Not since the post-1987 stock market, have so many sellers been ?upside down? on their mortgages. Unlike this early 1990?s real estate market, when sellers commonly would bring money to closing to make up the difference, banks are now commonly willing to forgo part of what is owed to them to get the liability off their books.

Short Sales Can Mean Delays and Stress

Deal or No Deal? You may not know for quite some time with short sales.

There are many more people in trouble now (and typically short a lot more money than in the early 90?s) than any other time in the past. Getting a great deal through a short sale is a popular idea. However, this type of sale does not come without some challenges for both the buyer and seller. As they say, no pain, no gain.

One example of short sale drama is Joe Nichol. After accepting a new job in Chicago and moving from L.A., Joe decided to buy his first condo in The Fordham building at 25 E. Superior. After a long negotiation, Joe was excited to move in to his first place in time to start his new job downtown. However, a few days into the attorney?s approval, Joe got a call from his attorney. Turns out, the seller of the condo could not pay off his existing loans to sell the property. This is where the stress began for all involved.

A Real Short Sale Story…of Waiting and Stress

For the next 3 1/2 months, Joe was not sure if and when he could close on the condo. He had to rent a temporary apartment and put his things in storage. The biggest part was the lack of communication from the seller?s mortgage holder. It took almost 3 months just to be assigned a ?negotiator.? After this, the bank needed detailed financial information from the seller, confirming that he did not have any assets to make good on the loan. The fact that the seller had not paid his mortgage in 2 months helped the bank move things along a little more quickly.

Joe closed on his condo, after enduring almost 4 months of stress and frustration. The day of the closing, the bank almost cancelled the deal because of some numbers that they thought were being changed on the RESPA. Banks are always looking out for sellers who are trying to profit somehow from a short sale. Luckily, Joe?s attorney and the seller?s attorney smoothed everything out with the bank and the sale closed.

A Not-So-Bad Short Sale Story

Another short sale that was recently sold with minimal drama was a multi-unit building in Lakeview. In this case, everyone knew it was a short sale up-front. Like many short sales, this building had multiple offers, ten to be exact. Some offers were very low and some very solid. This building had two mortgages. Luckily, the second mortgage agreed to take virtually nothing of what it was owed and the first mortgage took about a 10% hit. This deal closed in 4 months and went very smoothly.

Short sales can be easy or very difficult. You can have delay after delay and many surprises. If everyone knows what they are getting into, it helps to keep confusion and drama out of the picture. In this market, make sure you know if you are buying from someone that is even close to being ?short,? especially if you need to close by a specific date (as most of us do!).

We’d like to thank KamalSell for so generously sharing today’s photo via the Creative Commons License.

Earlier this month I highlighted some key points about short sales:

• What is a short sale?
• How does it compare to foreclosure?
• Are short sales on the rise and does this mean I should wait to buy?

This week, I?m outlining the challenges faced when dealing with a short sale, what is being done?if anything?to help streamline this process, and how to find the right people to work with to help navigate the short sale.

The Three Main Challenges to Short Sales

You may roll your eyes and look frustrated quite often when you try to buy a short sale property...but it can be worth it.

1. New Kids on the Block
Many real estate agents are new to the short sales process which can be a challenge in itself. But, then add into the mix, many lenders’ lack of sufficient and experienced staff to process short sales and this compounded problem can make anyone involved in the transaction want to pull out their hair and swear off real estate for good. Even if the real estate agents are experienced, due to the volume of activity, most servicers are simply under-staffed and still not adequately trained, making negotiating a short sale particularly difficult.

2. Ball of Confusion
Because both short-sale documents and processes are lender-specific, this makes it very difficult (and very time-consuming) for real estate agents to become knowledgeable and efficient in facilitating these transactions. Ideally, implementing a more uniform process and application will help speed things up and keep the transaction moving along. But until then, unfortunately, we must keep doing things the slow and inefficient way.

3. Double Trouble
In this market, it is not uncommon for home owners to have a secondary mortgage on their property. In fact, it seems more common than not. In a short sale situation, this complicates things. <sigh> When more than one lender is involved, the negotiations are much more difficult. We have seen many second lien holders step in like the 550 pound gorilla and often hold up the transaction to extract the largest possible payment in exchange for releasing their lien, even though in foreclosure they will get nothing.

As a result of these challenges, which Catherine and I have personally experienced along with many of our co-workers/colleagues in the Chicago market, the difficulties of unresponsive lenders, lost documents that require multiple (and I mean multiple) submissions, inaccurate or unrealistic home value assessments, and long processing delays. All of these often add up to the buyers to walking away. Not many buyers want to wait six months to hear if their offer has been accepted. The longer, or more importantly, flexible time frame the buyer has, the better for a short sale situation. However, wait time tolerance can all depend on how badly a buyer wants a particular home.

Is There Any Good News About Short Sales?

Yes!

Here is what is being done to address or eliminate these challenges: on May 14, 2009, the Obama Administration announced its upcoming Foreclosure Alternatives Program. Among other things, the new program:

• Establishes financial incentives for servicers, sellers, and second lien holders to encourage the completion of short-sale transactions.
• Requires that a time line, of no fewer than 90 days, be set to allow a homeowner to sell a home, without threat of foreclosure action.
• Requires the short sale agreement to specify reasonable and customary real estate commissions and costs to be deducted from the sales prices. (The servicer must agree not to negotiate a lower commission after receiving an offer.)
• Will provide standardized documents, including short-sale agreements and offer acceptance letters.

What if I find a home I want to buy and it is a short sale? Where do I start???

First thing is your real estate agent, (whose commitment and responsibility is to help you purchase your new home with the most advantageous terms possible for you. The listing agent has the same responsibility, but for his/her client, the seller) should call the listing agent to see if they have talked to the lender(s) and have been given an idea of what they would be willing to accept as far as a sale price. If they haven?t had that conversation with a representative of the bank, it can be more like throwing a dart today and waiting a month to see if you?ve come anywhere near the bulls eye, or in this case, acceptable sale price.

Questions to Ask the Listing Agent of a Short Sale

See what you can find out up front before you start this long process.

• Has the seller already provided their hardship letter?
• Have they provided their most recent tax returns?
• Have they provided all other required financial statements?
• How many months behind on payments are they, if at all?
• Does the seller own other properties that may be leveraged in order to sell the current property short?

If the seller hasn?t provided any of these required documents yet, you may be looking at an even longer process. Lack of required documentation from a seller only delays the process.

The Tools (People) You Will Need for a Successful Short Sale

• You will need a great, experienced buyer?s real estate agent. That agent needs to be aggressive, diligent with follow up, and will do everything they can to keep the transaction moving forward: they call the listing agent for follow up on a regular basis, they even call the lender (if they have the contact information) on your behalf to get solid answers to help guide you in the offer/process.
• Next, you want to want a great real estate attorney who is experienced and savvy with the short sale process.
• The last piece of the buyer trifecta is to have a reputable, knowledgeable, well informed mortgage broker who will help you get your loan with the best terms available for you, within the contract?s time frame, with as little stress and headache as possible.

Now that?s what we like to call ?The A Team? (without the Mohawk & layers of gold chains like Mr. T).

We’d like to thank Bobaloo Rox for sharing today’s photo via the Creative Common’s License.

Sign 'O the Times

Here?s a question real estate agents are hearing lately??With so many short sales out there?does that mean the market is getting worse and should I be concerned about buying now verses later this year??

The answer, in a word, ?No.? Short sales certainly seem to be on the rise due to a variety of reasons: it can depend on:

• when someone bought their property (at the height of the market perhaps)
• the down payment
• drops in home prices and values
• did the owners take out a 2nd mortgage
• and of course just the overall economic crisis (i.e. rising unemployment)

All these factors are contributing to the increasing number of short sales. This creates many challenges for real estate agents and their clients. People want to get a handle on what is happening and how to navigate today?s real estate market.

What is a short sale?

A short sale is simply a transaction in which the lender (or lenders) agree to accept less than the mortgage amount owed by the homeowner. In some instances, the difference is forgiven by the lender, and in others, the homeowner must make arrangements with the lender to settle the remainder of the debt. Ouch!

Are short sales different from a foreclosure?

YES! Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses. A short sale can also be the best option for a homeowners who are ?upside down? on their mortgage because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.

Stay tuned! Next week I?ll discuss the specific challenges faced when dealing with a short sale and how to find the best real estate agent to work with to navigate the short sale process!

We would like to thank TheTruthAboutMortgage for sharing today’s photo via the Creative Commons license.

Be prepared to wait if you are involved in a short sale purchase

The first thing I learned as a transactional real estate attorney was the only sign of success to the parties involved is a successful closing. For many years the fact that the buyer and seller both signed the contract was an assumption of success. I was always confident that I could resolve most issues with the other party?s consul under the attorney review provision of the signed contract. In the last few months this has changed and there are no longer any assumptions of success until the deal is closed and funded.

More and more the factors influencing a closing are affected by third parties?not the contract and its principals: the buyer and the seller. I have found one of the biggest pitfalls to a successful closing has been short sales, a relatively new type of transaction to even the most experienced real estate agent and mortgage professional.

The Problem is Closing Short Sales

Although the buyers are hearing it is a ?buyers market,? in a short sale the advantage for the buyer is presumably the price. Where these deals are falling apart is as a result of the rest of the factors of the transaction. The buyer nor the seller is in control of the closing date. The bank controls not only the minimum price, but the closing date as well. My experience has been the closing date can be set anywhere from 90 days to 8 months after the contract is signed. It is not just the purchase price agreed to on the contract and what the property appraises at, but the seller?s financial situation and the bank?s investors that come into play. There is no rhyme or reason to how each transaction is evaluated by the bank.

What Can a Buyer Do?

The buyer needs to be educated before the contract is signed. This means they have to understand that a short sale is subject to leinholder/bank approval. What differentiates this from a foreclosed property is the seller still owns it. The property is sold ?as is,? so once the contract is signed there is no negotiation on inspection issues. This is a major issue if the buyer is obtaining a loan and even more of an issue if the buyer will be using FHA financing. In many cases the buyer (not the seller) must be prepared to take care of any inspection items prior to closing or the mortgage will not be funded.

Delayed Closings Cause Lending Problems

With the ever changing loan guidelines and the length of time from contract to closing, many times the mortgage program the borrower relied on in executing the contract has been modified or is no longer available. Typically these issues can be resolved with the lender. Some situations I have come across are either where the transaction fails to close when the bank increases its down payment requirement where the buyer was approved many months back or when the buyer has suffered a change in income or credit history during the pendency of the contract, making the borrower ineligible for the loan by the time the transaction is ready to close.

Buyers Must Be Flexible and Patient!

When the deal is good enough, a buyer should be flexible and stay focused on the big picture?getting an exceptional price. If you are purchasing a short sale property, be prepared for the deal to take a while. Lenders are overwhelmed and these transactions can take months to complete.

We would like to thank It’sGreg for kindly sharing today’s photo via the Creative Commons License.

An Opportunity or a Hassle?

Many people out there want to take advantage of this buyer’s market and scoop up an excellent deal. Many are very successful at this, actually buying real estate for pennies on the dollar. Others, have no idea or clue what to do. The first thing one needs to ascertain is? “Am I a short sale or foreclosure buyer?”

What’s a Short Sale?

A short sale is a property that is currently owned by a party that can no longer afford the mortgage payments. In this declining market they also have found that they owe more on the house than the house is worth. Therefore they have decided to try to sell the house for less than the mortgage owed and will negotiate with the bank once multiple offers have been placed on the home.

What’s a Foreclosure?

A foreclosure is a bank-owned property. The home was once owned by someone, but mortgage payments were missed, the bank accelerated the loan and took possession after the equitable right of redemption period had expired.

Both types of deals can be quite lucrative for the buyer looking to get an excellent deal. But?

Caveat Emptor

Buyer Beware! Foreclosures are usually sold, “As Is.” Typically there will be no property history and certainly no disclosures to tell you if something you can’t see is wrong. What you see is what you get. But, you will not know if there are broken pipes behind drywall! You will not know if the basement has flooded in recent years. You will not know the age of the roof. You will not know if the electrical has been updated. Most of these questions can be handled by a professional inspection. However, some problems will not be available to the naked eye of an inspector.

Another question is timing. If you expect to put in an offer on a short sale or foreclosure and expect a timely answer . . . you are probably not a great fit to be a short sale/foreclosure buyer. In the current market, banks are holding more real estate than ever before. They also do not have the systems in place to handle all the inventory. This process is very time consuming and frustrating. Most banks want to see that they have multiple offers on a property before they will entertain any offer. They do not want to see offers with contingencies in them. The cleaner the offer, the more attractive it is to the bank. This goes for short sales as well as foreclosures. I have seen this process take as little as one month and as long as six months. If you are on any kind of deadline, these sales are not for you.

If you are patient and have the time to wait and have access to the plumbers, electricians, and contractors to fix the problems you uncover, you can certainly find that perfect deal!

We would like to thank Jeff Turner for kindly sharing today’s photo via the Creative Commons License.

Seldom Is Anyone Happy About a Short Sale

The state of the current real estate market has made short sales more prevalent than ever before. When I started selling real estate five years ago, I rarely encountered a short sale. This past Sunday while out with buyers, two of the seven homes we previewed were short sales. Having just finalized a short sale as the listing agent, I must say that the listing agent must be in constant communication with the bank, as well as the buyer’s agent and the seller’s attorney.  Short sales take more time and effort than a regular sale, but good communication skills from the listing agent will facilitate a smoother and possibly faster transaction.

What Is a Short Sale?

A short sale is when the property’s value is less than what the owner owes their lender. Although many homes are currently down in value, a short sale may only occur when the owner can prove some kind of extenuating circumstance that has negatively affected their financial situation. A short sale may help homeowners avoid further collection activity or foreclosure.

When analyzing short sale eligibility, the value of the property, the cost of foreclosure, and the owner’s financial condition are taken into account by the lender. Sellers must submit a hardship letter explaining why they can no longer afford the property, along with bank statements, and a financial worksheet noting all income and expenses.

Should I Buy a Short Sale Property?

If you are considering buying a short sale property, there are several things you should consider. There is a notion that you can get a great deal on the price. In many cases you can pay less than market value, but short sales require a tremendous amount of patience from all parties involved in the transaction. A seller can accept your offer, but their lender must approve the sales price. Lender approval requires having the property appraised, and the entire process can take any where from several weeks to several months. If your lease is up in a month, I do not recommend attempting to purchase a short sale property. The buyer has no say in when the closing will occur. The property will close once the lender approves the sale. Wells Fargo Home Mortgage estimates that the total short sale process takes approximately 37 business days. Typically, short sale approval is good for 30 days. If the closing fails to take place within the given time frame, the entire process may need to start over.

What Does The Buyers’ Agent Have to Do?

When representing a short sale buyer, a Realtor must be patient but diligent.  Providing the listing agent with as much information as possible at the time of the offer is essential.  Be sure to include a pre-approval from the buyers’ lender for this specific address or proof of funds if it is a cash offer.  Any time there is information missing from the package to be sent to the bank, days could be added to the transaction’s timeline.  A listing agent should be in touch at least once a week with an update.  I don’t recommend calling them every day to obtain information, because they are just as anxious to hear from the bank as you are.  If you are representing a buyer and there are multiple offers on the property, I advise you to treat it like any other multiple offer situation.  Provide the listing agent with the buyers’ highest and best offer.  There may not be an opportunity to counteroffer, so go in strong at the beginning.

I’ve heard agents worry that in a short sale they would not receive their commission.  This is not typically the case.  Banks do place a cap on the amount they will pay out to for Realtor and attorney fees, but the bank is not looking to rob you of your commission.  There is a net proceed amount that the bank must receive in order to approve the transaction.  If the commissions, tax prorations, title fees, transfer taxes, and any other fees add up to more than the amount that the bank will approve, the Realtor commissions and attorney fees may be reduced in order to ensure that the property closes.  If the sales price covers the spread between what the bank receives and all of the additional fees, your commission will be what was represented in the MLS.

Find an Experienced Team

Whether you are selling a home and short sale is your only option, or you are considering buying a short sale property, I highly recommend surrounding yourself with an experienced team. A real estate agent and real estate attorney who have short-sale experience will not only make the entire transaction easier, but it will also increase your chances of closing the sale.