Archive for the ‘Short Sale’ Category

What it’s like buying a short sale

Monday, April 4th, 2011

I recently wrote about the process of buying a foreclosure, in this article I will cover my least favorite transaction, a Short Sale.  These real estate transactions are called short sales because the bank that has the loan on the house for sale will get shorted on the amount owed them.   It works something like this; the seller, who maybe lost their job and can’t make the payments, owes $800,000 on the home and the most they can sell it for is $600,000.  In this case the Short Sale bank might agree to accept the $600,000 and let the owner sell the house.

The only consistency in Short Sales is the rules change all the time, as a matter of fact, there really are no rules, we are talking the Wild West.  In the above example the bank might agree to let the owner sell and loose $200,000 (actually much more after selling cost; commission etc.) but they could just as easily agree only to do so it they seller signs a promissory note agreeing to pay back the money at some future date.  This is less common because most owners would then just tell the bank to go ahead and foreclose.  When that happens the bank usually cannot go after the seller for lost money.  The main reason people Short Sale rather than foreclose is the hopes of it not affecting credit scores as much and the opportunity to buy another home in just a few years vs. almost 10 years.

Now that some of the basics are out of the way what is this process like for someone buying one of these homes?   First, my advice to my clients is this is the last type of property you want to buy.  Sure, if you just love a house and it is just right for you, go ahead and make an offer even if it is a Short Sale, just don’t get too attached because chances are the deal may fall apart.  Second, if you really want the house just hang in there, it may take months, many months, maybe over a year.

Why do you have to wait so long?  The transaction starts normal enough, you write an offer, the seller accepts it but the offer is contingent on the Short Sale bank accepting the offer.  That is what takes so long, waiting on the Short Sale bank.

Why do so many of these escrows fall apart (this list is long)?  The buyers may get tired of waiting and find another home thus cancelling the Short Sale escrow.  After waiting several months for the Short Sale bank to approve the deal you get out-bid by another buyer.  The seller might change their mind and decide to let the bank foreclose on them so they get a few extra months free rent. The Short Sale bank might decide the offer price is way too low and counter at something much higher than the buyer can afford (this is not necessarily unreasonable as sometimes listing agents price short sale too low in the hopes of getting an offer before the foreclosure).  Your inspection period usually does not start until the Short Sale bank has accepted the offer and if you find something bad at that point you may have just spent several months waiting for nothing.

Like I said, if the house you love is a short sale make an offer just don’t get your hopes up.

Warren Carreiro

warren@RealtyOfMarin.com

What it’s like buying a Bank Owned Foreclosure

Wednesday, March 30th, 2011

You’ve been looking and finally found the house you want to buy and it is a foreclosure, also known as an REO (Real Estate Owned –“by a bank”).  Usually these are considered a good deal, at least they typically are priced a little below the going rate.

Here is what you need to know.  There are no disclosures, nothing telling you the next door neighbors might be noisy or maybe water leaks under the house in heavy rains.  There are reasons for this; the bank has never lived in the house so they don’t know anything about it.  The former owners that got foreclosed on are not anxious to help the bank sell the house.  Also, those owners might make the house look better or worse than it is just to “get back at the bank”.  All this means you better do your homework and get inspections so you know what you are getting into.

When you write an offer on a foreclosure it may take several days for the bank to let you know if your offer is accepted, we are talking bankers’ hours.  Most of the larger banks with counter your offer, even if they like your price, with an addendum that turns the whole purchase contract in their favor.  For example, in a typical purchase contract you might have 17 days to do your inspections and if you don’t expressly remove the Inspection Contingency you can get out of the contract without losing your deposit.   The banks addendum changes that so if you don’t remove your Inspection Contingency by the given date it is assumed everything is okay and you are stuck in the contract.  Not only that but they usually give you just 5 to 7 days to complete inspections.

I suppose we could live with the shorter timeline and passive removal of contingencies except it is usually not clear when your timeline starts.  This is because when the bank counters your offer with their addendum they may sign it one day and you don’t receive it for several days after that.  Usually that would not be a problem but the bank form might say the start date is when it is signed by the bank.  At this point I can’t guarantee my clients what the real start day of the contract is so we have to go conservative and assume it starts when the bank signs it.  That can take our 7 day inspection period down to just a few days or worse if it is Friday or a long weekend.  No problem, right?  All we need to do it issue an addendum asking for more time for our inspections.   The listing agent will say okay and send it to the REO bank.  Problem is the bank never signs the extension but you are told it is okay.  We all know everything in real estate has to be in writing but we can’t get the bank to sign anything.  I have to say, so far, the banks have been honorable with their word but who wants to be there when they aren’t.

If a buyer get emotional in a multiple offer situation they may offer more than they wanted once all the dust settles.   No problem for the bank, their addendum takes care of that for them.  If you want the deal they make you sign a form that says if the home appraises for less that your offer you will still go through with the deal and make up the difference with a larger down payment.

Regardless of all these problems with buying a bank owned foreclosure, REO, it likely will still be less frustrating that buying a Short Sale…

Warren Carreiro

warren@RealtyOfMarin.com

Put Short Sales at the bottom of your list

Friday, November 20th, 2009

When looking for a new home put Short Sales at the bottom of your list. The reason most Short Sales fall out of escrow is the buyers get tired of waiting for the bank to accept their offer. In most cases it takes months for the Short Sale bank to respond to your offer and then you might find out they want to counter with a higher price.  Or perhaps you have waited several months for the bank to respond they at the last minute a new buyer comes in with a higher offer than yours.  At the very least I hope you keep looking for another “perfect” home while waiting for the bank to respond, and no, it is not legal to write offers on several Short Sales and take the first one that is approved (unless you disclose your intent on all offers).

Maybe everything goes along perfect, the bank accepts your offer and then you find out the sellers have changed their mind.  Rather than go through with the Short Sale they will let the bank foreclose and live in the house for several more months without paying their mortgage.

Speaking of waiting, did you realize that you don’t lock your loan rate until the bank accepts your offer?  This means you may write your offer when rates are in the 4% range and by the time the bank accepts your offer rates may have gone up close to 6%.

Don’t think you are getting a better price on a Short Sale either.  Many times the bank will list the home for a lower price as an REO (foreclosed home) than a Short Sale offer they refused.

Short Sale Creates Large Drop in Credit Score

Friday, September 18th, 2009

According to an article published in the Los Angeles Times, a Short Sale can hit your credit rating up to 130 points according to researchers at VantageScore. While this is a big hit there are several advantages to a Short Sale over letting your home foreclose. Typically owners that sell their home short have missed several months of mortgage payments and that is usually what affects your credit. The actual formulas for calculating credit scores are kept secret but typically you can get a new home loan in less than three years after a short sale.

If the bank forecloses on your home your credit rating can take a hit of up to 150 points and the record of foreclosure can stay on your credit report for seven years.

For those that choose Bankruptcy look for a credit drop of well over 300 points and ten years on your credit report.

To read the full story click on this link.

So you want a foreclosure?

Monday, June 29th, 2009

Buying a foreclosure is for the pros with a big checkbook. In Marin a “real” foreclosure is literally sold on the steps of the courthouse on Fifth Avenue in San Rafael. The buyers have several denominations of Cashers Checks that add up to the maximum they will pay. They bid against each other and the bank that holds the loan on the house and is foreclosing on it. The bank has the upper hand because they don’t have to write a check unless the bidding goes over the loan amount.

You will be bidding on a house you likely have not seen on the inside. No bank will lend you money until you buy the home. This is a cash transaction that does not come with title insurance.

When you hear someone say they bought a foreclosure that usually means they purchased a home that has already been foreclosed on by the lender. They are known as REO’s, which stands for Real Estate Owned (by the bank). When buying an REO the paperwork sucks. Banks expect buyers to start their inspection and financing timelines without so much as a signed offer acceptance from the bank. In many cases the acceptance of the offer is conveyed to the buyer verbally. As you know, in real estate verbal does not cut it, the law requires everything in writing. But as long as you are getting a good deal are you really going to fight with the bank that selling the house?

Homes are also sold in pre-foreclosure status which may mean the seller had a notice of default (they are late in mortgage payments) or it is a short sale. In a short sale the seller gets the bank to agree to sell the home for less than the amount owed.

Warren Carreiro

Why Banks Don’t Like Short Sales

Saturday, May 9th, 2009

The front page of the Huffington Post had an interesting article regarding Short Sales and why banks do not like them. The focus of the article was that if the bank sells Short they have to write off the short portion of the loan. If they prevent or ignore a Short Sale they can keep the full value of the loan on the books. I am not sure this is true if the owner is behind in their payment which most Short Sale owners are. Here is the link to the Huffington Post article http://www.huffingtonpost.com/2009/05/08/short-sales-banks-blockin_n_199099.html

Paul Hickman of Stewart Title feels banks don’t like Short Sales because they fear getting scammed by the home owner. An example of this is the owner sells to a friend or family member as a Short Sale and then in a year or two buys the house back (pre-arranged) from the “friend”. The result is the original owner gets the house at a much reduced price and the bank has lost a lot of money. All the Short Sales I have been involved with have a form required by the Short bank saying there are no secret deals. Usually they require that the new owner can’t have any pre-arrangement to rent back to the sellers.

Either way, the article is correct, banks can and often do take months to respond to an offer and by the time they do the buyers’ have given up and found another house.

Warren Carreiro, Broker

Novato Short Sale – Are They Closing

Monday, August 4th, 2008

Novato has half the Short Sale listings in the Marin MLS (B.A.R.I.E.S.) yet they are not closing escrow at anywhere near the rate they are going into contract. Short Sales in general have a high escrow fall-out rate and most of the time that is due to the bank taking too long to respond to legitimate offers. The banks are overwhelmed with paperwork from poor performing loans and don’t seem to know how to deal with the situation.

Here is the interesting part; Novato currently has 121 Short Sale listings and 48% of them are in contract (various stages of the sale process). If that percentage were actually closing escrow it would represent a very strong Sellers Market, which is definitely not the case.

In July 2008 Novato had just 9 Short Sales close escrow. Assuming the number of listings was similar in July to this August, which it is that means that less than 20% of the Short Sales are closing which is way off from the 48% in contract.

What happens to these homes when they fall out of escrow? Some go back on the market to give it another go but many are taken back by the bank and sold as bank owned property (REO – Real Estate Owned “by a bank” ).