the average seller who isn’t involved with a short sale, because they are compelled to compete. In fact, you probably have a much better chance of finding a truly good deal and succeeding with a purchase from a seller who is not seeking a short sale, than you do chasing short-sales. As an agent, I’ve come to think of most short-sales as wild goose chases or like a maze which usually leaves a potential buyer standing at a dead end, perhaps weeks or months after beginning their pursuit.
When looking for a home, don’t overlook resale properties simply because they seem priced a little higher than a tempting short-sale, because the actual price spread between the two may ultimately not be as significant as it appears at first glance. For example, an advertised short-sale for $400K could ultimately sell for much more, but for this example, let’s assume it is ultimately sold for $415K. On the other hand, another home in better condition and more appealing, whether it is simply larger or perhaps has a pool, etc. , which had been advertised with an asking price of $450K but not involved with a short sale requiring any 3rd party approval, and is later reduced to $425K, ultimately might sell for $415K too or even less, as just an example, so while the advertised prices of two homes you really like might seem out of line, you may actually find the price you are able to negotiate on each are really not much different and when there is no short-sale involved, you may actually find out if your offer has been accepted within just a couple of days, rather than waiting months to find out in some cases involving short sales or pre-foreclosure properties.
You’ve likely heard the old saying if the deal looks too good to be true, it probably is and I certainly believe that still stands true today,
but if you are determined to attempt the purchase of a short sale property, particularly for the price as advertised, here is my suggestion. Have your agent request a short sale pre-approval letter from the lender involved and give them just a few days to provide you that documentation in conjunction with the terms of your offer. Isn’t that fair? You already know the lender will surely require you the buyer to provide a pre-approval letter detailing your financial ability to purchase the home, so isn’t it only fair for the lender to provide you a letter that they have pre-approved the short sale, before you waste weeks or months of your time, waiting to find out if the sale will go though or not at the price you have offered. I mean if you are expected to provide a pre-qualification letter from a lender to purchase a home, shouldn’t you be entitled to a pre-qualification letter that the seller is qualified to sell the home for the price advertised? Good luck however getting this kind of cooperation from most lenders, but they certainly should cooperate, because as the number of short sales continues to increase, lenders may ultimately wish they had been more cooperative with buyers and sellers, as the number of foreclosures continues to climb as well.
Perhaps more importantly in today's market than ever before, you should seek out a good real estate agent to help you, whether you are selling or buying. If you are a seller in need of a short sale, begin discussions with your lender now. The process may be daunting, but by waiting, you will not make things any easier and probably just more difficult. If you are able to secure the assistance of your lender with a short sale, when you do attempt to sell, you will certainly have an advantage over most others attempting a short sale without having contacted their lender first.
As a buyer, you too should seek out a dependable real estate agent to help you. They know the market, the pitfalls and real opportunities at hand. They have incredible resources available to sift through available inventory to help you focus on finding just what you are looking for and most importantly, the skills and knowledge to assist you with negotiations or with opinions as to whether or not you can expect negotiations to be productive at all, depending on your particular goals. Not only can a real estate agent help you find the right home and negotiate a fair price, but in doing so, they can usually help you save a lot of time too and often help you avoid the wild goose chases as well, while guiding you though the maze so you will have a better chance of coming out a winner on the other side. Also, most real estate agents have long term goals just as you do and they not only value your business today, but they hope to earn your business in the future too, so they really do want you to be happy with whatever assistance they are able to provide you.
Surpisingly too, many potential buyers do not realize that most real estate agents don't charge buyers for their services, since typically, agent commssions are paid from the sellers proceeds, even when the seller is a lender. Also keep in mind, while a listing agent representing a seller may want to sell you the particular home they have listed, most agents representing a buyer merely want to help a buyer find the particular home the buyer wants most, because regardless of which home a buyer may ultimately choose to purchase, whether a new home, typical resale, short sale or foreclosed home, the buyer agent will still receive their commision through cooperating broker arrangements where the commisions paid are derived from the seller.
The opinions expressed above are offered
independently by Al Crawford, licensed in the State of Florida as a Real
Estate Broker Associate with Keller Williams Realty of South Tampa and do
not represent the opinions of the brokerage, any associations or any other
parties and the opinions of other real estate professionals may differ.
Crawford & Capozza Realty Group, Copyright © 2008