Monday, April 29, 2013

Why Short Sales Aren't So Short..


It’s a question I hear from clients: Why do short sales take so long?

Despite improving real estate markets, short sales and foreclosure sales will be with us for the foreseeable future. Many homeowners are still underwater, and at any time in the coming years, these folks may face a situation, such as a job transfer or divorce, requiring them to sell at a loss.
Short sales happen because the loan on the property is larger than the sale price minus all the sale expenses. With a short sale, the seller is asking the bank to take less than the amount owed.

Even if you’ve made an offer and the seller has accepted it, it’s not a done deal. The seller’s bank must approve the sale, and this is where the big delays can happen. Banks are losing money in a short sale and aren’t too keen on it. It’s understandable. Imagine that you loaned a friend $100, and he came to you later saying he could only pay you back $75. Would you cave in easily? Probably not.

It’s important to know that a buyer and their agent have no control over the process. The success of a short sale — and how long a short sale takes — relies heavily on a listing agent.  If the listing agent isn’t experienced with short sales, you’re likely wasting your time. A good short sale listing agent will properly advise the seller and have a thorough knowledge of the bank and its process before your offer is accepted.

Here’s a look at why short sales can take so long, along with tips for what you can do about it.

The seller’s bank must review the short sale package

In order to approve the sale, the lender requests a complete short sale “package” from the seller. Much like the package you must submit to get a loan, the seller must submit their finances. The lender will want to see the seller’s debts and assets, review their credit score and the contract to purchase the home. After all, why would a bank approve a short sale if the seller had $1 million sitting in the bank?

What you can do: A good listing agent will have the short sale package in hand and even completed upfront. Have your agent probe the listing agent to see if this package is ready to go before you put in your offer.  Once an offer is accepted, the agent can simply add the contract and buyer’s information and submit it.

Documents get lost, pages go missing, signatures are left blank

Most banks require hundreds of pages in the short sale package, and many of those pages require signatures from buyers, sellers and agents. If one page is missing or one signature left blank, the document doesn’t get processed. Often, the listing agent will submit over 100 pages and just wait. Sometimes it will take 6 months to get a response from the bank, informing the agent that things are missing, especially if it's a major bank like Chase, Citi, Bank of America.

What you can do: The listing agent should confirm with the bank after submitting the short sale package. Confirm that all documents have been received. Make sure the listing agent has gotten a case or control number.

Some documents quickly become outdated

It could be months between the time the documents get “processed” and when the information hits the desk of a negotiator, who actually reviews and negotiates. Does one bank statement come at the beginning of the month while all the others come at the end? That one bank statement may soon be outdated, and the bank will require an updated one. If that’s the case, it could take the lender weeks to realize this and another week to contact the seller or their agent.

What you can do: Review the statement date on each credit card and bank statement so you’ll know if a new one will arrive soon. Keep tight track of your statements so that if something needs to be updated you can do it right away.  The onus is on the buyer to move quickly once the bank responds.

Most Banks Use a Very Impersonal Process for Handling Short Sales

These banks asks agents to submit document through an electronic system.  The most popular is a system called Equator.  The agent scans in the documents as a PDF and they are given a case number.  The agent does not get to talk to anyone at these major institutions --- again the agents cannot influence a major bank to step on it and give a response.  It is possible and more likely that the listing agent can effectively follow up with a smaller, more regional institution but then again the regional banks did not get involved in predatory lending practices.  Many,  if not most, local and regional bank are what we call "portfolio lenders".  They not only underwrite the loan but did not and do not sell them in the secondary market.  As a result, they have far, far fewer of these upside down mortgages.  They, by and large,  required the more conservative 20% downpayment are far fewer of these institutions have 'upside down' mortgages.  

Of the local banks in this area, Hudson City, Oritani, Havens Savings bank they reportedly have ZERO short sales/foreclosures.  

Net, net, in a short sale you are most likely going to be working with a major, national bank that has a very impersonal process where the listing agent and the seller have no control over how long it will take and what the outcome will be.

What Can You Do:  Be prepared mentally to wait.  Understand that your deposit which is usually 50% of your intended downpayment amount, will sit, tied up for months and your agent will be waiting with you without much control over how long it takes. For example, on a $250,000 offer with 20% down, 10% deposit is $25,000.  Ask yourself can I afford to take $25,000 out of my account, not earning interest for 6 months?  Can I tolerate that financially and emotionally?  If the answer is no a short sale is not for you.  Can I tolerate that I might be missing the market on other opportunities while I wait?

The Seller:  Also, keep in mind that this is the worst thing that ever happened to the seller.  As mentioned above, the bank won't take the loss unless the seller proves he/she doesn't have the means to pay the loan off regardless of the fact that the mortgage is worth more than the current market value of the home.  They are in the process of ruining their credit and I don't know anyone who is willing to do that unless they really don't have any other choice.

As a result, sometimes the seller is unwilling to participate in the small they have to make the process move forward.  

The seller is still on the title even though he/she is most likely already in default (if they don't stop paying their mortgage, the lender is not going to deem them 'unable to pay).  Because they are still on the title, they do have the right to list the property.  They have to approve an offer to be sent to the bank.  I have made offers on short sales where the listing agent could not get the seller to respond so that they could even submit the offer.  Not only are they ruining their credit, there is nothing really in it for them to sell it. That is, they are losing their home and are losing what ever down payment they put down on the place.  

The seller also has no money to pay for typical fees and expenses that are incurred by the seller in a normal transaction.  The seller for example often does not have enough money to pay his attorney, or the realtor commission, or the fire certificate fee or for any repair items that may come up as a result of an inspection, or back Home Owner's Association dues.  So on top of asking the bank to take a loss on the mortgage, the seller may be asking the bank to pay all these fees.  Often times the bank will ask the buyer to come up in price to cover all this. So even though you may get a discount off market on the sale price, the buyer ends up paying some if not all of the sellers expenses.

What can you do:  Factor in all these expenses when bidding.  Assume you will have to pay the sell side expenses and bid accordingly.  If you can't get a sale price low enough to make up for paying all these expenses and wait time, walk away from the deal.


The Seller Part 2:

I have seen sellers who were so resentful of being in this situation, after defaulting they really wanted to stay in the place without paying in order to make up what ever down payment and fees they had in the unit to buy in the first place.  They may not approve your offer because they want to live there without paying their mortgage, taxes and Home Owners Association Fees (HOA).  Banks have not been quick to foreclose because then they would have to carry the asset on their books.  There are too many of these so even though banks have filed for foreclosure, many and frankly most of the major banks have not followed through on the process because they know that they cannot sell it.  They too have been waiting for the market to turn.  The owner gets to stay there for free.  The bank keeps it off of their books.  The Home Owners Association loses and sometimes prospects waste their time. 

I have also seen sellers list there property as a short sales as means to qualify for a HARP modification.  The Home Affordable Refinance Program (HARP) is the result of a class action lawsuit that many states made against predatory lenders like Chase, Citi and Bank of America who hold all of these loans that were made with no money down and little to no income verification.  NY and NJ participated in this lawsuit and as a result HARP modifications are available to NJ homeowners who can prove that they are upside down in their mortgage.  Banks who were successfully sued in this lawsuit were forced to fund this program.  Applicants who prove they qualify, get money from the fund to pay down the mortgage to a more tenable level that is inline with current market values.  Owners are listing their properties for sale to prove that they are not getting offers that even get close to the mortgage balance. 

What You Can Do:  Be aware of these consequences and factor that in as a risk when bidding on one of these properties.  You could be used as a pawn as part of another strategy to get the seller out of a bad situation.

Information Provided by Donna Antonucci
Prudential Castle Point Realty
201-240-6832