Monday, June 7, 2010

Sacramento Short Sale Tip Numero Uno - Ask your agent for references...

In the greater Sacramento area, short sales are extremely common. If you have followed my blog for a while, you may have read my recurring series of posts entitled "Erin's Sacramento Short Sale Experiment" where I compare the statistics and trends for the volume of short sales in some of Sacramento's different neighborhoods.

For those of you who are not familiar with short sales, it is the sale of a house for less than the amount that is owed to the bank/mortgage company. Occasionally, homeowners find themselves in positions in which they must to sell their home, but the reality is that their property is worth less than what they owe the bank...perhaps they did a "cash-out" refinance?...perhaps they bought at the peak of the market with 100% Financing? Many banks will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a costly foreclosure, and the owner is able to pay off the loan for less than what he owes.

I field dozens of calls each week from prospective sellers looking for information regarding the possiblity of doing a short sale...In the last couple years since short sales have really become prominent, I have successfully negotiated and closed 20+ short sale transactions for both buyers and sellers. These are extremely complicated transactions...if you are looking for a short sale agent in Sacramento, I have a key suggestion for you: GET REFERENCES. There are many agents who have obtained "certifications" (basically a piece of paper that states they sat through an online class about short sales) and proclaim themselves to be "short sale agents" but have never actually closed a short sale transaction.

A few myths about short sales:
1) "The seller must stop making payments on their loan." Not necessarily. I have negotiated several short sales where the seller has not missed any payments, and were not in default. In those instances, we were able to prove that future default was imminent and that the seller was trying to be proactive with the short sale.
2) "The seller is in foreclosure." Not necessarily. It is possible to have missed payments and not be in full-blown foreclosure. Generally most lenders will not file a formal "Notice of Default" until the seller is 90 days or more late. MANY lenders are so back-logged with past-due accounts that they literally do not have the manpower to file a NOD in a timely manner. Also, due to certain government programs, legislation, and generally just the mass numbers of homeowners in distress due to economic conditions, many lenders do not pursue filing a NOD until they have exhausted other attempts to allow the homeowner an opportunity to go through the process of an alternative to a foreclosure (for example, a short sale).
3) "Buyers will not want to make offers on short sale property." Not true. Occasionally buyer's agents are reluctant to represent offers on short sale property. Often times, listing agents will take on short sale listings when in reality they have no knowledge base or skill set to successfully negotiate the lower payoff. A shrewd buyer's agent will call the listing agent and make sure they are competent to complete the process, and then submit an offer. Also, because of the high concentration of short sale listings in certain areas, really in this day and age buyers do not have much choice but to consider attempting to purchase a short sale listing.
4) "Financial hardship is the only reason a lender will accept a lower payoff." Not true. There are many potential reasons a lender will allow a lower payoff. One such example is that the seller must relocate for some reason, such as to care for a sick relative, or due to employment requirements. Other examples include divorce, illness or injury, the birth of a child, death of a family member, etc. Of course the short sale lender will want some sort of proof of these circumstances.
5) "A short sale where there is a first mortgage and a second mortgage will not be approved." Not true. While this scenario requires diligent negotiation and tends to add complication to the transaction, many 2nd mortgage holders will accept as little as $1,000.00 in lieu of a full payoff. I have even successfully negotiated and closed short sales with three separate mortgage loans.
6) "A short sale means that the escrow period will be short." Generally no. Depending on how much negotiation can be completed in advance, a typical timeline for lender approval can be 2 weeks - 2 months. Once the lender approves the lower payoff, escrow is opened and the transaction timelines proceed from that date.
7) "Short sales are a bargain!" Banks do not give property away. They base approval on recent sales comparables, and actually retain the services of a local agent to perform a BPO (aka, Broker Price Opinion). While I do believe it is possible to get a lender approval for a property a few percent under its market value, purchasing at "wholesale" is just not reality under most normal circumstances.
8) "The seller of the property can make money from the short sale." Not true. The lender will REQUIRE that the seller nets $0 from the sale. Additionally, most lenders will require that the transaction be at "Arm's Length" - meaning that you can not sell it to a family member or business associate. No form of "enrichment" of the seller will be acceptable.
9) "The mortgage lender is the seller in a short sale transaction." Nope, the homeowner is still the seller! While the mortgage lender(s) must ratify the transaction and agree to lower the payoff so that the seller can sell, the lender is not a party or principal to the actual transaction. The purchase agreement is between the buyer and the seller.
10) "Once I get an offer on my short sale and submit it to the bank, I can stop showing the home to other buyers." This is not something I would advise a seller to do. Buyer offers on short sales are frequently withdrawn for one reason or another. Occasionally the short sale will take so long to negotiate that the buyer's circumstances may change (change in income, family, etc.) and they may decide not purchase the home. Many buyers will continue to look at other homes even after an offer has been accepted on a short sale listing. I do not personally condone this practice, but other agents encourage their buyer clients to do so. In light of this, it is a good idea to continue to show the home so all the seller's eggs are not in one basket.

These are just some of the common questions and assumptions I get from both buyers and sellers regarding short sales. In reality, most people (buyers, sellers, and even some real estate industry professionals) do not have a clear understanding of what they are and how they work. I have successfully negotiated short sales in the past for seller clients. If you are facing the reality that you have to sell your home, and you owe more than its current market value, I may be able to assist you with this transaction. I welcome your call.

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