Sunday, February 22, 2009

Short Sales: How to manage them to a successful close

Short Sales, REOs, Investor-owned, "as-is," "subject to bank approval." These are terms that the average buyer is seeing everywhere. In a market that is already getting negative press and "doom and gloom" projections, the idea of purchasing, or selling, right now can be very confusing and scary. Short Sales are here to stay for awhile, if you are thinking of a home purchase, you will definately run into one. Here's what to expect, and how to handle the process to minimize the uncertainty of buying one.

Let's start with a definition. What is a short sale? It is definitely NOT a sale that must be done in a short amount of time. In fact, they have the reputation of taking a very LONG time. This doesn't have to be the case, but it is the reputation. A Short Sale is a situation where the seller is asking the bank to accept less than is owed in exchange for the release of the mortgage lien. The lenders will often do this if they believe that the home owner will ultimately allow the home to go to foreclosure and they will end up losing more money by waiting it out, than in taking a quick deal now.

The process should be simple, but in practice it's not, why? First, the listing agent does not know how to handle this process. In a Short Sale, the bank is NOT the home owner and should not be sent all offers as if they owned the home. But often this is what the listing agent does. They mistakenly believe that their job is order-taker and that they just send offers off and wait. The lender ends up with a file of 10-20 offers or more, many of which are from buyers who are not even interested anymore. When an asset manager has 100s of files to work on, this type of file is not going to get much attention because it's too hard to work. This is not the way to handle a Short Sale, but this is exactly what many people have experienced and why Short Sales have such a bad reputation.

So, how should we handle a Short Sale? Regardless of whether we are representing the buyer or the seller, the goal is to send 1 offer to the bank for approval. As a listing agent, we price the home reasonably and collect offers. We handle them the same way we would for an equity sale...we check credit, verify funds and perhaps make counter offers. Once we have a solid buyer, we open escrow and send the 1 accepted offer to the bank. Then the home goes into Back-up status. This is a benefit for all concerned! The buyer can feel comfortable that they are the only offer on the table, the seller knows that they buyer is committed since they have a deposit in an escrow account, and the lender is looking at a complete file with a solid offer that is ready to close once they give the approval. I average about 45 days on these Short Sale approvals.

When we represent the buyer, we try and work the same way. Many listing agents are happy to find a buyer willing to open escrow and wait. Not many buyer's agents ask for this. We do! I will advise my buyers to write a decent offer if the listing agent will open escrow. We will incur no costs until we have formal approval from the lender, no inspection, no appraisal etc. So we are not jeopardizing our funds, but we know that we are the only offer the bank sees. Frankly, if a listing agent is not willing to open escrow with our offer, I will advise my buyer not to write the offer...or at least to keep looking in the meantime. There is no guarantee we will ever hear anything back from the listing agent. We might also be tempted to outbid an offer that isn't even valid anymore. This is the way to over pay for a home, and that's the last thing we should do in this market. We can watch that listing and at some point if it becomes an approved Short Sale, we can move then.

Which brings me to another term one sees in advertisements. Approved Short Sale. What does this mean? It means that some offer price was approved and now that buyer is gone, as we discussed above. But the approved price is also most likely based on home values from a few months ago so we need to be careful about writiing offers based on the approval price. Due diligence must still be done to make sure we are offering a fair price based on current values and not what the bank appraised the home for several months ago. Therefore, we might still write a lower offer and it will need to go back up the chain of command at the bank for approval. Often the list price will be lower than the approved price for this very reason. So when you see this, ask your agent to explain the situation with that specific home.

I hope you have more of an understanding of Short Sales and how to handle the process. I have more information on my website at which goes into detail about the seller and buyer sides. But don't be afraid of Short Sales, there are some great prices to be had working these.

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