In our last post we defined what a short sale is and what it isn’t. Here we will go through the process in more detail. I’d like to thank Attilio Leonardi of Team Lally & RE/MAX Kapolei for his insights into the process. He and his team have sold over 80 short sale properties and gladly shared their knowledge.
Of course, nothing is too good to be true, so let’s take a quick look at the potential challenges one could face when attempting to purchase a short sale property.
Short sales can be challenging for a number of reasons:
- They tend to take a long time – ?Short sales typically take timeframes that are counted in months, not days.? While a normal purchase can be completed in 30-45 days, a short sale may take anywhere from 3 to 9 months or more to complete from the time an offer is presented.? The time-frame really depends upon the existing lender on the home and how busy they are.
- The bank has to consent to the loss – The existing lender is going to take a loss on the sale of the property, so they need a quick evaluation of the sales price to make sure that it is close enough to the actual market value to make it worth proceeding.? The size of the loss is depends upon the size of the outstanding lien, but in reality, it is the proximity of the offer to the market price that drives the decision.
- The seller has to qualify – Not only does the existing lender review the offer in relation to the market value of the home, they must also determine that the seller is in a position of financial hardship and qualifies to do a short sale.
- The communication process is tough – Attilio Leonardi just returned from a meeting in Florida where the head of Bank of America’s loss mitigation department informed the group that his department receives 88,000 incoming calls a day. The plea from B of A was, “please stop calling.” These departments are extremely backed up and the extra communication isn’t going to speed things along, it actually does the opposite.? Unfortunately, for a prospective buyer, waiting for an answer is the norm and there will not be day to day updates, or even week to week.? One update a month is about the best to hope for.
- The market may move while you wait – For a transaction that may take months, there is a big chance that the market may move.? Especially if you are making an offer in an area with a slough of short sales, values may be declining.? A property worth $450K at the time of initial offer, may decline in value to $425K by the time the deal closes.? However, it appears that lenders have been pretty good about reducing the sales price if the appraised value comes in below the offer price.? After all, the lender is motivated to sell and would be remiss to start the process over again.
- There is really only one benefit to buying a short sale property, but it is a big one…money!? While lenders are motivated to sell these properties to recover their losses and have the money available to lend again, they do want something close to market value.? If you submit an offer at 50% of the market value, you most likely won’t get a response.? However, if you are within 10-20% of market, you may have a chance.? So, submit a reasonable offer, or multiple reasonable offers and you may end up with a dream home, for a nice discount.
Keys to Success
- Extreme Patience – First and foremost, patience is the key.? A short sale offer may take months to be approved and, as a buyer, there isn’t much you can do to move things along.? Here are things to keep in mind when your patience starts running thin:
1) B of A gets 88,000 incoming calls to their loss mitigation department each day, and the same is true for most of the national lenders that service most of these loans. ?One more call about your file won’t have much effect speeding things along.? If ever short sale buyer exhibited patience, there would be fewer inquiries about the same thing and the whole process could speed up.
2) In order for your short sale offer to be approved, there are many departments and entities that must approve the offer or hold off on exercising their collection rights.? There are at least two internal levels of approval within the existing lender, then they may have to obtain approval of the actual note owner (which may be a different company), they may have to get HOA approval so that they don’t place a new lien on the property, they may have to obtain approval from a second mortgage company as well.
3) Two questions to ask – There are really only two questions to bother asking of the seller’s realtor during this process:
- “Did you receive my offer?”? Make sure the realtor and seller have received your offer.? They most likely won’t bother accepting it right away because it is subject to lender approval, but they may let you know if they believe it is strong enough to submit for lender approval.
- “Do we have lender approval?” – In reality, this is a question you probably won’t need to ask.? You will surely be notified if and when your short sale offer is approved.
- Flexibility – Because the process takes a while and the timeframe can be unpredictable, the more flexible the buyer, the better chance of success:
1) Don’t need to move/buy right away – if you are on a tight timeframe, like having a lease expiring or just moved and living in a hotel, then the unpredictability of short sale timeframes certainly won’t be for you. ?If you can afford to wait one to six months to complete the transaction, then you may find yourself a deal.
2) Have many dream homes – submit one offer or many offers. You surely won’t get one accepted without putting one in.? There is nothing preventing you from submitting more than one offer.
- Ask questions about the property being offered for sale -? Here are some questions to help you along:
1) Has the seller’s realtor done many short sales previously? Obviously, the more experience, the more familiar with the process they will be.? Wowever, it isn’t rocket science and if they don’t have much experience, but know what to expect and have a plan, then that could be fine as well.? Ultimately, if the answer satisfies you, then go for it.
2) Has the realtor gathered a complete short sale package from the seller yet? This is important.? A short sale package will need to be submitted to the lender with your offer.? If the seller hasn’t filled out his/her part, they may not have the motivation to do so, and the whole process could be stalled.
3) Who is contacting the lender & are they experienced? Again, there could be several answers that are satisfactory here, but the important thing is to know that there is a plan and someone with experience and a plan who will be moving the process along. Is it:
- The Realtor and/or their team?
- A Third Party?
Phew, that was a long post, sorry if there was too much detail, but I hope I have provided you enough insight into the process to determine if it is right for you