10 Biggest Myths About Short Sales

10 Biggest Myths About Short Sales

The 10 Biggest Myths About Short Sales

(And How They Affect Both Buyers and Sellers),

Introduction Part I

Short Sale’ is one of the most misunderstood terms in the real estate industry. Whether you are a buyer looking for a bargain, or a seller looking to get out from under a troubling loan situation, it pays to understand what the term ‘short sale’ represents and the things you need to know before making crucial decisions.

A Growing Trend

With the recent growth of the sub-prime mortgage trend and the subsequent fallout from so many questionable loans, more and more listings in today’s market are categorized as ‘short sales’. This is one of the most misunderstood terms in the real estate industry. As a real estate professional working with both sellers and buyers, I come across short sale situations every day. I’ve found that people who know what they’re doing are able to avoid common pitfalls and make good financial decisions for their futures, whether they are buyers looking to find a good deal on a home, or sellers looking to get out from under an upside-down loan.

The Definition of a Compromise Sale

If the seller has other assets or is gainfully employed, the lender might choose to do a compromise sale. In a compromise sale, the lender will place a short demand into escrow that allows the sale to close, but it will require a payoff from the seller for the balance still owed. This note may be secured by another real property or it may be a personal note.

Know How to Make the Right Decisions

Though it is important to know about the compromise sale option, my focus in this special report is on short sales. My goal is to provide you with the education and insights you need before going down the complex path of the short sale. Whether you are a buyer looking to purchase short sale property, or a seller looking for short sale approval on your property worth less than you owe, my upcoming report will outline the pros and cons of short sales, on both ends of the spectrum. In the following weeks to come we will uncover 10 of today’s most common myths about short sales, including the accurate information you need to make educated real estate decisions.

You will find the first five myths are directed to sellers, and the last five are directed toward buyers, but I highly recommend studying all of them in order to have a full understanding of how short sales can affect every facet of your real estate experience.

#1 Seller Myth In Short Sales – It’s Easy to Get Approval From Your Bank to Conduct a Short Sale.

Perhaps the biggest misconception about short sales is that it is easy to get the bank to agree to a reduced payoff on the loan. Many homeowners figure that as long as they are in a situation where their property is worth less than they owe, they are a candidate for a short sale – with the hopes of ‘breaking even’, at the very least.

The truth is, it’s not that easy to get approved for a short sale. The thing to be remembered is that banks are always looking out for their best interest. Nobody is more tuned into current property values than banks, and they generally do what’s best for their bottom line. Whether they foreclose or go to a short sale, they are taking a hit financially. So if it makes more sense for them to foreclose on your property for any number of reasons, there is a good chance they will pursue that option. Rarely can the bank be swayed emotionally by your financial situation. Most times it comes down to this; if they feel they can save additional time and costs by approving a short sale, then they will be more willing to work it out with you.

The first thing to do is consult with a real estate agent who understands short sales and has a strong grasp of the subtle intricacies of the banking approval processes. A knowledgeable agent can offer you guidance throughout the short sale approval process. Once you have a good understanding with your agent of what you are asking for, contact your lender as soon as possible to discuss your situation, research your options, and ultimately, ask for a short sale approval on your property.

#2 Seller Myth In Short Sales; The Agreed-Upon Short Sale Price is the FINAL Price.

This is where many sellers – and buyers who make the offers – are caught off-guard by short sales. Though the initial short sale approval process is quite detailed and in-depth by the bank, they are primarily looking at the bottom-line (meaning, a short sale will cost them the least amount of extra time and money).  With the initial price approval they are basically willing to position the property as a short sale to see what they can get in return. They will determine a price range at that point, usually with a ‘bottom-end’ price they are willing to accept.

The process becomes confusing after a buyer makes an offer that is accepted by the seller and their listing agent; that’s when the ‘real’ short sale approval process begins. At this point, the bank will once again review the current market value of the property, including a full appraisal. They will also completely review the financial situations of both the seller and the buyer to ensure their investment is safe.

Through this detailed and often lengthy process, the bank decides if they are still willing to accept the price. And so begins the frustrating part of the short sale rollercoaster. They may choose to come back with a counteroffer, or pull the plug on the listing altogether. Ideally, they will accept the offer and it will most likely go smoothly after that. But you always have to remember; the bank will hold the cards as long as they want through what can be a lengthy process.

#3 Seller Myth In Short Sales; Default Payments and Home Equity Loans Will Not Impact Short Sale Approval

Unfortunately, many sellers seeking short sale approval from their banks are under the impression that this is an opportunity to ‘cut the cord’ and get out of their property clean and scot-free. As you can tell from reading this report, it’s not as simple as that.

In many cases, homeowners have defaulted on loan payments and/or Homeowners Association dues on the property in question. If this is your situation, don’t go into the short sale process assuming that you will be absolved of these back payments. In fact, any money you owe will certainly factor into the short sale approval by your bank. You may come out of the short sale process still owing your creditors, it could become a compromise sale, or you may not be approved for a short sale at all. Rather, the bank may opt for foreclosure if the payment situation is severe.

If you are considering a short sale, it’s important to stay current on your mortgage payments and HOA dues. This will greatly improve your chances of short sale approval. It will also help your credit rating. When all payments are up to date, a short sale will not have much impact on your credit score, and in some situations it can have no impact at all, but a history of defaulted payments can have a negative impact on your credit score.

If all payments are up to date, you can ask your real estate agent and lender to offer your Deed in lieu of foreclosure.  In a nutshell, this is when you hand over your Title Deed to the bank before the foreclosure process begins. This can be a viable option – depending on your situation – but make sure you have the information and guidance you need from industry experts during the process, because nothing is ever as simple as it seems.

Another factor that comes into play is having an outstanding home equity loan or second/third mortgage. When multiple lenders are involved, this greatly complicates the approval process and lessens your likelihood of attaining short sale approval. The bank that holds your first loan will have the biggest say so, but the more lenders and loans that are involved, the more difficult it becomes to arrive at a short sale agreement to everyone’s liking. In many cases, the bank holding the second loan will not recover much money – if any at all – from a short sale. If your second loan is held by the same bank that holds the first, this will slightly increase your chances of approval.

#4 Short Sale Seller Myth: Once Approved For A Short Sale, Your Worries Of Slipping Into Foreclosure Are Over

As we’ve discussed in previous myths, you must keep in mind that the bank is always in control and always doing what is in its own best interest. Even though the bank has indicated it is willing to approve your short sale and allow your agent to put the listing on the market, they can always reverse the right to retract the offer and begin the foreclosure process. This can be a very frustrating experience for sellers looking to avoid the unpleasant foreclosure process.

Rarely will this happen once your short sale is approved, but it’s important to know that it can. Banks don’t like going through the foreclosure process any more than homeowners do, but they will do what they must in order to do what they think will be best for their bottom-line. So if your listing stays on the market for a really long time, or the bank begins to feel the short sale listing price is too high to sell in the current market, they may choose to pursue foreclosure of the property.

Again, it’s vital to know what you are getting into when selling your property via short sale. Make sure you read the paperwork thoroughly and look out for any deadlines or loopholes that might be included in the contracts, and don’t be afraid to speak with a real estate agent and lender in order to better understand the playing field when it comes to short sales and foreclosures.

#5 Short Sale Seller Myth: Real Estate Agents Are ‘Cleaning Up’ in the Short Sale Market, Part I

While it’s been a tough time for the majority of real estate agents out there in today’s market, some agents have been able to find business in the short sale and foreclosure markets of recent years. But it’s no bed or roses; listing agents are generally getting less commission in a short sale because of a bank’s heavy involvement and efforts to keep a seller’s closing costs to a minimum.

That being said, it is often a lot more work for an agent to represent the listing because they are dealing with both the bank and the seller. There is a lot of going back and forth; they have to manage both sides to keep everyone happy and informed as possible throughout the process, often times acting as more than a regular agent. They are more like an interpreter, intermediary and peacekeeper.

Some agents have relationships directly with specific banks and are representing any number of short sale or bank-owned (REO) properties at one time. Keep in mind that when working with an agent like this, their primary customer in general is the bank, so they may not be as attentive to the needs of the seller as they would like to be. It’s not always the case, but it can be. In fact, one of the most frustrating parts of short sales for agents and clients is the waiting game because it takes longer to get the information reviewed by all the parties involved.

#5 Short Seller Myth: Real Estate Agents Are ‘Cleaning Up’ in the Short Sale Market, Part II

It’s important to develop a relationship with an agent before you pursue short sale approval; an agent who not only knows how to the short sale market works, but who is also definitely on your side throughout the listing process, from escrow to closing. An experienced real estate professional – with the help of your lender – can help you explore all of your options before you make decisions that will greatly impact your immediate financial future, as well as your credit rating for future purchases.

Here are some short seller tips to help you during the process . . .

1.     Current Payments – Keep your loan and HOA payments current to avoid credit problems and increase chances of short sale approval.

2.     Lender Consultation – Talk to your lender as soon as possible to see what your short sale options are.

3.     Realtor Consultation – Talk to a real estate professional who understands short sales and can guide you through the approval and listing processes.

4.     Do Your Homework – Be flexible in your expectations. Don’t automatically say yes or no to the first offer from the bank. Make sure to consider all the aspects from the offer against your financial situation in order to make the right decision.

5.     Emotional Value – Don’t get overly attached to what you think your home is worth. In today’s changing market, values are always shifting. You have to set realistic expectations and be willing to accept what you can get.

6.     Property Damage – No matter what, do not damage the property on the way out. In some cases, this can result in civil or criminal litigation.

Buyer Myth #1: The Short Sale Market is Teeming with Incredible Values and Even Downright ‘Steals’.

It is true that you can find some good deals with short sale properties. Unfortunately, most buyers go into their home search thinking that they will save 10 to 20 percent, and even more when they purchase a short sale property. On average, most short sales will close at about 3-7 percent off the full market value.

The important thing to remember is just how savvy banks are. They are not going to approve a short sale if it’s not going to net a decent return for them. They are losing money no matter what, so they are going to try to lose as little money as possible. They know market values better than anyone and will set the price based on what they feel will be just low enough to sell, but will be closest to full market value.

So what does this mean to buyers? It means you can save a little money buying a short sale property, but that you should not always expect to find a ‘steal’. Also, be sure to factor in any renovation costs that may be associated with the property. Most short sale properties are truly sold as-is; rarely is there wiggle-room in negotiations for concessions or repairs.

Because the seller is largely removed from the process, you will not easily be able to negotiate with the bank to make necessary fix-ups; replacing carpet, paint, etc. If you know the property needs a lot of work, make sure to do a thorough evaluation of all the costs associated with renovating the property before you make your offer. Determine whether the reduction in selling price is worth what it will take to make the property livable for you.

A short sale transaction can be a long, laborious and time-consuming process, and it can sometimes fall through completely during different parts of the process. As a buyer, it’s important not to get completely wrapped up in one short sale transaction while watching other opportunities pass you buy. Work with your agent to leave yourself outs in the offer process, just in case you decide to pursue something else.

Buyer Myth #2; Banks are Desperate to ‘Unload’ Their Short Sale Properties

It’s always crucial to keep in mind that the banks are motivated by the bottom-line. Many buyers go into a short sale offer thinking the process will go quicker because they think the banks are desperate to unload the property. This is the perception for buyers when it comes to foreclosure properties, as well.

The fact of the matter is, banks are extremely careful with every aspect of the short sale, from initial approval of the price all the way through to the close of escrow. When you submit an offer, they scrutinize every detail. They fully review the seller’s situation and your financial stability to make sure there will be no problems with the transfer of the property or payoff of the loan. Again, these are the types of things that can often draw out the buying process.

With that in mind you need to make sure you are covered on your end before submitting an offer on the short sale property. Be sure to talk to a real estate professional and a knowledgeable lender.

It is best to get pre-qualified for your loan and submit a pre-qualification letter with your offer. This will show the bank you are not only serious about buying, but also willing and able to pay for your loan. If you want to take it one step further, you can consider getting pre-qualified by the bank that holds the title. Quite simply, the more information they have about you, the more faith they’ll have in you as a buyer, and thus, the more likely you will be to have your offer accepted.

Buyer Myth #3; ‘Short’ Sale Implies a ‘Shorter’ Closing Period

This is where many people have misguided perceptions about short sales. People hear the term and they think it means that the process will be ‘shorter’; because both the bank and seller want to sell the property as quickly as possible. That’s true in one sense, because they do want to get it off of their books sooner rather than later, however, they will still take whatever time they need to get the best return on their investment. In addition to the extra diligence they will take to make the decision, keep in mind that a many banks are now too understaffed to handle the growing number of short sales and foreclosures in a timely manner.

Because most banks are stringent in the short sale approval process after an offer has been submitted, it can often drag on for several extra weeks, if not months. You need to go in knowing it could be quick close or it could take much longer. It can be frustrating in that you may not know for certain until after you’ve made a offer. This is where an agent can ‘scout’ the listing for you by speaking with the listing agent – and sometimes, the bank itself – feeling out the situation to see what the desired terms may be.

When I work with buyers to create a short sale offer, I always recommend they put a relatively short close period – 30 days or less – in the contract. Why? That proves to the bank that you are ready and willing to close quickly. They will be drawn to your offer when they understand that you are serious. This also allows you an ‘out’ later if they drag on the escrow process.

But even though the bank may be more apt to accept your offer because of a short close period, it does not necessarily mean escrow will close within that timeframe. Most of the time, it doesn’t. The escrow process can be extended as long as they need it to be in order to make a financial decision. This is very important to understand before you make your offer, especially if you are in the process of selling your current property and trying to ‘time it’ accurately. Make sure your agent stays on top of the listing agent – and the bank, if needed – keeping the process moving forward and avoiding getting your contract get lost in the shuffle.

Buyer Myth #4; The Listing Price is What the Bank Will Most Likely Accept When You Make Your Offer

Before a short sale is ever put on the market, the listing agent and bank will determine an undisclosed price range for the property. The high-end will be what the bank would ideally like to get back. The low-end is the minimum they would be willing to accept at the time of the approval. The listing will generally go on the market at a price that is closer to the high-end of the range.

A lot of buyers will make the mistake of making a real ‘low-ball’ offer. If it is below the low-end of the accepted price range, they will likely dismiss such an offer immediately. Remember, banks are not as desperate to sell as most people think, and they’ll do whatever they can to have the property sell at the highest possible price. So, if you are serious about the property, make a reasonable offer. An experienced and market-savvy real estate agent will be able to help you determine what a ‘winning’ offer is on any specific property, short sale or otherwise.

Even if the seller accepts your offer and the bank accepts the offer initially, they will still go through the full short sale approval process before anything is finalized. They will appraise the property once more and review all aspects of the contract to make sure it is to their liking. If they determine that the property is worth more than you are offering, they can – and usually do –make a counteroffer asking for something more. This can include a higher selling price, a larger down payment from you, reduced agent commissions or in some rare cases, a stipulation that you must secure your home loan through them.

When you submit your officer and pre-qualification letter, make sure the amount in the letter is the same as the offer price. Even though you may be qualified for more, have your lender put in the exact price you are submitting. If they see you are qualified for more there is an increased chance that they will ask for more. Even though they will eventually review your full financial situation, you don’t want to advertise upfront that you can afford more than you are offering. This is a good strategy when making any real estate offer, but especially important to remember when purchasing a short sale property.

Buyer Myth #5; Short Sales Are a Goldmine Opportunity and a Can’t Miss Investment

As you can tell from reading this report, there are many upsides and downsides in short sale real estate. If you know what you are doing and are prepared for the process that often comes along with purchasing a short sale property, opportunities can certainly be found.

You will be able to save a little money on the purchase price, but you have to make sure you are covered elsewhere. Be sure to factor in the fix-up costs, property taxes, HOA dues, any land lease fees and other things that will impact the overall price of the property.

Here is a good rule of thumb to consider when looking at a short sale or foreclosure purchase; add up the selling price and the fix-up price. If together they are equal to or ideally less than what you perceive to be regular market value for that property, then it is probably a viable investment.

To determine the regular market value for the property, consult with a real estate agent who can provide you with a Comparative Market Analysis – CMA – using similar properties and recent sales in the neighborhood as ‘measuring sticks’ to estimate the value of the home.