In today’s market, REO and short sales are saturating the market. They provide opportunities for many buyers looking for a first-time home purchase or a fixer investment property. Banks are becoming much more streamlined in preparedness to respond to short sales, and experts project that more will hit the market in the coming year. Approximately half of the listings we take are short sales or become short sales during the listing period.
Too often we hear from owners who have tried alternatives, communication with the bank, and are fed up and have a trustee sale date pending. If you are in a difficult situation we would like the opportunity to review your housing situation and offer some suggestions and action plan. A short sale is an involved process, but if you’ve been through it dozens of times, it’s much easier!
Here’s what you need to know before pursuing an REO or short sale:
General:
What does REO mean?
Real Estate Owned—in other words, the property is owned by a bank usually due to foreclosure proceedings
What is a short sale?
A home owner is selling the home for a price less than what they owe, and the bank(s) holding the note (or loan) must agree to accept less than the full balance as a payoff, or the sale will not take place.
What’s a BPO?
This is short-sale speak for a market analysis. A Broker Price Opinion is ordered by a bank that is considering the acceptance of a short sale offer. A broker or independent agent will evaluate the home (in person) and check comps in the area to provide feedback to the bank on their opinion of the current market value. This is done before a bank will approve the short sale and respond to prospective buyer.
For sellers:
If I need to sell my home but know I am “under water,” what can I do?
First, meet with a local real estate agent and get a market analysis on your home to confirm if you need to plan for a short sale. If so, then: contact your lender to obtain a “hardship packet.” This packet provides financial statistics and information about your personal circumstances which the bank will review to determine the validity of your short sale request. If you aren’t able to make your payments, don’t delay. Hire an agent experienced with short sales to list your home on the market. The agent will serve as your liaison with the bank(s), buyers, and title company. You may need to list at “market” price and wait to develop a baseline in activity. Make price reductions as needed, but with the goal to have a “good” offer to submit to the bank. A low-ball offer may start the review process, but you are better off getting a quality buyer who will stick around for the time it takes to get bank approval.
If I know I need to short sale my house, when should I start the process?
You are best served getting your house on the market when or prior to any lapse in payments, as once the bank begins foreclosure proceedings, you may have only a few months to secure a buyer and get approval for the short sale.
Will a short sale affect my credit?
We’ve not completed a short sale with a bank yet that has allowed the borrower to maintain payments and, by doing so, keep their credit intact. The common requirement for a bank to even discuss a short sale is for the borrower to be 30+ days in arrears.
I am not sure I will need to do a short sale, so can I try to sell the house first by normal means?
If you are close to clearing your loan (i.e., your loan is $300K and the house may net $300K to $305K), trying a “normal” sale and considering alternatives to bring in cash to close may help salvage your credit. After 30 to 60 days of marketing, if you don’t have any offers then you have established a baseline to approach the lender with, and then you can move into a short sale mentality by reducing the price.
Can I stop a short sale once it’s begun?
Technically, any time you bring your mortgage current and remove the house from the market, you can stop a short sale. However, if you are under contract with the bank and a buyer to complete a short sale, you should review the repercussions of backing out of a transaction first.
How long does it take to get approval?
Most banks require a ratified purchase contract before they will consider the short sale and price. You need to consider the time it will take to get a contract in place plus the possibility of one to three months of communication with the lender(s), PLUS escrow time. On average, a short sale may take then four to six months from the date of listing.
What type of documents are needed for a short sale?
Aside from the standard purchase agreement, the bank will need to see documentation from the buyer for proof of funds, preliminary title report, proof of payment on any other liens on title, financial statements from seller, hardship letter or package, paycheck stubs or tax returns from seller, HUD from title company, and listing agreement, to name a few. Failure to provide any requested documents usually delays the processing of the approval.
Does a short sale buyer have an obligation to wait for the bank approval?
Most offers submitted on a short sale include an addendum that provides a date by which the buyer will wait for an answer from the bank, usually a timeframe extended beyond the acceptance deadline of the offer. If the bank does not reply by that date, then the buyer has no obligation though all parties can certainly continue the sale with extensions and written agreement.
Does the seller negotiate with their lender about a short sale?
We’ve found it helpful for the seller to make contact with the bank during the process. However, once they authorize their real estate agent to act on their behalf, the agent may continue communications and negotiate with the lender. The process is quite complicated and we strongly recommend sellers hire their own agent with short sale experience to represent them once they feel a sale is immanent. Experienced agents know what to ask for and what the bank needs to see on paper to approve a sale. Trying to sell your own home through a discount broker and negotiate a short sale is NOT recommended.
I have a second on my home. How will that affect the short sale?
Both lenders have to agree to the short sale, and the more irons in the fire, so-to-speak, the more complicated it will be to get all to agree to the same terms. Depending on what type of second you have (personal loan, HELOC, purchase loan, etc.), the amount due may or may not be considered “paid off” by a short sale. Some lenders will still hold the borrower responsible for the balance as part of a condition to agree to the short sale.
What advantage is there to do a short sale over letting the bank have the house back?
I hear the phrase “giving the house back” frequently, but you are referring to a foreclosure which will negatively affect your credit. Either route—short sale or foreclosure—will affect your credit in some manner. The advantage to a short sale is that most banks will offer a level of debt forgiveness whereas a foreclosure may not absolve you from the financial obligation.
I can’t have my credit affected by my housing situation, but I need to move and I know I am underwater on my loan. What are my options?
Since both short sale and foreclosure processes are pretty much guaranteed to affect your credit, your options are to rent the house out until the market improves, bring cash in to pay the difference, or, if your loan is assumable, see if the financials work out to allow a transfer of your existing loan.
For buyers:
Which type of sale is easier to pursue?
Either type of sale usually takes a patient buyer, as often there is a two- to six-week wait to obtain approval from the bank for the sale. However, when you buy an REO, the bank usually has a faster response period, especially if your offer is around fair market value.
What is the advantage/disadvantage of a short sale?
Often a home on the market for a short sale is still owner-occupied. The utilities will then still be on and the buyer is able to make reasonable investigation through inspections to determine the true condition of the home. In a short sale, the seller will also provide disclosures on the history of the home. Many REOs will not have utilities turned on or documentation about the home, which creates a “buyer beware” situation.
What is the process of making an offer on a short sale?
It’s similar to the process of submitting a “normal” offer as it is presented to the listing agent and the seller will sign to accept. However, even if the seller agrees to it, the sale and terms must be approved by the seller’s lender. The listing agent must submit the offer to the bank and follow up for approval. Some banks have streamlined this process so approval is given within a day or two, though most frequently it is a four- to six-week process. The bank will reply in writing with an acceptable net sales price and close of escrow. The buyer must be able to perform and close escrow before the expiration of the approval.
Is a short sale better or worse when there are two lenders?
Usually worse, in that it is more difficult to get two entities to agree on the same thing. The first lender must agree to allow the second lender a certain amount of funds or the second lender will not agree to the sale. Unless both lenders agree to the sale, there is a stalemate and eventually the foreclosure proceedings will prevail.
How long does it take to get an offer accepted in a short sale where there is a first and second lender?
There is no set way to determine if both lenders will accept a short sale. Say you offered $500K on a house with a first loan of $550K and a second of $50K. The first lender will get a good portion of their investment back, in comparison to the second lender, who will get nothing. There is no advantage for the second lender to agree to accept nothing. The second lender may foreclose, take the house back by paying off the first, and then sell it. Unless the first lender agrees to allow some of your $500K offer to go toward the second lender's note, then the foreclosure option may be the best solution for a second note holder to obtain some of their investment back. Often the second lender will also not make any approval or commitment until the first lender has granted approval. The approval confirms what amount the first lender will or won’t provide for the second lender.
Is it possible to have an accepted offer on a short sale but not be able to buy it?
Yes, for several reasons. Usually the seller has stopped making payments on the loan(s) in order to start the short sale process. The lender will most likely file a notice of default and begin the countdown to foreclosure. Once the NOD is filed there is a 90-day timeframe to pay off the loan (by selling the property) or bring it out of default, unless the lender delays the process. Therefore, the bank may foreclose on the home before approving the short sale, or a trustee sale may be held where another entity purchases the home. Also, should the bank approve the short sale and the buyer is unable to complete the process before the expiration of the approval, the bank may elect to terminate the agreement or change terms as a requirement to extend approval.
Is it true that banks are trying to unload their REO properties and they will look at any offer?
Banks want to sell their properties but will be looking for fair market value. Most banks sell through a local real estate agent who will price the home accordingly. The bank may choose to wait for one offer or twenty before deciding which to pursue. We recommend buyers submit their highest and best offer under the expectation that they are basically bidding on an auction.
Is it better to low ball an REO or a short sale to get a “deal?”
If you low ball either, you are gambling on a situation controlled by a bank not by a person, so the desperation factor really isn’t there. If you are a cash buyer and do not need a loan, that will give you the best possible scenario for securing a “deal.”
If I want to buy a short sale, how long should I wait for an answer before pursuing other properties?
Since there is no sure thing in a short sale, we typically recommend buyers who have more than one home they are interested in submit offers on all the homes. A buyer may rescind an offer if they are accepted for another property or they elect not to wait for a response.
Is it difficult to get a loan on an REO?
In general, loans are more difficult to get now, and several factors can influence your ability to get loan approval. Some lenders are very particular about the condition homes are in, so it’s best to get some guidelines in advance. Key problem areas we’ve seen are: additions/remodels done without permits, termite repairs, older roofs, obvious damage to structure such as broken windows or missing cooking surfaces, foundation damage, or incomplete construction. Many REOs are left in poor condition and will not qualify for a standard loan, much less VA or FHA.
What is the best offer strategy for an REO or short sale?
Hire an experienced agent who can negotiate and write a clean offer!
I don’t want to deal with the hassle of an REO or short sale. I’d rather buy a “normal” sale or a property that’s already been flipped. Are there any strategies for this?
Most MLS databases now mark the REO and short sale listings so your agent can search for “normal” sales. However, a good question to ask up front is whether the house has been sold within the last six months or year. Make sure your lender is aware if the answer to this is “Yes.” Many lenders will not fund on a property that’s been on the market/transferred ownership within a certain period of time. Therefore, flipped properties may be out of your reach, and it’s best to isolate those out before you invest time and money in inspections and an appraisal.