What is a short sale?

A short sale is a situation when a seller who owns a property is attempting to sell a house and cannot pay off the full amount of the mortgage loan(s) that are a lien against the property based on the current market value.

Example:

• Joe Smith bought his home in 2005 for $300,000
• Joe put $0 down on the house and got a 1st Mortgage for $240,000 and a second Mortgage for $60,000
• In May of 2009, Joe decided that he needs to sell his home, but the market has declined significantly in his area and now the home is valued at $260,000
• If he can sell the home for $260,000 he will have to bring $40,000 to the closing table to pay off the loans and that figure doesn’t include selling costs (realtor commissions, closing costs)

If Joe doesn’t have the over $50k to cover the loss on the house, then he will try to get the mortgage lien holders to take the loss.
That is a short sale.

Why would a lender agree to take less than what they are owed?

Lenders will not agree to take less than what is owed unless the seller can prove the following things:

• A hardship that is forcing the seller to sell the home
• A job loss that is making it difficult or impossible to make the mortgage payments
• The seller had to quit their job to take care of a sick parent or child
• Another hardship, beyond the seller’s control, that is forcing the seller to sell
• The market has declined and the value of the house is really less than what the seller paid for it
• Foreclosure is imminent if the lender does not agree to a short sale

Getting the lender to take such a large loss is not easy and requires a lot of paperwork and information that the seller will provide to the lender, but often times it is in the best interest of the lender to agree to a short sale as opposed to letting the house go in foreclosure.

What is a foreclosed home?

A foreclosed home is a lender owned home that the lender has acquired through the foreclosure process.  The lender will generally list the home for less than they are owed in order to reduce the inventory that they have of foreclosed homes.

What is the difference between a pre-approved and unapproved short sale?

A pre-approved short sale is when a lender has agreed, in principal, to take less than they are owed on the property.  It means that the seller has provided all the documentation that the lender has requested and the lender is satisfied that the seller has met the conditions for a short sale.  The lender might not have agreed to a specific price, but they have agreed to take less than what they are owed.

An unapproved short sale means that the lender has not agreed to take less than they are owed for the property.  Either the seller has just started the process or the lender is very backed up and has not had a chance to review the documentation that the seller has provided.

Is the process for making an offer on a short sale or a foreclosure different than on a regular property?

No.  The offer process is the same for short sales and foreclosures as it is for a normal listing.  There may be additional addendums to fill out relating to the short sale or the foreclosure, but otherwise the process is the same as for a normal listing.  The difference is in the acceptance of the offer.

How is the acceptance of a short sale and foreclosure different from a regular offer?

The acceptance of a normal listing only depends on the seller as the decision maker.  Sellers will generally respond within 24 hours of your offer, accepting, countering or rejecting the offer.

The acceptance on a lender owned, foreclosed home depends on the lender making a decision about the presented offer.  The lenders have an REO department that handles their inventory of foreclosed homes.  Depending on the inventory of homes and the amount of offers that the REO department is receiving on that inventory, it could take anywhere from 3 to 5 business days for the bank to respond to the offer.
For short sale offer, acceptance not only depends on the seller signing off on the offer, but the lender has to sign off on the offer before the contract is considered under contract.  So, the seller will sign the offer that is “subject to lender approval” and forward it onto the lender for them to review and respond to the offer.

How long will it take for the lender to review and respond to the offer?

The best answer to that is, “It Depends.”  It could take anywhere from 15 days to 6 months before the lender will respond to the offer.  That time frame is directly related to whether the short sale is pre-approved or unapproved.  Unapproved is ALWAYS going to take longer.

Why does it take so long?

Lenders are in the business of lending money, not in selling real estate.  Because of that, they do not have the infrastructure to handle to mass of shorts sales requests that have flooded them and the market in the past year.

If a lender has not pre-approved a short sale, it takes significant amount of time to process the documentation provided by the seller in order for the bank to agree to the short sale.

If a lender has approved the short sale and an offer is received, signed and accepted by the seller it will be sent on to the lender and the following has to happen:

1. The title company works up a HUD-1 settlement statement.  This allows the lender to get a preliminary estimate on the amount of the loss from short sale.
2. The lender reviews the HUD 1 and the offer and orders a BPO (Broker Price Opinion) or Residential Appraisal in order to determine if there is any possibility of getting a higher price for the house
3. When they receive and review the BPO or Appraisal they make the decision to accept, reject or counter the offer
4. If the lender decides to accept the offer, they then generate a Short Pay Off authorization letter that states the amount they will accept in order to pay off the mortgage.  This letter has an expiration date and any deal must close prior to that date.

This process takes numerous phone calls, messages, and emails to the lender’s REO department.  The lead time on any of these items getting done is a least a week.  So it all adds up in the end to making the short sale process a LONG process, anywhere from 15 days to 6 months.

Can the lender reject or counter the offer?

Just like a normal seller, the lender is free to reject or counter the offer for any reason.  The seller might not have met the hardship qualifications or the market value of the house may be significantly greater than the offer and the lender may counter the offer to mitigate their losses.

Is there anything a buyer can do?

Unfortunately, the buyer is at the mercy of the lender.  The best thing for the buyer to do is be patient.  If the house that you put the offer in on is the house you want then just sit it out and wait.  If, however, you are in a time crunch and have to move by a certain time, putting an offer on a short sale (even one that is pre-approved) is probably not the best idea.
Remember… in the short sale process, patience in the key!!!

No one really needs a broker to find a home.  The internet has leveled the playing field by giving consumers access to pretty much the same information about houses for sale as a broker has access to.  But advertising a home for sale or finding a home to buy is just part of the process.  An experienced real estate broker can help you avoid mistakes and pitfalls in the home buying and selling process.  People that represent themselves in real estate transactions can do ok.  But often, a broker could have gotten the seller more for their home or gotten a buyer a better deal on a home.  Here are 10 reasons why you should consider hiring a real estate broker to represent you.

1. Education and Experience

When you have a problem with your furnace, do you call an expert or do you try and handle it yourself?  If you are like most people, you call a furnace specialist because they have the education, training and experience to handle the situation.  The same is true for hiring a real estate broker.  A broker is trained, educated and experienced in buying and selling homes.  They understand the intricacies of negotiation, contracts and closings.  Don’t you want someone that is on your side, who represents you, that knows what all the legal jargon means and can navigate you throw common pitfalls that happen during the selling/purchasing process?  Why waste your time trying to become an expert in real estate when there are people out there that already are experts?  The only trick if finding the right broker to represent you!

2. Brokers are filters

A good broker will sift through the junk of property showings and visits.  If you are a buyer, they will preview prospective properties to make sure that they fit what you are looking for.  If you are a seller, they can mitigate the phone call leads that lead nowhere and encourage serious buyers to put in an offer.

3. Knowledgeable about the neighborhood

If you find the right broker, they will have specific knowledge or know where to find the industry buzz about the neighborhood you live in or want to live in.  Brokers will be able to find comparable active and sold homes and will be able to provide you with a current market analysis of the neighborhood.  They will also be able to direct in finding information about demographics, schools and crime.  For example, a house down the street from yours may have been listed for $425,000, but a broker will be able to give you specific information about how much it sold for, what kind of upgrades it had, how long it took to sell, and if it ever came back on the market due to inspection issues or financing issues.

4. Understand the Market

Despite what some people think, brokers do not set prices for buyers and sellers.  A good broker will use the market to consult a client to make a good decision for themselves.  A selling broker that represents a buyer will tell the buyer to consider all the information that the broker has supplied to the buyer and will ask the buyer what offer price they would like to put forward.  The negotiating strategy used by the broker will be based on market conditions, supply and demand.  The same is true for a listing broker and a seller.  A good broker can only recommend a list price to the seller, based on their knowledge of the market and comparables that have sold.  A seller is has the most vested interest in the sale and has got to be comfortable with the list price.

5. Market Conditions Information

Real estate brokers have access to the latest and most accurate market condition information and that is going to determine your buying or selling process.  The factors that determine market conditions include: price per square foot of similar homes, median and average sales prices, average days on market, and ratio of list-to-sold prices.  These criteria, among others, will have a huge impact on what you, as a buyer or seller, decide to do.

6. Professional Networking

Real Estate Brokers have built relationships with other professionals that provide services that you may need in the buying and selling process.  Although many brokers are hesitant, due to legal liability, to recommend one individual or company over another, they do know vendors and can refer you to several that have a good reputation for reliability, efficiency, competency and competitive pricing.  This way you can make an educated decision regarding contractors needed to complete the sale or purchase of your home.

7. Negotiation Skills & Confidentiality

Negotiating is an extremely important part of the real estate process.  Top producing brokers are good negotiators because they are practiced and skilled at it.  In addition, unlike the buyer and the seller they don’t get wrapped up in the emotion of the transaction.  Good brokers are professionals who are skilled at presenting their client’s case to the other side.  They also have a fiduciary responsibility to the client and will hold client information confidential from competing interests.

8. Stacks of paperwork

The Colorado Contract to Buy and Sell Real Estate is 13 pages long.  That doesn’t even count all the Colorado Real Estate Commission required forms and disclosures.  One error, omission or mistake to cost you a lot of time, money or headaches.  Real Estate Brokers are trained to understand the ins and outs of these contracts and help make sure that nothing is missed.

9. Answer Questions After Closing

A good broker will be there for you even after the house is bought or sold and all the documents are signed.  Issues come up and an honest and trustworthy agent will not leave you to hang in the wind.

10. Relationships are How Brokers Stay in Business

Building and maintaining relationship is how a good real estate brokers stays in business.  The best brokers understand that their business depends on making sure that their clients are happy and satisfied with the service that the broker provides.  No agent would survive if they had to consistently drum up new business.  This means that an agent that stays in business will be there then next time you need to hire an agent.  It also means that if you have questions or need updates on the market, they will be happy to oblige.

Don’t Make a Major Purchase of Any Kind

It seems obvious, but your ability to qualify for a mortgage loan can be greatly affected if you make a major purchase prior to looking for a house or during the home purchase process.  Even days before closing, buying a car, appliances or furniture for the new home can derail the process and hamper you ability to purchase the house.  By altering your credit to debt ratio, a lender could pull the plug on the loan and you could end up not being able to buy the house.  So just to be safe, you should wait on making a major purchase until after you buy your house.

Don’t Move Money Around

When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assents. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.

If you have been moving money between accounts during that time, there may be large deposits and a paper trail of all the withdrawals on some of them. The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious. Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it “easier,” could make it more difficult for the lender to properly document.

So leave your money where it is until you talk to a loan officer.

Oh… don’t change banks, either.

Don’t Make a Career Change

For most people, changing employers will not affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money in the same field. However, the effects of changing careers can be disastrous to your loan application.  Lenders want to see a solid work history and job jumping does not give the sense of stability that lenders are looking for.  Generally, a lender wants to see 2 years of constant employment in the same field, so even if changing careers may get you more money, it may affect your ability to qualify.  Talk to your lender before you make any career decisions while you are looking for and purchasing a house.

1. Check your credit.

Before you apply for a home loan, regardless of your credit, it’s a smart idea to obtain a copy of your credit report from the three major credit bureaus and review the information. If there are errors or things that need to be addressed, it’s easier to address them before you have found a house, than after you have found a house and are trying to close your loan.
If you know that there are a few blemishes on your credit, let your lender know what they are, why they are there, and why you are still a good credit risk. Lenders look at your credit to determine how likely you will pay back the loan. If you had extenuating circumstances- like a the loss of a job or medical bills- let them know so they understand it is not likely to happen again in the future.

2. Get approved before you buy.


An approval means a lender has reviewed your credit history, verified your assets and employment, and has approved your loan before you have found a home to purchase. As long as the home appraises for at least the purchase price, the loan should close.
Getting approved also gives you an advantage over other buyers. Your firm approval makes it easier for you to negotiate on the price of a home, than a person who is not approved or is only pre-qualified.

While getting pre-qualified may sound official, it is really just getting an idea of what you can afford. It’s having a person plug in a few numbers that you give them- your monthly income and your monthly debt- and getting an approximate payment calculated. From the payment, the calculator can approximate the house price and range that you can afford. No information is verified. Because your assets, income or credit is not verified, a pre-qualification has little value when purchasing a home.

3. Find a great buyer’s agent.


Traditionally, real estate agents represent the sellers in a transaction. When you are not working with a buyer’s agent, they are less likely to negotiate the best price or contingencies for you.

A buyer’s agent’s job and fiduciary responsibility (meaning legal duty) is to you, the buyer. Before working with an agent, establish if they are a buyer’s agent or a seller’s agent. After spending a lot of time with a realtor, it’s normal to feel like you’re a team. But if they are not negotiating for you, then they are not on your team.

4. Learn about the neighborhood.


Often times the house you find may be in a neighborhood that you’re not familiar with, which is okay. It just means you’ll have to do a little more research. If you find a house you like, ask for a list of the neighborhood properties that sold in the last year. How does your home rank? Is it at the top of the price range? If so, it might be hard to resell. Is it average or on the low end? If so, great- as the other home prices go up in value, they will pull your home’s value up a well.

Check out the schools – are they sought after? A good school district means families will always value your neighborhood, which is a great reassurance to purchase, not to mention the value-add if you have school aged children.

Next, contract the police station and obtain crime statistics? Are they acceptable to you? Sometimes, if they won’t give them to you, it could be cause for alarm.

Talk to the neighbors. The more people you talk to, the better sense you will get of who makes up the neighborhood and how they will effect your time spent in it.

Check out the location of the shopping, police, fire stations, schools, and air traffic overhead. These are all things that might affect your property value or quality of life.

5. Protect yourself.


Ask your realtor for a copy of the documents you will be asked to sign if you decide to buy the house. Read them ahead of time so you will understand the questions that you will be asked, the things you need to know, and the decisions you will need to make.

6. Have reasonable expectations.


There is a lot of money at stake. No house is perfect. Understanding and remembering these two statements will help diffuse the negotiation stage, the inspection stage and the closing stage.

Emotions are high for both buyers and sellers. The seller may have loving memories and years of sweat equity in the house. Maybe they are being relocated and don’t want to go. Understanding their motivations for selling will help you appreciate their situation and predicament during these emotional times.

There is a lot of money at stake for all parties involved (and that includes the realtors). Just remember that market value (the value of a home) is the price a willing buyer and willing seller can agree to. If you cannot agree on a price, ask yourself: is there something you missed? Are there comparables that support the price they want? Are there motivations that might factor into the price they are demanding? In the end, does it matter? What is the house worth to you today and what do you think you can reasonably sell it for based on the amount of time you plan to spend in it? Think about the answers to those questions before you make your move.

No house is perfect. Always get an inspection. It might be a few hundred dollars, but it’s worth it. It’s the inspector’s job to find any problems with the house that could cost you thousands to repair down the road. Some inspectors have a tendency to over play the importance of their role and the items they find. Get objective opinions that you trust before making a decision on an inspection report. Likewise, if an inspector says a foundation is cracked but is nothing to worry about- get a second opinion. Ask a handy man for an idea of how much repairs will cost and how complicated they are. The home buying process is an emotional, complex, and time-consuming process, but it is worth it. Nothing compares to owning your own home in a neighborhood that you choose.