In last week’s column, we talked about short sales and foreclosures, or together what’s commonly referred to as distressed sales. Although the volume of these transactions is thankfully declining, they still represent a significant number of home sales. During 2012, more than half of all the properties sold in Prince George’s County were either a foreclosure or short sale; in Baltimore city, it was one in three.
As a result, we thought it would be helpful to provide a little more information regarding distressed sales and how they can affect a buyer and or seller. For now, we’ll leave foreclosures for another day and we’ll drill down on what to keep an eye out for regarding short sales. But, first, let’s reiterate what constitutes a short sale.
A short sale is when someone wants to sell a house but the market value, and expected sales price, is less than the outstanding balance on the mortgage. The need to sell might be driven by financial troubles, when a homeowner is having difficulty keeping up with their payments, or it could simply be the result of something like a job relocation. In either case, the bank must give permission for a short sale to take place, and the bank will have the final say on what sales price is acceptable. Once the property is sold, the homeowner might be forgiven the difference between the sales price and mortgage balance, or the lender could require that the homeowner sign a note obligating him to eventually pay the remaining amount.
If you’re the buyer on a short sale, the watch word is “patience.” The approval for a short-sale transaction isn’t just up to the seller; it must work its way through the bureaucracy of a large lending institution, and sometimes more than one. The process can take several months, and at the end of all your waiting, the bank might simply say no. So, if you’re a buyer, get ready to go nowhere fast and be prepared for the possibility of disappointment at the end of your journey.
Furthermore, Bank of America, one of the largest lending institutions involved with short sales, recently issued the following news release: “As of January 15, 2013, there will no longer be a temporary foreclosure hold during the Cooperative Short Sale property marketing phase. We may begin or continue the foreclosure process up until a submitted offer to purchase the property is approved by all relevant parties.”
Here’s what that means: Formerly, a bank would hold off on beginning to foreclose on a property until it had played out the possibility of a short sale. Now, Bank of America (and all the other lenders will probably follow suit) has decided that, where applicable, it will simultaneously pursue foreclosure and a short sale. Consequently, you might be a buyer and seller working your way through a short sale when the bank could suddenly foreclose, thus voiding the potential short sale.
Additionally, sellers contemplating a short sale should know that not all real estate agents are properly trained to guide them through the process. And even though some agents may have taken a class or two on the subject, nothing can substitute for real life experience of getting a short sale to settlement.
Locally, Michael Davis of the DavisResnick Group has been working short sales for some time now, giving him an in-depth knowledge of short-sale transactions. In doing battle with the banks, Davis has found what it takes to improve your chances of success. Specifically, he’s come up with the top 10 questions for a seller to ask a potential short-sale listing agent. Here they are:
1. What is your experience with representing sellers in short sales? How many have you closed, and what is your success rate?
2. Have you closed short sales with multiple liens and different lienholders?
3. Have you closed a loan on behalf of a seller with the specific bank where the seller has his loan?
4. Have you closed short sales with specific investors, insurers or institutions such as Fannie Mae?
5. When the seller receives offers, are you going to sign just one offer and submit it to the bank for approval, or do you think it’s best to submit multiple offers?
6. Do you have a financial modeling program to determine whether the short sale is going to yield more cash to the investor than a foreclosure?
7. How do you recommend pricing the property, based on the outstanding mortgage balance as well as current market conditions?
8. How as the listing agent will you handle possible commission reductions requested by the bank?
9. Are you going to handle the short sale yourself, or will you outsource the process to someone else?
10. As a listing agent, would you characterize yourself as an expert in short sales?
As you can see, short sales are complicated, and there are a number of specific issues related to this type of transaction that aren’t common knowledge for most real estate agents. Therefore, if you’re a buyer or a seller looking to embark on a short sale, it’s not something just any old agent can do. Your friend or Aunt Betty may have been a real estate agent for many years, but unless she has had short-sale training along with ample experience in actually completing a variety of short sales, this is a deal that’s better left to a bona fide expert.
Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.