The changing landscape for buying a short sale

With more borrowers underwater on their mortgages and having a difficult time making their mortgage payments, we’ve seen an increase in homes being listed as short sales. A short sale is when a seller attempts to sell a home for less than their bank is owed. The bank concedes the outstanding balance in order to sell the home more quickly and to avoid the cost of foreclosure. I have written about this before, but we’ve been seeing a wildly varying landscape of short sale transactions as the number of these properties has increased. Some of these changes are for the better, as it appears that banks are becoming more willing to participate in short sales (though not all banks). Also, agents are becoming more sophisticated at shepherding properties through the short sale process. What we have learned is that every single transaction seems to be unique, and it is tough to evaluate a buyer’s chance for short sale success without digging in to the details for each individual property. Let’s take a look at some of the trends that we are seeing.

  1. Competition is up – Many agents are pricing short sale homes aggressively. Given the many difficulties and lengthy time frames for a successful short sale, setting a home at market price is not sufficient to bring out offers. The result? Attractive prices that are bringing out multiple offers on many, many transactions. We currently have 5 customers involved in multiple offer situations on short sale properties and have toured ~15 homes just this month that are in multiple-offer short sale situations.
  2. Only top one or two offers being submitted – In the past, agents would submit all offers that they receive to the bank, hoping for approval on one of them. That is still happening, but recently we have seen many properties where the seller will only submit the strongest one or two offers to the bank, and ignore the rest. The idea here is to present only the best possible offers to the bank for approval. If you are in this situation, you need to first “win” the bidding war with the seller, and then hope for bank approval to follow. There likely isn’t a chance to renegotiate in a situation like this, so put your best offer forward.
  3. Pre-approved pricing – We’ve also seen a new trend emerge where some properties have a “pre-approved price” that the bank will accept. If a seller has engaged the bank early, or if a previous offer started the process, the bank may have gone through their formal valuation process and decided what amount they will or will not accept. Essentially if you offer the list price, the bank is going to approve your offer and will likely do so relatively quick. This greatly improves the chance of a successful short sale, but not all banks are doing this. Some large banks won’t even consider starting the process until an offer is received, and you can wait 2-3 months for a response.
  4. Increased willingness to work with 2nd mortgage holders – If there are two mortgages on a property held by different banks, they both need to agree on a short sale, and often the holder of the second mortgage wants some compensation from the holder of the first mortgage, who isn’t losing nearly the amount that the second mortgage holder is. There is no established system for this negotiation to take place, but there are signs that bank policies are changing to help facilitate this negotiation, with encouragement from the Treasury Department. This is still the riskiest and lengthiest of short sale transactions, so tread carefully. I wouldn’t proceed with an offer on a short sale with two lien holders unless I have confirmation that the lenders have already expressed their willingness to cooperate in the process.
  5. Banks may have already completed their valuation – Lots of short sale offers have reached a dead end recently. Many buyers get impatient and walk away after a 2-3 month wait for a bank response. For the next buyer, this is a positive situation, since the original offer may have gotten the bank to appraise the property and decide on their valuation. If this has happened, the process will likely move faster for the next buyer. Though “faster” in a short sale process is certainly a relative term.
  6. Loss mitigation representatives have been assigned – Some properties have an assigned representative at the bank to review short sale offers. This is a positive, proactive sign that the seller and their agent are engaged with the bank. However, bank approval will still be slow if the loss mitigator has hundreds of files on their desk.
  7. Short sale negotiator has been hired – Some sellers and their agents will hire a short sale negotiator to facilitate the offer process. The idea here is positive, since such a person negotiates short sales with a wide variety of banks, so they will know the ins and outs of working with each one. Once again, this person cannot speed up the process if the bank is bogged down with thousands of transactions like this.

As a buyer, your prospects for successfully buying a short sale are still not great. Banks are bombarded with thousands of transactions like this, so getting timely responses is still a big challenge. However, there are some positive trends emerging to move the process faster. The key to remember here is that almost every transaction and every bank is unique. A simple real estate search might tell you which properties are short sales, but you need to work with your agent to uncover the nitty gritty details on each one to see if have a realistic chance of success.

  • Michael P. Lindekugel

    1. Competition
    Part of the need to price aggressively arises from the time bomb of the Notice of Trustee Sale. A few banks are unwilling to postpone the foreclosure auction date to allow a sale to complete. Most of the banks are understaffed which results in banks postponing based on a fire drill the week of the auction which produces a lot of anxiety for everyone. It is not uncommon to be on the phone on a Thursday for 3-4 hours negotiating your way up the food chain to convince the bank it is in their best interest to postpone tomorrow’s auction.
    2. Pre-approved pricing
    The bank may verbally agree to a price, but it is not an approved price. A short sale approval will only happen when the bank approves the terms of a mutually accepted contract and the distressed seller and the bank agree to the short sale payoff terms for the existing indebtedness. The bank issues an approval letter good for 30 days. If the listing has an approved price, then it means a previous deal failed. The next offer still has to go through the approval process all over and the bank may change the terms of the short sale payoff with the distressed seller. Again, it may just be the bank’s verbal approval which isn’t always meaningful.
    3. Increased willingness to work with 2nd mortgage holders
    I have never seen a problem with two lien holders. The second will generally accept 10% or $5k-$10k for a payoff. Securing no recourse on a second is more difficult when the second is not purchase money, is a HELOC or a credit union.
    The Treasury’s Department incentives will not prove to be much incentive. The last I read the Treasury was offering $1000-$2000 per loan to the bank for a short sale. In higher priced markets, the incentive payment amounts to…..not a lot.
    Working a short sale with two lien holders is not that difficult. Three or more is very difficult. The first lien holder probably will not begin talking until the third lien holder disappears. The first doesn’t want a third or more on the HUD. Private Party lending…..forget it. PP is difficult to negotiate.
    5. Banks may have already completed their valuation
    Most banks have a BPO performed and few get an appraisal. BPOs are $50-$100 and generally inaccurate. Appraisals can be $400-$700. $700 doesn’t sound like a lot of money when trying to recover hundreds of thousands of dollars. Banks are pinching pennies.
    6. Loss mitigation representatives have been assigned
    A few banks are notoriously slow to assign a negotiator and then negotiate. Understaffing is the biggest problem. Countrywide has trouble assigning negotiators in less than four weeks. A CW short sale can take 90 days to get approval.
    7. Short sale negotiator has been hired
    First, if the bank pays the non attorney negotiator, then there is conflict of interest between the seller and negotiator and the negotiator and the bank. The bank pays the negotiator to beat up the bank. The bank adds the negotiator cost to the loan deficiency to the detriment of the seller. Second, the buyer may have to pay the negotiator’s fee. There is some NAR and HUD information trickling out that buyer paid negotiator fees are a HUD and RESPA violation if they appear on the HUD. The buyer’s lender won’t allow the negotiation fee to be added to the cost of the house and financed. The buyer has to pay the fee out of pocket outside of closing. Some negotiators are trying to work their fees into the deal as inspection credits or something similar which sounds like lender fraud to me! Third, the option is for the agent to share their commission with the negotiator. Some states (I think WA included) preclude an agent from sharing their commission with non licensees.
    Never pay anything up front to hire a short sale negotiator.
    If the SS negotiator is experienced, then the probability of a successful close is about 70%. The 30% of failures are usually due to unrealistic

  • Michael P. Lindekugel

    1. Competition

    Part of the need to price aggressively arises from the time bomb of the Notice of Trustee Sale. A few banks are unwilling to postpone the foreclosure auction date to allow a sale to complete. Most of the banks are understaffed which results in banks postponing based on a fire drill the week of the auction which produces a lot of anxiety for everyone. It is not uncommon to be on the phone on a Thursday for 3-4 hours negotiating your way up the food chain to convince the bank it is in their best interest to postpone tomorrow’s auction.

    2. Pre-approved pricing

    The bank may verbally agree to a price, but it is not an approved price. A short sale approval will only happen when the bank approves the terms of a mutually accepted contract and the distressed seller and the bank agree to the short sale payoff terms for the existing indebtedness. The bank issues an approval letter good for 30 days. If the listing has an approved price, then it means a previous deal failed. The next offer still has to go through the approval process all over and the bank may change the terms of the short sale payoff with the distressed seller. Again, it may just be the bank’s verbal approval which isn’t always meaningful.

    3. Increased willingness to work with 2nd mortgage holders

    I have never seen a problem with two lien holders. The second will generally accept 10% or $5k-$10k for a payoff. Securing no recourse on a second is more difficult when the second is not purchase money, is a HELOC or a credit union.

    The Treasury’s Department incentives will not prove to be much incentive. The last I read the Treasury was offering $1000-$2000 per loan to the bank for a short sale. In higher priced markets, the incentive payment amounts to…..not a lot.

    Working a short sale with two lien holders is not that difficult. Three or more is very difficult. The first lien holder probably will not begin talking until the third lien holder disappears. The first doesn’t want a third or more on the HUD. Private Party lending…..forget it. PP is difficult to negotiate.

    5. Banks may have already completed their valuation

    Most banks have a BPO performed and few get an appraisal. BPOs are $50-$100 and generally inaccurate. Appraisals can be $400-$700. $700 doesn’t sound like a lot of money when trying to recover hundreds of thousands of dollars. Banks are pinching pennies.

    6. Loss mitigation representatives have been assigned

    A few banks are notoriously slow to assign a negotiator and then negotiate. Understaffing is the biggest problem. Countrywide has trouble assigning negotiators in less than four weeks. A CW short sale can take 90 days to get approval.

    7. Short sale negotiator has been hired

    First, if the bank pays the non attorney negotiator, then there is conflict of interest between the seller and negotiator and the negotiator and the bank. The bank pays the negotiator to beat up the bank. The bank adds the negotiator cost to the loan deficiency to the detriment of the seller. Second, the buyer may have to pay the negotiator’s fee. There is some NAR and HUD information trickling out that buyer paid negotiator fees are a HUD and RESPA violation if they appear on the HUD. The buyer’s lender won’t allow the negotiation fee to be added to the cost of the house and financed. The buyer has to pay the fee out of pocket outside of closing. Some negotiators are trying to work their fees into the deal as inspection credits or something similar which sounds like lender fraud to me! Third, the option is for the agent to share their commission with the negotiator. Some states (I think WA included) preclude an agent from sharing their commission with non licensees.

    Never pay anything up front to hire a short sale negotiator.

    If the SS negotiator is experienced, then the probability of a successful close is about 70%. The 30% of failures are usually due to unrealistic

  • Michael, thanks for the feedback.
    I actually had have problems with second lien holders before. It feels like they are moving towards a more practical stance, allowing short sales to go through as you mention. However, I’ve been in transactions where the second lien holder effectively held the first lien holder hostage for more money. They squeezed the first lien holder and both agents to get the deal done.

  • Michael, thanks for the feedback.

    I actually had have problems with second lien holders before. It feels like they are moving towards a more practical stance, allowing short sales to go through as you mention. However, I’ve been in transactions where the second lien holder effectively held the first lien holder hostage for more money. They squeezed the first lien holder and both agents to get the deal done.