Real Estate Roundup with Sharon Alva: Short sales revisited
Short sales have been a moving target as banks finesse their approach to these transactions. But what are some of the considerations for buyers when making offers and purchasing a short sale?
LOOKING AT THE PROPERTY
In a short sale the owner is often living at the property. They have usually invested money, energy and time to purchase, maintain, improve and keep this home. It is not just their house, it is their home. It’s true that they owe on it more than it is worth, and that they may have made some bad judgment calls along the way, but they have been through so much to have this property listed. Buyers may have to see the house while the sellers are there and they may not be in the most jovial mood. Compassion can never be underrated. I try to tread carefully. It does not harm my buyers’ position one iota to be compassionate and gentle with people in this situation. Be respectful of their home and their privacy. This is especially true if their children or other family members are present when you see the house.
WHO IS ACTUALLY SELLING THE HOME
In a short sale, remember that the seller is the entity on the trust deed. The bank must approve the transaction but the buyer enters into a regular contract with the seller. This means that after the seller has signed, but before the lender has approved the transaction, the buyers are in a state of limbo. The transaction is not moving forward but it is a binding contract.
I think this period is hard for all parties involved. Buyers often ask me about continuing to see and write on other properties while they wait for the bank to decide if they will cooperate with the short sale. I am keenly aware that waiting for the bank pushes buttons for many of my buyers.
Since a buyer can only be in contract on one property at a time, they cannot write an offer on another property. If something better comes up, buyers can exit the contract, and only then write an offer on another property. There are a few exit points.
When submitting a short sale contract, the buyer will also be signing a short sale addendum. That addendum defines the time period that a buyer will wait for a response. If that time has elapsed the buyer is no longer contractually bound. Nonetheless buyers are encouraged to cancel in writing to make sure everyone has been notified and agrees to the cancellation of contract.
The usual contingencies are written into the contract for investigation and loan approval. But the timeline on these does not officially start until the seller’s lender has approved the short sale. Buyers can cancel based on the investigation contingency even in the waiting period. Recently I had clients who chose to cancel a contract because they had started their investigation period by spending time in the immediate neighborhood of the house and were not comfortable. They canceled based on investigation.
WHAT’S THE HOLDUP?
The long wait from contract to lender approval has made many buyers walk away. What are we waiting for?
The property often has more than one loan on it. Even if it is just one loan it could be serviced by one lender but held by another. The decision making process goes through various departments and is negotiated between multiple lien holders. The lenders are making a two tiered decision.
First lenders are deciding if the particular borrower deserves what they see as the courtesy of a short sale. They want to see a documentable hardship. Loss of income or a medical crisis are typical hardships that the banks will acknowledge.
Once the particular borrower has been approved, the specific offer must be accepted.
Typically, short saled properties are approved if they come within 20 percent of market value. So a property that would sell for $580,000 as a traditional sale will likely be approved even at $470,000.
The caveat is that the transaction must be at “arm’s length.” The bank does not want to forgive hundreds of thousands dollars in of debt so the seller’s parents or siblings can buy it back for a fraction of the cost.
So the bare bones of approval are:
1. Proving hardship
2. 80 percent of market value
3. Arms-length transaction
When representing buyers, I query the selling agent about the particulars of the situation to find out of the hardship is likely to be approved. A little research into public records usually gives a wealth of information about the situation too.
The list price becomes irrelevant. Often it is either very low (teaser price) or high (wishful thinking). The only relevant number is the market value that can best be determined by looking at recent sales in the area.
We will be seeing more and more short sales. Buyers should not be shy about approaching these as long as they are realistic. Buyers can be compassionate when looking at these properties, and their agents can and should do the research needed to determine the viability of the short sale’s approval. And last, buyers are well poised to buy a well-priced home, and help the seller’s exit their difficult situation, if they are patient and let the bank work through its decision making process.
Sharon Alva is a real estate agent with Alain Pinel, living in Alameda. You can reach her at (415) 572-8759 or firstname.lastname@example.org.