What is a short sale? How does a short sale work?
A short sale is when the homeowner falls behind on their mortgage payments and needs to sell the home but can’t because they are upside down on their mortgage, meaning that they owe more on the home than it is worth. At this point, the bank tells the homeowner that they need to list their home with a Realtor to begin the short sale process. The Realtor then determines the market value of the home and lists it at or around that price. Until the Realtor can bring a sales contract for that property to the bank, they really don’t want to be contacted. Once a sales contract is written and submitted to the bank, the bank may take up to 30 – 90 days or more to respond and in some cases it can take over six months to hear a response from the bank. Often, when the bank does respond, they will respond with a counter offer that may be above the listing price, and therefore is too high for the present market. The bank is crunching numbers on how much is owed and how much it WAS worth, but in the current real estate market the home values are changing and the banks don’t always have a handle on what the real estate market is doing in our particular area. Some short sales have a payoff negotiated, but in many cases the bank’s loss mitigation department doesn’t begin evaluation until they get the first offer. Because of this bad reputation that short sales have, sometimes a property listing can be tricky – it might say that the home is in “pre-foreclosure” or that the listing is “contingent on lender approval”.
Don’t be totally close-minded to the idea of a short sale; just be mindful, do research and ask lots of questions before submitting an offer. The easiest question to ask is, “has the bank negotiated a payout?” If the answer to that question is “yes”, then the process should be easier and quicker than a typical short sale. Another thing to check out is how many mortgages there are on the property, which is public record. Keep in mind that for your offer to be accepted, ALL of the involved mortgage companies must approve. That can mean more time and more hassle.
A final note about short sales is that if you are using a Realtor who has never successfully negotiated a short sale before, it may be even more difficult to get the property closed. Dealing with banks and mortgage companies is a lot different than dealing with the average homeowner. There are different forms to fill out, special hoops to jump through and extra communication that needs to happen. Consider choosing a Realtor who has extensive experience in these areas.
What is a foreclosure? How does a foreclosure work?
If you are thinking of buying a foreclosure property, that’s an entirely different situation. A lender or bank now owns property. The price that the home is listed at is approved by the bank and therefore will sell at or near that price. In some cases, the bank MIGHT accept slightly less than the list price but more frequently, the property will actually sell for a slightly higher price due to multiple offers being submitted. The banks will usually take the highest and best offer that is submitted rather than the first offer that is submitted. Foreclosures, or bank owned properties often are on a price reduction schedule that will reduce the price little by little until a strong offer comes in on it. The amount of time that you will wait is negligible; usually about the same amount of time that it would take if you were submitting an offer on an owner occupied home. In most cases, banks will want to close within 30 days so they can turn their inventory as quickly as possible.
People often ask, “how does the bank even know what the property is worth if they’re out in California? They don’t know our market.” “Do they even know that there are holes in the walls or the carpet is stained?” The answer is yes, yes and yes. The bank gets a full report on each property and pictures. We do what is called a BPO or Broker’s Price Opinion.
Here’s the formula that they follow: If the home is in an urban area you can search for comparable homes within a one mile radius of the subject property, if the area is suburban you can go out 5 miles and rural you can go out 10 miles. The closer the comp the better. Next they will let me go back in time 6 months in sales from today’s date. Some banks are only allow going back 3 months or less because the market is changing so rapidly. For comps in the final report, the banks will only look at three active property comparisons and three sold comparisons. They do not look at any pending properties. Then we look at square footage of the home. Then next thing is age. They like the homes within five years +/- on the age. So, if the home was built in 1995, search for homes built from 1990-2000. In some cases they will let us go 10 years on either side. They also prefer us to stay with the same number of bedrooms and bathrooms. If the home has a pool, they would want us to use other homes with pools for comparison or put in adjustment for a pool.
I also want to point out that they will get a BPO from the list agent and then the banks also pay for at least one Realtor that is independent of the sale to do a BPO. Then they compare the two. If the prices that were arrived at are wildly different then they would question both Realtor’s about their BPO’s. Both Realtors are required to submit photos of the home so the bank can view them. They typically want photos of any damage, all mechanicals and appliances, the water heater, electrical panel, four photos of every room, the pool area (if there is one), and a street view of both directions. We also fill out a page of positive and negative features of the property. And at the end of the report we will give our opinion on a list price for the home to get it sold in 30 days. So, there you have it that’s how we arrive at a price for the bank.
Here are a few points to keep in mind. Usually foreclosures do close pretty quickly. If you are submitting a cash offer they will want to close in 14 days. If it’s financing, usually 30 days is acceptable.
Most of the time banks will pay for title and they will select the title company. This is because they want to keep tabs on all of the property they handle and it is much easier to do this if they are all at one title company.
If there are several offers on a home the bank will often come back and ask each buyer for their highest & best offer. Sometimes they will require you to sign a form notifying you that you are in a multiple offer situation. This is not always set in stone and they don’t have to do highest & best. Another question we get is,”Can you disclose any of the offers?”. The answer is no. The other buyers will not know what you offered and you will not know what another buyer has offered. Your Realtor can run comparable properties for you to determine what a reasonable offer might be.
All foreclosures are sold “as is”. An “as is” contract reads, “as is” with right to inspect and you will fill out how many days you have to inspect the home and cancel the contract if you find any issues. The banks always sell their property “as is” because they have never lived in the property and therefore are not aware of any issues there might be with the home. You will also not receive a sellers’ disclosure, which is a typical document in a owner occupied home. This again, is because the bank has not lived in the home. There may or may not be issues with the home but we would advise buyers to hire a home inspector.
Once you submit your contract and it is accepted, the bank will almost certainly send another contract out that overrides the first contract. Please read this contract carefully because most of the verbiage will be different than the original contract you signed and this contract and addendum’s will override anything in the original contract. Some banks will not allow a cancellation of contract if you find something wrong with the home. It would state this in their contract. Often the addendum are 5-30 pages long. Many of the longer contracts are with Fannie Mae, Freddie Mac and HUD. HUD usually will not let investors bid on their homes until the home has been on the market for 10 days. This gives an owner occupant a chance to offer on the home without the competition of an investor. So, many of the HUD homes sell to owner occupants for this reason.