For the greater good of those who frequent The Chicago 77, I’ve decided to open my playbook and share what I have learned through the numerous short sale and foreclosure (SS/F) experiences that I’ve had. Hopefully there are others out there with lessons that they are willing to share as well. In the end, what short sales have really taught me is that if everyone involved works together in a courteous way, the process runs much more smoothly.
As we all have to start somewhere, I’ve found that many real estate agents have little or no experience on the sell or buy side of a short sale transaction and many agents that do are tight lipped whenever I’ve asked for tips. At the beginning of last year I had written contracts on a large number of SS/Fs with about one in eight actually being accepted and half as many closing. Now the number is about one in four being accepted and almost all of those closing. Throughout my trial by fire I’ve acquired a few best practices that have significantly increased the number of approved contracts and closings on SS/F deals. These best practices have also allowed me to keep my clients happier and save them money in the long run, which is always my first priority. Some of these tips may be familiar to seasoned agents, and some may be new. I will try to leave nothing out.
Tip 1: Set Your Buyer’s Expectations Up Front
Educate them on the process. Have them read my article on short sales (shameless self promo) or another that you’ve found helpful. If they have a deadline they’re trying to meet and they’re making offers on short sales, let them know the risks they’re taking up front or you could end up looking like a fool and potentially lose a client as well as the referrals they would have given you.
Tip 2: Your First Offer Should Be Your Best Offer
Anyone who’s dealt with SS/F deals knows about the, “call for best and final offer.” This is a call, email, or fax that you receive after you have put an offer in. To sum it up, the listing broker is letting you know that there are multiple offers on the table and since the bank is only going to be looking at the best one, you have one shot to strengthen your offer by raising your bid and/or removing contingencies by a certain cut off period. The trick is, the listing broker may send this to you even if there are no other offers on the table. If there are no other offers on the table or if you are already the highest bidder, by submitting a higher offer you are effectively bidding against yourself, and that broker just made a multi-thousand dollar phone call. For this reason, I always council my clients to put their best offer in the first time.
Tip 3: Research Your Offer Price
I cannot stress this enough: the list price on a SS/F home may have no reflection of the property’s market value. It is common practice for a listing brokerage to put a price on the property that is significantly lower than the market value of the home in an attempt to solicit multiple offers. Some times these prices are pulled right out of thin air! If you structure your offer based around the price on the listing sheet without doing a thorough Competitive Market Analysis (CMA) then you are wasting your time. Worse yet, you are wasting your clients’ time and possibly their money! When you and your client find a property that they agree to make an offer on, do your CMA and make your offer at or around the market value for the home. This step is quite valuable for several reasons:
- The bank will be doing one as well using similar data (Broker Price Option or BPO) so this will give you insight on what they feel the home is really worth. No bank is going to let you low ball them on a property that is already being sold at a huge reduction due to property and market conditions.
- If your buyer is financing, their offer needs to be at or around the true market value or the bank they hope to obtain financing from will deny the loan. This denial will come after your client has already shelled out $500 or so on an appraisal. Try explaining to your client why they just wasted $500 on an offer that was way too high for the property.
- If the selling bank receives an offer to finance that they know is way over the value of the property, they will ignore the offer knowing that it will never be funded. At the very worst they will accept your contract, tie up months of your time working through the deal only to have your buyer’s bank deny the loan as mentioned above.
Tip 4: The Lowest Number of Contingencies Wins
To put it simply, a contingency is a way out of the contract for your buyer. Right now banks are being flooded from both sides and one of their goals is to keep a lid on the enormous amount of work they’re presented regarding short sales. On one hand they are receiving an unexpected number of their borrowers applying for a Short Sale. And given that up until April 5th when the new Short Sale Guidelines came into play, the process was largely unregulated and extremely cumbersome for the banks (still is). On the other hand, they are being overwhelmed by offers of all types coming in to purchase these properties listed for short sale. Each offer has it’s own set of plusses and minuses that need to be considered carefully. Hopefully you had a chance to read my two part article here on TheChicago77.com about short sales and the need for regulation and you understand fully how tricky the process can be. Given that understanding, it should be easy to understand that a bank, having invested time and money into managing their side of the process, does not want to take up valuable time from their over worked and under-staffed loss-mitigation department on a contract that will likely fail before closing. As such, offers with the lowest number of contingencies will usually win in a multi-offer situation.
Not all contingencies are created equal. The contingencies that are ranked highest in the banks eyes are: mortgage contingency and inspection contingency. There are others used less often, but in the efforts of keeping this article trim I’ll focus on those most commonly used and how they may help or hurt your offer.
Tip 5: Cash Is King
There is no doubt, in any transaction that cash is king, and it’s doubly more so when dealing with SS/F homes. Assuming there are competing cash contracts, having a mortgage contingency on your offer in a multi-offer situation is almost always something that will cause the selling bank to dismiss your offer. I have been in many situations where my well researched offer was beat only to find when the property’s closed price was quite a bit lower than my client’s offer. The reason is because there is less risk for the bank when cash is involved. A mortgage contingency contains a bundle of several contingencies that make the selling bank wary. There’s the appraisal which I mentioned before, the rate-cap which gives the client an out if interest rates should shoot up during the process, which is very possible as the short sale often takes months to close, and depending on the type of loan the buyer has there may be others. All-in-all a mortgage contingency is a risky endeavor for a bank who could take a little less in cash and close quickly.
One exception is if you are lucky enough to have no competing cash offers. If every other offer has a mortgage contingency, it levels the playing field a bit. The unfortunate thing is that bidding on SS/F homes is largely “luck of the draw”—there is no way to know what type of contracts you are competing with.
Another fact to keep in mind is that not all mortgage contingencies are created equal. If you have a VA, FHA, or FHA 203k loan you are lowest on the totem poll against those with conventional mortgages. Depending on the condition of the house, these loans may be tossed out without even looking at the offer price because banks know they would never fly. Besides the contingencies of a conventional mortgage listed above, VA, FHA, and FHA 203k loans come with a slew of other contingencies (too many to list) that could stop the deal in it’s tracks costing the selling bank and your client time and money. Not to say it’s impossible to purchase a SS/F home with this type of loan, but in a multi-offer situation where there is any other option for the bank, these loan types are kicked to the curb.
Tip 6: The Inspection Contingency
I found out about this little beauty after being denied on too many contracts to mention, and this is probably the single most useful tip I have for you. If you include an inspection contingency, which is written into any contract I’ve come across, you are telling the selling bank that you would like a period of time to have the home inspected and if your inspector finds something your buyer doesn’t like, the bank must either fix the problem, give a credit in the form of a closing cost assistance, or let the buyer out of the contract. As many, if not all SS/F homes are sold as-is, the bank will most likely deny any request to fix issues found by the inspector or give a credit. As such, banks know that if an issue is found that the buyer cannot afford to fix, there is only one path left for them to take, which is to walk away from the deal; again having wasted the bank’s time. Given this knowledge, it is understandable why a bank would view this contingency as unfavorable.
A couple different scenarios:
1. You have a a buyer that does not want an inspection for one reason or another. They may have a general contractor in the family, they’re planning on tearing down the house and starting from scratch, etc. The bank cannot read your mind. You must communicate this to the bank by crossing off the inspection contingency on your offer! I even council you to write in over your cross off, “No Inspection Required.” Clearly communicate to the bank that your buyer is taking full responsibility for this property and will ask for nothing from the bank in this regard.
2. You have a buyer that wants to have the home inspected, but does not want to risk having their contract overlooked because of this contingency. Schedule a visit to the property with your client and an inspector of their choice. Do this before making the offer. It may cost your client a few hundred bucks, but if they are saving thousands on the purchase of the distressed home and this is really a property they must have, it will be worth it. Then, if the inspection comes up clean enough to make an offer, submit the contract with the inspection contingency crossed off (see above).
You just gave your offer steroids!
Tip 7: Associations
If your buyer is attempting to buy a SS/F property that is part of an association with a loan, DO YOUR HOMEWORK FIRST! That is to say, everything can go smoothly with this type of loan, the seller accepts, the bank approves, your buyer pays for an appraisal and it goes well, then the attorney review starts and your buyer pays for the inspection and even that comes out clean. Then, while getting all of this done, your buyer’s bank finds out that: 1. There is no home owners’ association (HOA), 2. The HOA is broke (little or no money in reserves), 3. There is a huge special assessment that the listing agent never mentioned or didn’t know about, 4. Someone is suing the seller for one reason or another, 5. The sellers owe a year of back assessments that your buyer isn’t able to cover, etc. Any of these things and more can kill a deal and leave you and your buyer high and dry. The worst part is this can happen several months and many dollars after bank acceptance.
When dealing with a SS/F deal I strongly encourage you to have a standardized condo questionnaire handy to give to the listing agent or a contact person at the HOA or their management company. You can obtain one of these questionnaires from your preferred lender or the lender your buyer is using. If you cannot get some basic answers up front, this will be a clear indication that something may be up with the unit and or the HOA. Keep in mind that in order for your buyer’s underwriter to approve the loan they will need the answers to ALL of the questions on this questionnaire. The challenging part is, this step is usually handled at the very end. Silly…I know, but that is why it is important for us as responsible agents to get the ball rolling on this as soon as the selling bank approves the contract.
Tip 8: Left Overs
The goal is to structure a deal that is so clean that a bank won’t have to negotiate with you. Here are a few extras:
- Prorate the taxes at 100% – splitting hairs can kill a deal.
- Home Sale Contingency – After reading this article having your buyer ask for a Home Sale Contingency on a SS/F should give you nightmares. At the very best, it could be used as a bad joke at a Realtor meet & greet.
- Anywhere on the contract that says “acceptance” you should write in the word “Bank” before it. I.e.: The attorney review period will be completed 5 days after BANK acceptance, etc. This tells the bank that you understand that their acceptance is the one that matters not the seller’s (speaking with regard to short sales).
- If your buyer’s can afford the closing costs do not ask for them to be paid by the seller. If the bank doesn’t throw your offer out because of asking for seller assistance, they will most likely say “no” during the negotiation and if you made it to the negotiation and your buyer’s are denied the credits they need to close, you’ll have some serious egg on your face after months of wasted time. Again, this is only if they can afford the closing costs themselves. If not, you have no option but to ask and cross your fingers.
- Never change anything on the addenda! Even if your buyer’s name is misspelled, do not touch the addenda or it will delay the deal while they send you new copies and make your buyer’s re-sign everything. As long as there is nothing in the contract or addenda that revoke your client’s right to attorney review, have them sign and address any concerns during the attorney review period.
Hopefully by this point I have been able to illustrate the importance of a low number of contingencies to you and your clients and give you enough strategy on how to structure your offer to significantly improve your chances in a multi-offer situation. All of the information contained in this article is based off of my own personal experiences and there are always going to be exceptions. If you have any other tips you have learned, please contribute here on TheChicago77.com. The only way we are going to pull ourselves out of this situation is if we all work together toward a common goal.