Having helped hundreds of distressed home owners, and instructed thousands of agents around the country on the topic of short sales, distressed, pre-foreclosure sales are a particular forte of the Phoenix Heritage Real Estate Group.
Below are some brief thoughts on the topic. We also recommend that you browse over to the AZ Short Sale Experts Blog (of which Greg Markov is a member). You can also see a couple of videos on the topic of foreclosures and short sales by an Arizona real estate attorney here .
Are You A Qualified Seller?
Before you decide to list your property for sale, you must first determine if a short sale is right for you. In other words, is this truly the best option for you at this time? To get to this answer, it is important to know the WHY behind your decision to go through with a short sale. No one else can conclude this but you. The general reasons for someone doing a short sale can be many – avoiding the stigma of a foreclosure, credit preservation, ability to negotiate deficiency demands with the bank prior to foreclosure, neighborhood preservation, etc … but the specific reasons are yours alone.
In addition to knowing why you want to do a short sale, it is also important to understand what other options are available to you in your particular situation. Other options may be renting your home, settling or consolidating other debt, getting a second job, working a loan modification with your lender, filing bankruptcy, or letting the home go to foreclosure. It is important to understand ALL options available to you, in order to make the right decision.
While there are many resources for each of those options available on the internet, we strongly recommend that you have a conversation with a local professional experienced in each of the fields (attorneys, accountants, HUD counselors, bank counselors, etc). A true professional immersed in their field will have all the right resources, and can recommend other reputable professionals to you. Please remember that a real estate professional is not qualified to provide you legal, financial/tax or credit advice, so it is important that you get your questions in these areas addressed as well.
Some common options many sellers evaluate are “Short Sale vs. Foreclosure,” or “Short Sale vs. Staying,” or “Short Sale vs. Renting.” The most frequent scenario we encounter is the “Short Sale vs. Foreclosure” decision. It is important to understand that ultimately this is exactly how your bank will view your short sale as well – an alternative to foreclosure. And remember, once you have stopped making payments on your loan, you are on a path to foreclosure.
During a short sale the bank will ask about the nature of your hardship, and ask to see supporting documents (to include, but not limited to, recent bank statement, tax return, paycheck stubs, etc). Hardship is a very relative concept, but the most common definition that we use is that something has changed, and you are no longer able to keep making the payments to the bank. Does this describe you? Are you able to avoid foreclosure through another means? Or is a short sale your best option?
Once you have determined that a short sale is the best option, it is time to find the right real estate professional who can handle the short sale for you. In 2006 the National Association of Realtors estimated that less than 1% of all Realtors nationwide know how to do a short sale. Times have changed, but it is still incredibly important to interview any prospective agents to make sure they truly know how best to represent you and have the experience in the field with multiple successfully closed transactions. The Phoenix Heritage Real Estate Group has helped hundreds of distressed homeowners through the process of foreclosure, and we would be happy to discuss your specific situation with you.
One of the most important factors in a successful short sale is the price of the property. Unlike a normal sale, there is no equity in a short sale property, as the market will not bear the amount owed due to a price decline. Therefore, what is currently owed on the property is for the most part irrelevant. Rather, the pricing intersection of what a buyer is willing to pay and a bank is willing to accept is the target price of where a property ultimately gets sold. Many failed short sales happen because the property was either overpriced (and nobody was interested) or underpriced (and everybody except the bank was interested). Banks understand that a property is only worth what someone is willing to pay for it in the current market, which is why principal (the amount owed) becomes largely immaterial (except in figuring the loss the bank/borrower will settle).
So how is the listing price determined? From the market data, based on where similar homes are SELLING in the immediate area. Generally, at some point during the short sale process, the lender will order a Broker’s Price Opinion (BPO) from an independent third party – a licensed real estate agent – to determine the current value of the property for which you are asking for a short sale. This is typically done once an offer has been submitted to the bank, although some lenders are starting to try and determine current market value before the property ever goes on the market. The BPO agent will be looking at the current market condition and property condition to determine a value.
While this approach may work fine in a stable market, it becomes a huge issue in a down market, with many valuation disputes between buyer, seller and bank taking place. This is where it becomes critical to have a competent agent listing your house. It is not enough to talk about a specific listing price without discussing a pricing strategy. Everything (initial pricing, reductions) must be done with the goal of persuading the bank that you have submitted the highest and best offer to them, and this most certainly includes how the property is marketed. A good agent will also be able to provide all records of pricing and marketing activity, as well as a history of buyer interest to the bank in order to convince them that all efforts have been made to solicit the best possible offer.
One final and very unique factor in hiring a qualified short sale listing agent, is their ability to market the “closeability” of the short sale transaction, because a short sale listing is only as good as the agent’s ability to get the bank’s approval and close on the transaction. This becomes critical in attracting a solid Buyer, who with THEIR agent, are confident and willing to wait for the bank process to be complete. Generally this comes down to the agent’s experience and their reputation in the industry.
Much has been said about Qualified Sellers and Listing Agents, and yet, without a Qualified Buyer you don’t have a short sale … you are just short. As mentioned earlier, proper pricing and marketing is critical in attracting a solid, reasonable Buyer, who can ultimately close on a short sale transaction. Buyers have all the same data at their disposal, and many Buyers are represented by Buyer’s Agents who understand the short sale process and are looking to determine whether or not a short sale is truly closeable. A reasonable Buyer will be able to substantiate their offer price and terms to the Seller, which also makes it a strong, reasonable offer to the bank. A Buyer with unreasonable expectations is very often a waste of time for all parties involved, but unfortunately the final fallout may be months away and on the brink of foreclosure. Thus, it is imperative to determine that you are working with a Qualified Buyer before the offer is submitted to the bank.
One important thing to understand is that the Seller is NOT the Bank, it is the Seller (the legal Owner of the house). The bank is not a party to the transaction, even though they ultimately determine whether or not they will approve the short sale. Thus all offers are submitted to the Seller, and it is the Seller who determines which offer(s) they chose to submit to the bank for review. The factors the Seller is looking at while making their decision may include price, terms and Buyer’s overall qualification (ability to wait and ultimately close). A savvy Buyer’s Agent will be able to counsel their client to help them become better qualified, to stand out above others in a multiple offer situation. Remember – if you see the value in a property, you are generally not alone – thus it becomes important to represent the strength of the Buyer to the bank in this particular situation and explain how they are best fitted as the buyer of this particular piece of real estate.
While bank negotiation is typically considered the most difficult part of the short sale transaction, when properly understood, it is merely a decision making process.
Typically short sales are handled by a bank’s Loss Mitigation Department, which has the primary goal to (Surprise!) mitigate the losses of their investor. The Lender generally sees a short sale as being more advantageous (profitable) than a foreclosure (provided that the offer under review is close to market value).
Once an offer is submitted, the process will cycle through several different stages like Setup, Valuation, Review and Approval. However, the exact process is very much up to the individual bank and investor associated with your loans. If you are eligible for any special programs (like HAFA *** link http://makinghomeaffordable.gov/hafa.html ***), this will also influence the exact process that your offer will go through.
At various points along the process, and at the final stage before an agreement is reached with the bank, negotiation will take place. When negotiating with banks, it is most important to focus on the Win-Win aspects of the transaction in order to maximize the return to all parties involved. At its root, a short sale is a win-win-win-win transaction for all parties involved – the Seller avoids foreclosure, the Buyer gets the house they want, the Lender mitigates their losses and the Agents are paid for facilitating the transaction. The negotiation gets difficult when any one party refuses to be cooperative and to see the self-interest of the other parties. In such instances (if the blind party happens to be the bank), the file may be transferred, or escalated, to someone else, who may be more reasonable or open minded about the transaction and may be willing to reconsider the position previously held.
Ultimately, it is essential to understand that it is the Seller, who is the final decision-maker in the short sale transaction. Yes, the agents, buyer and bank all have a hand in the decision, but the FINAL decision is up to the Seller. The Arizona Association of Realtor’s Short Sale Addendum to Purchase Contract puts it like this: “this Contract is contingent upon an agreement between the Seller and the Seller’s creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s).” (Lines 9-11) In other words, the Seller has the final say regarding whether or not they are willing to go through the sale once the terms of short sale approval from the bank are known. If the terms are not agreeable, the Seller may choose to renegotiate them, or choose another option available to them (like foreclosure). Based on the lengthy process and the uncertain outcome, you can see why it is important to know (in advance) what you will do if the short sale does not get approved. The decision making should be done BEFORE you get to this stage with everyone wasting a lot of time for no result.
Once the Seller and the Seller’s Lender arrive at an agreement acceptable to both, it’s time to move toward a Close of Escrow in earnest. All parties should be aware of potential issues that can arise here, as the transaction is far from over. In a down market, the Buyer appraisal is becoming increasingly more of an issue. It is possible that the property went under contract several months back, and the bank used the older comps to arrive at the value and approve the short sale, but now the Buyer’s appraisal is showing the value to be less than what the Buyer is offering to pay. The problem arises from the fact that no lender in this market is willing to lend more than what the property is worth. The solution in such a situation is to renegotiate the purchase price with the Seller’s banks. Fortunately this is one of the easier arguments to make since all banks understand the dilemma (and frequently find themselves on the other side when lending). If for some reason the negotiator is not receptive to the logic of the ongoing dilemma, it may be time to look for another sympathetic ear (escalate).
Other issues that can arise might be during the Buyer inspections. The Buyer’s Inspection Period does not start until the Seller and the Seller’s Lender reach an agreement and the Seller issues Agreement Notice. This means that most of the inspections will be done during the closing period (about a 30 day window after approval). Unfortunately the Buyer may discover issues that they are not willing to deal with at this time, which may result in a cancellation or a request for repairs. While most short sale homes are sold in “As-Is” condition (meaning that the Buyer cannot request any repairs of the Seller), some banks may be willing to offer a credit for the repairs in order for the sale to go through. Please keep in mind that this is extremely rare, and any Buyer that is relying on the bank offering a credit, has unreasonable expectations. Since so many issues can come up during the closing, some savvy Buyers and Buyer’s Agents will try to eliminate as many of those as possible even prior to short sale approval. For example, some will go ahead and complete underwriting approval with their lender to eliminate as many conditions as possible, and some will go as far as doing their inspections to make sure that the property they are contracting for is truly worth waiting for. The Buyer may be hesitant to spend money on a house they are not guaranteed to get, but obviously each situation is different.
One last thing to address here is Seller disclosures. Contractually the disclosures (Seller Property Disclosure, Insurance History, Lead-Based Paint, etc.) are not due until after Agreement Notice indicating the seller and their lender have an approved short sale, is issued. However, there is really no reason why the Seller would not be able to provide those before the approval. Again, the idea here is to have two parties that are willing to wait during the period of negotiation, and the more they know about one another the more likely they are to be patient. Communication is key and something that real estate professionals on both sides of the transaction need to help facilitate. There has been an alarming increase in the number of Sellers in a short sale who refuse to disclose anything about their property, and there is simply no reason for this. A lot of short sale homes were owner occupied and there is no reason why the owner would not be willing to fill out a disclosure form, just because they are doing a pre-foreclosure sale.
Post Short Sale
Once the short sale is over with, it is time to start the work of putting your life back together. As is the case in all areas of your life, it is important to seek the counsel of reliable professionals after a short sale. Phoenix Heritage Real Estate Group would be happy to provide you with a list of trusted Credit Repair Counselors who could consult with you on how to rebuild your credit quickly and possibly even help you negotiate better settlement terms (in terms of credit reporting) on your closed accounts. We have seen a trend of some of the larger investors favoring short sale sellers over someone who has foreclosed on their property, by requiring a shorter wait period for future financing. For example, both Freddie Mac and Fannie Mae have stated that the wait for new loan financing for someone who has a short sale on their credit report is less than someone with a foreclosure.