Is purchasing a short sale really one of the “Great Deals” in our current economy?

Short sales are the hot real estate topic everywhere right now. I am continually asked about short sales by my clients, neighbors, family and friends, and it seems like almost every neighborhood has been affected by either a short sale or a foreclosure. It is definitely a topic worth understanding, regardless of whether you are anticipating a change in your address.

Are short sales a great value?
The answer can be yes and no. There is a common belief is that these homes are a great value, often priced far below market value, equating to fabulous opportunities for the buying public. In some instances this is the case, but those are generally the exception and not the rule. In order to fully grasp the nuances to buying or selling a short sale, you need to understand the basics.


What is a short Sale?
First let’s review in simple terms what defines a short sale. This is a situation where the seller simply owes more than they can realistically expect to realize in proceeds from the sale of their property in its current condition, with no special terms or incentives. The underlying debt can simply be a first mortgage, but typically is a combination of a first and second mortgage, and in some instances other debts such as unpaid homeowner’s dues, property taxes, and unpaid contractors to name a few. The liens encumbering the property are a matter of public record, however it is advisable to obtain an actual title report to be ensured of receiving the most current and accurate information. Keep in mind a seller may often be behind in mortgage payments, adding to the short, which may not be public information. Other typical costs associated with selling that would also be reflected in the final “short” amount such as title, escrow and brokerage fees along with state excise tax. If an attorney or other facilitator is involved to administer this process, that can be an additional cost. It is not uncommon for a seller to anticipate an additional 10% of the purchase price in fees to complete such a transaction.

Example
$500,000 first mortgage
$125,000 second mortgage
$2600 Tax lien for unpaid property taxes in 2009
$41,317 traditional selling costs (excise tax, escrow fee, title, etc.)
_______
$668,917 total financial encumbrances

($500,000) Sale price of five hundred thousand dollars
$168,917 total short to be negotiated to close.



If I make an offer at or above list price, how certain can I be that I will be purchasing the home?
Short sales must be approved by the lien holders. The seller may set an asking price but it is typically not pre-approved. The mortgage holder will order either one or more appraisals or broker price opinions on the property, commonly referred to in the industry as “BPO’s”. The appraisals may be performed by an employee of the institution holding the lien or an independent firm. BPO’s are preformed by licensed brokers not affiliated with the seller’s listing broker. If the lender infers in those reports that the price in the offer is artificially low, not a reflection of reasonable value, approval is typically rejected, and in some instances the seller is even instructed to raise the asking price subsequently. Many lenders also request the solicitation of multiple offers versus a first come first serve approach. Terms such as “all cash as-is” versus financing and other contingencies may also dictate which offer is perceived as superior versus solely basing decisions on price.



How long can I anticipate from the date of my offer to closing?
Approval in thirty days would likely be best case, but my experience has been to plan for three to eight months for approval. Expenditures such as private inspections, appraisals and the like are not advised until you have formal bank approval.



Why the long wait?
Numerous factors make the approval a lengthy process. First, lenders and other lien holders want to be assured that this is the only option and collection of the full debt is not likely. The reason that they would agree to a short sale is to settle for a lesser amount sooner rather than taking the chance of never being paid at all and then having to foreclose on the property and facilitate a sale-a very costly proposition. Another approval problem arises if the sale price doesn’t cover the first mortgage and the junior lien holders may stand to receive nothing. They may not be motivated at all to release their liens to offer a buyer clean title, prohibiting the sale from closing. National estimates are that as many as one in three homes in America are encumbered by debt that exceeds reasonable market value. A third factor is that lenders are ill prepared to handle the processing of the huge volumes of short sale requests from their borrowers. There is hope that these processes will improve as resources are implemented.


Won’t the abundance of short sales drive prices lower and should I wait to move?

Don’t lose sight of the big picture that Puget Sound has one of the strongest and most diverse economies in the country, with countless regional attributes. Mortgage interest rates are not anticipated to remain at today’s record lows indefinitely. Those who have the need, desire and ability to buy will enjoy the long term benefits over those waiting hoping to catch prices and interest rates simultaneously at record lows will likely regret it.



Sounds great, do I need to know anything else?

As you gather, short sales are far more complex and require more patience and guidance than a typical real estate transaction. The investment in professional assistance and peace of mind exceeds any nominal financial savings of pursuing the process alone or with minimal guidance. Selecting an agent, experienced and educated in this process, surrounded by similarly accomplished professionals in these matters is imperative. As a Certified Foreclosure Specialist) Accredited by the National Association of Mortgage Fiduciaries and a veteran of practicing through multiple recessions, you receive the benefits of my expertise and experience. In addition I have experience in the “trenches” with both short sale listings and successful short sale purchases with my clients.


So call me already. -Ha just wanted to see if you were still reading.

-John