Short Sales, Foreclosures & Private Sellers- THE TRUTH!!!

Private Sellers
“Normal” transactions where an individual or group of people own the house. In today’s market, these people probably bought the property (and haven’t refinanced) before the 2004-2005 price spike and have some equity.

Typical Private Seller Transaction:
Listed asking price realistic, often selling within 95-97% of list price
Respond quickly to buyer’s offer
30-45 day closing
Closings are generally on time because the seller gets to pick the escrow and title company
May be one or more counter offers between buyer and seller before a final price and terms are settled on
Full range of disclosures including property defects, neighborhood issues, and environmental problems
Request for Repairs may be granted
Normal 17 day inspection contingency period before buyer’s deposit is at risk

PROS: quick response to offer, full disclosures, and negotiating room
CONS: unless seller is highly motivated the price may be higher than foreclosures & short sales
CONSIDERATIONS: Finding a realistic, motivated seller is great, but rare these days
STRATEGY: Depending on the circumstances, submitting a reduced (but reasonable) offer isn’t out of the question, as long as it can be substantiated by market data. This only holds true if your offer is the only under consideration however, and if the property is “hot” with a lot of interest, private sellers may opt to hold out for full price. Understand that the seller will likely counter back and showing some price flexibility on the buyer’s end may get the deal done. Once in a deal, there’s a chance that a Request for Repairs may be granted, saving you additional money.

Foreclosures
A bank has repossessed a house from the owner. The bank is the official owner and seller of the property. Banks aren’t in the real estate business and are motivated to sell REO (Real Estate Owned) properties.

Typical Foreclosure Transaction:
Listed asking price realistic, often selling within 97-100% of asking price.
Respond within 3-7 days of buyer’s offer
30-45 day closing or sooner contracted closing time, but the bank selects their own escrow and title companies, which may be very backed up, so the closing date can be significantly delayed- up to 2 months in some cases
Often want “highest & best” offer presented, which is accepted or rejected without counter offers
Terms of contract restricted:
Shorter inspection contingency period, often 3-10 days
Penalty to buyer if closing is delayed, often $100-150/day
Home warranty paid by buyer not seller, often $350
Exempt from most disclosures since the bank has never occupied the property
No Request for Repairs granted. Property sold in “as-is” condition, unless a major unknown issue arises.

PROS: often aggressively priced and a relatively quick response time
CONS: property may need cosmetic fixing (paint, carpet, etc.), little room for contract negotiating, no disclosures; may be in HIGH demand with lots of competition, many well priced “move in ready” foreclosures sell for ABOVE list price- up to $20k in some instances.
CONSIDERATIONS: Don’t think that a bank is going to accept a lowball offer. The property is often aggressively priced already. Be ready for the occasional fist hole in the wall and ding mark from moving, dirty paint, missing appliances, unkempt yard, and worn carpet. Most listing agencies and escrow companies are employed by the bank and get properties in bulk, and provide very little information on the property and notoriously poor services.
STRATEGY: Find a foreclosure you like? SUBMIT AN OFFER QUICKLY! The best foreclosures often sell within a week of being listed, and have multiple offers – sometimes creating bidding wars. You’ll absolutely, positively need a Pre-Approval Letter, Copy of the Deposit Check, and Verification of Down Payment Funds. Asking for closing cost assistance will make you look like a weaker buyer than others not asking for help, and putting higher down payment amounts will make you look stronger.

Other Foreclosure Considerations

Bank’s aren’t in the business of real estate and need properties to be sold quickly, hence the great listing prices. Some banks have started listing properties to generate an “auction mentality”. Banks will purposefully list a property $100,000 or more under market to generate immediate interest. They will tell all buyers to submit their highest and best offer within 5 days of listing, and the highest bidder will “win” the house. However, if none of the offers meet the “reserve” price (the bank’s REAL bottom line), then it won’t be sold to anyone and they will readjust their pricing. Recently, a property came on the market for $200,000 that was really worth around $400,000, but the bank told everyone that within the first few days they had received offers up to $400,000, and that a buyer shouldn’t even bother submitting an offer unless they wanted to beat that price. It worked, and the property sold for $409,000 - a far cry from $200,000! Don’t get caught up in the game!!!

Short Sales- NEW Listings
An individual or group of people still own the property, but are trying to sell it for less than they owe on the mortgage. The lender must approve any “short payoff” of their loan in order for the transaction to close. Often the owners are in the process of being foreclosed upon, but not always.

Typical Short Sale Transaction for a NEW Listing:
Listed asking price may NOT be realistic
Some agents (especially initially to attract the first offer) will under price the property just to get some “action”. The listed asking price is just a guess by the seller & agent of what the bank will accept, which can range widely. Nobody will know the real price the bank will accept until about 15-90 days after an offer has been submitted.
Response to offers can vary depending on several factors, but often 45-90 days. Some transactions with smaller banks get approval in as little as a week, while others (like with Countrywide) take forever- somestimes up to 6-8 months! There’s no way to tell.
1.5-5 month closing, which includes 15-90 days of bank review, plus 30+ days to close
No contract negotiating on the seller’s part. They just want an offer – any offer – to submit to the bank and let it decide.
Terms of the contract may remain normal with 17 day inspection period, etc.
Full disclosures
Often no Request for Repairs, property sold “as-is” usually

PROS: final sales price may be comparable to foreclosure prices, full disclosures, less competition that foreclosures because other buyers may be scared off by the potential wait time, often the property is in better condition than a foreclosure but is comparably priced
CONS: BUYER BEWARE!!! Long time before close, often 3-5 months. Meanwhile, you can be outbid at anytime during the process by another buyer and have to start over. Plus, there’s no guarantee that the bank will even accept the short sale and instead choose to foreclose (yes, this does happen). Also, the bank may not accept the offer and ask for more money, even if the offer is at full listed asking price.
CONSIDERATIONS: Be prepared to wait, and wait, and wait some more. Unless you have months before you want to move, don’t bother with short sales. Don’t put all your eggs in one basket. The sale could fall through 3 months into the transaction without warning.
STRATEGY: Many buyers think of short sales as back ups, and many request that I filter short sale out of their property searches completely. Buyer’s can submit an offer on a short sale and during the wait look for foreclosures or private party sellers. Ethically, the listing agent of the short sale should be informed of this when the offer is submitted. If something better comes along a short sale offer can easily be withdrawn.

Short Sales- OLD Listings (90+ Days)
Seller still owns the home, but is more likely to be in the process of a foreclosure. After missing 2 payments, the bank can begin the foreclosure process, which takes a minimum of 115 days. Depending on where the seller is in the foreclosure process, there may be a time pressure to submit an offer in order to delay the completion of the foreclosure. Most of the previous considerations still apply, except for the following.

Typical Transaction Differences for an OLD Listing:
Hopefully, an offer has already been submitted by another buyer (who later withdrew the offer, which is common), and the bank has reviewed and approved the short sale. If so, a BPO (broker price opinion, an “informal” appraisal) has been performed and the bank has disclosed their bottom line acceptable price
Listing price may have been adjusted to reflect bank’s wishes
Negotiator may have been assigned by the bank, thereby limiting the wait time associated with a new short sale listing
Offer can be accepted by seller, contingent on lender approval, and the property can be put into escrow. This removes the risk of being outbid by another buyer.
Quick response time from the bank, within 3-14 days

PROS: realistically priced, at this stage is resembles a normal private seller transaction
CONS: still a possibility of a wait, but much less than a new listing
CONSIDERATIONS: You must meet the bank’s pre-established bottom line. If you want closing cost assistance, we’ll have to add that into the purchase offer above the bank’s bottom line.
STRATEGY: If we find an approved short sale (which is rare), JUMP ON IT QUICKLY! Sometimes these properties slip through the cracks because other buyers are scared of the long wait time. Once word spreads that the short sale has been approved it becomes very attractive and may sell quickly. Banks generally approve short sales at foreclosure prices, and we must come in at least 90% of the BPO price, which may or may not already be reflected in the list price.

Other Short Sale Considerations- IMPORTANT!!!

The list price of a short sale may be “shocking” in some cases. If it’s too good to be true, it probably is! The HIGHLY UNETHICAL strategy some listing agents use is to list the property ridiculously low and hope to generate an offer quickly. Without this offer the bank won’t review the short sale, so the listing agent tries to attract anything. They know the bank will never accept the price, but for their purposes they have to submit an offer to get the process started. You could submit an offer of $1.00 on a short sale and the seller wouldn’t care. DON’T BE FOOLED!!!!! From the seller’s perspective their property becomes more desirable if the bank reviews the short sale because it will then get approval and sell quickly after that. Yes, you’re getting used!!! Banks have the final say in the sales price and the listing price means absolutely nothing to them! The bank bases this acceptable sales price on comparable market sales, so you’re not going to get a smoking deal on a short sale if it can’t be supported by market data. As stated previously, you’ll get the same deal for a short sale as you would a foreclosure.
PS- Buyer’s Agents hate it when listing agents do this, and there are a number of complaints about this unethical practice (including from yours truly). It is a serious problem, and it generates a lot of unneeded work for buyer’s agents.