Thursday, December 29, 2022
Short sales in Sacramento -- will they amount to a significant part of the market in 2023 and beyond? Your short sale questions answered...
short sales to our Sacramento real estate market -- ironically I have found myself explaining mostly to other agents more than anyone else exactly what short sales are. Realistically I suppose if someone has been an agent for under a decade they likley will not have much, if any, experience with them. Short sales have not been a significant portion of the Sacramento real estate market in probably 8 or so years -- and candidly doing a quick search in MLS today, short sales barely register a blip on the radar. Though I would expect that as values stagnate or possibly decline further we will see some sellers faced with some difficult choices.
By my count today, there are 13 active and pending short sale listings in all of Sacramento County (out of 2,450 active and pending listings). That is approximately one half of one percent. So in other words today, 99.5% of listings are not short sales, and 0.5% of listings are short sales. That is a drop in the bucket. Back in the Great Recession, the vast majority of my listings were short sales. And short sales and other types of distressed property listings absolutely DOMINATED the market. Between my own client listings, and the listings of other agents where they contracted with me solely to negotiate the short sale side of the equation -- I closed well over 100 of these highly complex transactions.
Keep in mind that listing or purchasing a short sale is A LOT different than a traditional resale real estate transaction with a traditional seller who has home equity. I tell my clients to take everything they think they know about buying real estate and throw it out the window.
So putting my Short Sale Agent hat on, here are the answers to some commonly asked questions:
What is a short sale? A homeowner who needs to sell ultimately owes more on the property than it is currently worth, so they list the house with a real estate agent who then attempts to negotiate a lower payoff with the owner's mortgage company so the owner can sell the house. For example, if the property is worth $500,000, however the owner has a mortgage for $550,000 the owner would not be able to sell the home and pay off the mortgage with the proceeds of the sale. The property would be listed for $500,000, an offer received from a buyer and accepted by the seller SUBJECT TO LENDER APPROVAL, and the agent would negotiate with the mortgage company to accept the net proceeds of that sale at its current market value. An important note -- usually there needs to be a compelling reason to sell or a financial hardship on the seller's end for the mortgage company to entertain allowing a payoff for less than the mortgage amount owed.
Is a short sale quick? How long will I wait for approval? The term "short sale" is often confused with a quick time period and close of escrow. Short sales are not usually quick. While some mortage companies will provide for a pre-approved short sale process, the average waiting period for the seller's mortgage company to approve the short sale is probably 30-60 days once an buyer offer is submitted. Some take less time...some take A LOT more time. The fastest approval I have received on one of my short sale listings was 11 days. The longest was almost 2 years. Once a short sale is approved, then the bank typically allows the buyer somewhere from 21-30 days to close the transaction. There are SO many variables that will dictate the length of time it takes to get approval...like which lender services the mortgage, which entity owns the mortgage, how many loans there are on the house, how knowledgeable the listing agent is, how cooperative the seller is with the process, if the seller is trying to use a government short sale program, etc. There is also no guarantee a mortgage company will approve a short sale at all. So.......fasten your seatbelt.
Does the seller have to be delinquent with mortgage payments to get a short sale approved? No. I have successfully closed several short sales where the seller stayed current with payments.
Who decides what the listing price is? The price listed in MLS may not be the price the seller's mortgage company is willing to accept. Usually the listing agent will set the price based on market value, and in consultation with the seller. Some mortgage companies offer a pre-approval process for short sales but I would guess that very few listing agents and sellers do this in advance of listing the property for sale. The seller's mortgage company will do its own valuation or appraisal (often referred to as a BPO - or Broker Price Opinion) to validate the offered price. The bank may counter your offer. Heck, they may counter a perfectly reasonable market value offer too... in addition to the possibility of countering the price you offer, the lender may counter the terms of your offer.
Who pays the real estate agent commissions? In a short sale scenario, the lender(s) who agree to forgive debt and allow a short payoff of the loan(s) pay for the real estate agent commissions - generally by absorbing the costs of the commissions out of the proceeds of the sale. As a side note, oftentimes these commissions are re-negotiated by the lender(s) during the process. For example, if the seller and listing agent agree to a 6% total commission initially when the property is listed (usually then split in half to 3% to the listing agent, 3% to the selling agent), the lender may re-negotiate that fee later to perhaps 5% total (2.5% / 2.5%) or less. Note: Real estate commissions are always negotiable and NOT set by law or local custom.
Who pays title insurance, escrow fees, and transfer tax fees? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). For example, perhaps the buyer and seller agree initially that the seller will pay for 100% of title insurance and escrow fees, 100% of county transfer tax, 50% the city transfer tax. The lender(s) may negotiate that the buyer pay a different split of these fees...however the portion that is paid by "the seller" is absorbed into the overall debt forgiveness and short payoff. Occasionally you will see a lender agree to pay one of these fees, up to and not to exceed a certain amount (for example, they may agree to cover up to $750 of the escrow fee that costs $1200). Generally then, the buyer would cover the unpaid portion of that fee. So basically, again, the lender(s) will absorb many of those types of fees.
Who pays for a home warranty? This is negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). Generally though, I would prepare any buyer of a Sacramento short sale property to expect to pay for this cost, even if you ask the seller or short sale lender to cover it. In my experience, this is paid by the short sale lender in less than 20% of my approved short sales.
Who pays for home inspections, certifications, or repairs? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). Most short sale lenders will not agree to cover things like pest or termite inspections, roof inspections, sewer line inspections, or any corresponding repairs or certifications. A lot will depend on the circumstances with the condition of the property, how many loans are involved, the buyers' loan program, if the property is in default, the length of time of negotiation, etc. As a safety net - buyers, do not expect that lenders will grant these requests. Generally short sale properties are sold "as-is" and sellers can not afford to make repairs anyway.
Will the short sale lender(s) give the buyer credits for closing costs or interest rate buydowns? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). I have seen this vary widely from the short sale lender(s) agreeing to pay up to 3% closing costs for the buyer, to the short sale lender(s) rejecting those requests. Again, much will depend on the circumstances surrounding the sale of the property.
Who pays delinquent property taxes or unpaid utility liens? It depends. Sellers, if you have not been paying your property taxes or county utilities, you really need to let your agent know this ASAP! I work closely with the title company on this to make sure that we know of any lien issues in advance, but because it can take several weeks or months to get approval, new liens may pop up during the lender negotiation process. When I negotiate short sales, one of my worst fears is that after the short sale is approved an unexpected lien will pop up. This has happened to me before, and for lack of a better way of describing it - this sucks! If you can let your agent know in advance that these items are unpaid, it will save lots of headaches all the way around. IF WE KNOW in advance that these liens exist, there is a great chance that the short sale lender will absorb these costs into their overall debt forgiveness and short payoff. IF WE DO NOT KNOW in advance that liens exist, once the short sale is approved - this will halt the transaction until we can find a way to pay these liens. The seller is often financially unable to pay them, the buyer usually does not want to pay, the agents commission has already been reduced, and the short sale lender has already taken a loss on the loan. Sellers - please save everyone a headache and communicate with your agent.
I have IRS and FTB Tax liens, can I do a short sale? Yes. There is a parallel process to get what's known as a "valueless discharge" of liens when doing a short sale. This does not release you from owing IRS or FTB tax debt but it does release the debt from the property so it can be sold. Again, be up-front with your agent if these exist so your agent can initiate the paperwork and process asap.
Can I buy a short sale property from my sibling/parent/cousin/spouse/relative? No. Short sales must be "Arm's Length" transactions and all parties will have to sign an affidavit stating no parties are related.
Are there tax or legal ramifications for sellers who do a short sale? The best answer I can provide here is that you need to speak to a CPA or an attorney. Every seller's circumstance is different. Some may face income tax on forgiven debt while others may not.
Clear as mud, right? My advice to you is to find a competent Sacramento short sale agent to help you navigate the process. I have done A LOT of these transactions and would be happy to answer your questions.