The Short Sale Buyers' Problem: The market is very soft right now, and there are thousands of homes available on the market for purchase and very few buyers. I should have thousands of homes to choose from, so why can’t I seem to go to contract on anything?
I’ve been looking and making offers on properties for months, and nothing seems to pan out. WHY? I either get outbid, or I make an offer and never hear anything back. Sometimes I offer the FULL LIST PRICE, only to have the listing agent come back to me 3 MONTHS LATER with a counter that is higher than LIST PRICE!!!! Can they do that?
The MLX stated a given price, and I offered that price in full. How can they come back to me after all this time and ask for more? What do I need to know as a buyer about what is going on in our area and what I can expect as I go to look for my house? All the information on the internet about short sales is for sellers, not buyers. WHAT IS GOING ON?
9 HELPFUL HINTS FOR BUYING SHORT SALES IN BROWARD COUNTY
- The truth about saturated inventory and the myth of "lots to choose from"
- How to bid on fully negotiated short sales
- The myth about avoiding short sales
- How to identify short sales that have a good chance of closing
- What to expect when bidding on an unapproved short sale
- How the short sale submission process works
- How much to offer on a good unapproved short sale
- Why banks sometimes prefer to foreclose rather than take a cash offer
- Why you need to educate yourself about mortgages before you start looking
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RE: Saturated Inventory and the myth of “lots to choose from”
There are thousands of homes on the market for sale, BUT for every 5 listings in MLX on the market, there is just ONE listing that is ready to go to contract and close NOW. This 1 property that you can actually BUY NOW, is either a regular Joe trying to sell their home (very few and far between) OR a short sale, listed at a price which has already been accepted by the bank, OR a bank owned REO property. The other four properties are ALL non negotiated, unapproved short sales that are listed by agents who are waiting to get an offer so they can submit the short sale request to the bank to see what they will accept.
This means for someone who is serious about buying a home now, (this month or next month) we have slim pickins! It also means that even ugly, over priced listings will have multiple offers on them. This is confusing for you as a buyer, because it is disheartening to see multiple offers on the property YOU LIKE, in a market where nothing seems to be moving. The fact that most of the inventory is made up of unapproved short sales, whose list price has not even been submitted to the bank, explains why.
I get FULL list price on almost all my bank owned REOs no matter how ugly, and how overpriced, specifically because of this reason. Look up the TOTAL number of homes currently listed in MLX, and then take 25% of that. This is the total number of homes that is actually available for closing now. This 25% of homes that are really “on the market for sale and closing NOW” are comprised of fully negotiated short sales (approved short sales), bank owned foreclosures, and private sellers. The other 75% of this massive inventory are all non approved short sales, which is the same as nothing. So what we have are very motivated sellers who are all desperately trying to sell their house at any price. The problem is that it is NOT their call. Banks and investors have to agree to ALLOW them to sell their house. And getting them to approve these short sales is a tedious process.
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RE: How to bid on fully negotiated short sales
On fully negotiated short sales, there is NO NEGOTIATION on the price. Not even one penny. The price has already been negotiated and the price is based on a given percentage of CURRENT fair market value. If you see “fully approved short sale at 205,000, you cannot offer 204,900. The price has already been negotiated, and the loss to the bank has already been accepted and signed off on by the lien holder, and sometimes a junior lien holder PLUS a mortgage insurance company. Getting this to happen has taken some poor soul 90-120 days…..Never feel like you want to bid below the fully negotiated price in MLX because this is a buyers market and you don’t want to be the only fool who offered “sticker price”. This is not a sticker price, it is a “floor price” This is the term banks use for the minimum amount at which they will mitigate losses….The deal has already been negotiated ad nauseum and these negotiations have taken 90-120 days.
Let’s keep things in perspective. HOWEVER, sometimes the “fully negotiated price” has been fully negotiated for over 90 days. In this case, you can offer less than the negotiated price. The listing agent goes back to the bank and requests an updated current market value, and the deal could be approved at the reduced contract price, because values have dropped. If the deal was approved in the last 90 days the fully negotiated price is what the bank need to allow the sale. Please don’t ask to come in below the approved price, or prepare yourself for a 60 day wait so we can hear, NO.
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RE: Short sales are such a bother and so difficult. I don’t want to see or bid on short sales.
IF WE DECIDE TO BOYCOTT short sales, there will be nothing to buy and nothing to look at. We have to work AROUND the short sale offerings and be selective about what you bid on. Choose wisely. DO NOT BID on short sale properties that have NO CHANCE of closing. We will end up making offer after offer and no matter how good our offer is, if the person handling the short sale does not know how to negotiate a short sale, we will never close. We will wait 60-90 days for a response, only to have the seller counter at more than list price OR never hear a response back from the seller at all.
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How are we supposed to weed out the short sales that have a shot at closing from those that are not worth our time?
First thing we do on short sale listings is CALL THE LISTING AGENT…Gather information, and ask the right questions. This is my job.
These are the red flags that tell you that you should not waste your time with a short sale: BAD SIGNS
1. Other agent does not know if there is one lien or two. Agent does not know who holds the liens.
2. Other agent says they have not submitted the short sale request to the bank because they are “waiting for an offer”. They are opening the short sale file with your bid. No thank you. Go waste some other hapless buyer’s time for 4 months and call me once the price is negotiated and ready to go and the other “guinea pig” buyer has walked off in disgust.
3. The agent says an attorney or “loss mitigation firm” is handling the short sale. They don’t know the firm’s name or number and they won’t allow you to contact the firm DIRECTLY, and see where the short sale is at, before making an offer. Or, they give you the phone number for the person handling the short sale….. you explain you are a potential buyer, leave a message for them to call you tell you the status of the negotiations, and this call is not returned in 24 hours.
4. When asked how the listing agent arrived at ask price, they say they saw several other properties listed at that price. Short sales that are not priced properly do not close (like any other listings that are not priced properly)…if the agent is looking to see what else is active in the area and basing her price on what the neighbor is listed for, that list price in MLX is not going to even be close to what is acceptable and is going to be way off.
5. When you ask about paperwork, the agent says “the seller is handling that part” or they say the seller already submitted their paperwork to the bank directly.
6. The agent says they have many offers on the property. If you have 10 offers on the property, PEND IT in MLX and stop wasting everyone’s time. They want more offers because the agent is not convinced that any of the offers she has on the table are still viable…..This means they have been waiting for a long time, and probably does not update the buyers regularly.
Good Signs when inquiring about a short sale.
1. The agent knows how many liens and who holds the liens.
2. The agent admits they know nothing about negotiating short sales, so they do not know the answer to your questions, BUT they tell you they have sought help with the short sale from some outside firm, AND provide you the name and contact info for whomever they are dealing with, so you can get your information you need from this third party
3. When you ask “where are you at with the negotiations” the agent responds with SPECIFIC things that have already been done, and seems to know what comes next, or what is missing. They know what they are waiting on. They have done everything that could be done before your contract arrived, and can tell you what they are going to need to do now that your contract has arrived. If the sellers bank statements are outdated and need to be resent, they say so. If the BPO has not been done, the agent knows when it was requested/ordered and when it is expected to be back.
4. When asked how they priced the property, the correct answer is, “I looked at recent closed sales, and weeded through all the active listings which are unapproved short sales. Then I used the last closed sale and the LOWEST VALID (must have approved pricing) active listing, to try and guess where the BPO/appraised value would come in…..Then, I took 80-91% (depends on the bank guideline but all fall in that range) of that probable fair market value, ADDED all the seller’s closing costs and expenses to the net price, got that gross figure, and listed it at that value. THIS is how short sales that close are priced out. Sometimes the listing agent makes a lucky guess and doesn’t know how they arrived at that figure, but the figure ends up being right on the money. If the property is priced appropriately by the listing agent, this is a GOOD sign.
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RE: If I bid on an unapproved short sale, what can I expect?
First of all, on un-negotiated short sales the list price means nothing. The listing agent arrives at the list price and puts it in MLX. This is NOT the price at which the property is being offered. The listing agent has NO authority to offer the property for sale at that price. They are guessing what they think the bank will take. Before we make our offer we call the listing agent and ask a few questions:
A. How did they arrive at this list price?
B. Have they gathered the short sale paperwork and submitted it to the bank?
C. Who is negotiating the short sale and what is their background?
If the answers to these questions is favorable (see above) and it is determined the Realtor knows what they are doing….You will wait about 30 days and you will have an acceptance in writing from the bank OR a counter offer OR a rejection. The realtor will know who the lender is on the 1st and second loan (if any). They will already have gathered the paperwork from the seller and submitted it to the bank. They will have the phone numbers and contact info for both banks handy.
Then all they need to do is submit your offer with a HUD one, wait for the appraisal to be done, and then another 5-7 days to submit for approval. Sometimes if we are lucky, the appraisal will already have been done for a previous buyer and all the agent has to do is fax over our contract and our HUD one AND update the sellers financials. Short sales that have been structured like this by the listing agent CLOSE.
If the answers to these questions is not what it needs to be, you will find that the realtor has low balled this list price, has collected 10 or 12 offers, (none of which will probably be acceptable) and is now submitting all these offers to the bank to see if anything will stick. They are opening the short sale request with your offer. You are 90 -120 days away from getting an answer back from the lender, assuming the agent can even get a response from the bank.
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THIS IS HOW THE SHORT SALE SUBMISSION PROCESS WORKS…(More than you ever wanted to know about short sales…BUT you have to know how short sales get negotiated if you are going to be making offers on short sales)
It has to be received and it has to be perfect. Then the set up department has to look over the paperwork to make sure nothing is missing, and everything makes sense. If anything is amiss they have to correct the paperwork. Then order a payoff from the payoff dept. (this takes about 5 days) Then they order the appraisal. It takes 10 days to order and 10 days to get it back. Then they have to prepare their internal bank paperwork and worksheet. Then it sits on someone’s desk for another 10 days. Then it gets assigned to a negotiator who is working 200-300 files at a time where it sits on their desk for another 20-30 days. Then the negotiator checks to see if it meets the guideline. If it doesn’t, they reject the offer. (about 45 days have gone by.) If it does meet the guideline, then it goes out to the investor for approval. You will wait another 30 days for an answer. Short sales that are structured like this never close and are an exercise in futility.
DO NOT make offers on deals like this.
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ONCE I FIND A GOOD UNAPPROVED SHORT SALE, HOW MUCH DO I OFFER ON THAT UNAPPROVED SHORT SALE ?
Our goal is to get the bank to accept the deal at the lowest allowed amount that will still mitigate losses. So the initial offer needs to be a little less than what we estimate they will accept, so that we don’t end up offering more than the bare minimum accidentally. BUT we don’t want to make it so low that the bank doesn’t counter it….The bank will decline the offer and counter back with this floor value. That is how we are going to know we could NOT have gotten the property for less.
Where to start? We need to go into MLX and find the lowest recent closed sale. Then go to the MLX and find the lowest active sale, with no regard for whether or not it is approved or unapproved. Most BPO agents that prepare these “appraisals” erroneously use these active sales even though they are not approved, so we will too. We use these two figures to try and gauge what the BPO will show the fair market value to be….Then we take 75% of the fair market value (ALL investor guidelines fall between 80-91% of fair market) but for good measure we will write at 75%.....Bear in mind we have to calculate the sellers closing costs and add this to the 75% value, because the loss mitigation guideline is 80-91% of fair market value NET to the bank…. Once you add the sellers expenses back into the price, this is a good starting offer. Be ready for a counter offer though, which will come back somewhere from 80-91% of fair market NET, depending on who the investor is.
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“I am a cash buyer and I offered what I felt was a fair offer on a short sale property but they did not take it. Then the property ended up getting foreclosed on. What I offered them was low, but is better than nothing. The bank preferred to foreclose and get nothing than to take my cash offer.
NO… I don’t know why people think that the bank gets nothing at foreclosure. At foreclosure, they have the property. Many of these loans have mortgage insurance on them. This means the bank gets 80 cents on the dollar (80 cents on the FULL loan amount, not the current market value) at foreclosure. If the bank is guaranteed 80 cents of what they lent on the property, at foreclosure, they are not going to short sale the property out for less than what they can get from the insurance company.
On the other hand, the bank also factors in the amount they are guaranteed AND THEN BACKS OUT the cost for them to foreclose, because getting to foreclosure auction is not free. Anything that is more than this amount, “mitigates losses” and warrants short sale approval. If your offer does not mitigate losses the bank thinks it makes more sense for them to absorb the cost of the foreclosure, get the insurance monies, OR let it revert to an REO, fix it up, put it on the market so they can try to recover losses on a more level playing field. Maybe it’s flawed logic, but that is how the loss mitigation process works. Short sales are about CUTTING LOSSES. Bank owned foreclosures are about RECOVERING LOSSES. They didn’t spend 50,000 to foreclose so they could put the property on the market and give it away.
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A few words about loans and financing. It’s a whole another world. Educate yourself about the mortgage market BEFORE you start looking.
Don’t assume you qualify for financing just because you have good credit. There are many other new requirements. Good credit is not enough. Be prepared to qualify for a loan OLD SCHOOL style. Stated income products are a thing of the past. You will have to qualify and meet the debt to income ratios by showing your tax returns. If your tax returns don’t show much income because you are self employed, you will struggle to get financed. If at all possible, try to focus on FHA financing.
Conventional financing is tight right now and you are going to need a nice sized down payment conventionally unless you go with one of these govt programs. ASK HOW MUCH YOU WILL NEED OUT OF POCKET, and ASK HOW MUCH YOUR PAYMENT IS GOING TO BE INCLUDING TAXES AND INSURANCE. Most banks are not going to allow you NOT to escrow. They are insisting that you pay principal, interest, taxes and insurance in the payment. So make sure you know what the payment is going to look like. Ask what percent of the purchase price is allowed for a sellers concession towards your closing costs, and lets try to get every penny we can from the seller.
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How to Use These Helpful Hints
Our job as your agent, is to educate you about current market conditions, because we are sitting in a market where things are being done completely differently than they have ever been done in past. I’ll tell you about these changes, and my observations about them. I make these observations because I am working, and actively navigating this market every day. I would like to try and save you some time and heartache. These are my perceptions and they are based on real life experience, being in the trenches 12 hours a day, every day. You might perceive things differently.
I will NOT tell you that things don’t change and that these principles apply without exception in each and every case, OR that they will hold true going forward. These are generalizations and there are certainly exceptions to every rule.
You can make offers on 15 or 20 properties and you will come to notice the same patterns and learn these things for yourself. You can follow the advice I give you here, or you may choose not to follow my advice. My goal is simply to give you the information so that you have it and can make educated choices.
Most properties right now are bank owned REOs, approved short sales and unapproved short sales. Your offers have to be structured, according to the type of property you are making an offer on, AND your offer has to make sense, for it to be accepted. In the end, a property is only worth what you are willing to pay and what it is worth to you. Just bear in mind it may be worth more, to someone else and be prepared to lose it if your offer is not sufficient to be accepted.
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