Short Sale/Foreclosure

Over the past two years, incidences of short sales and foreclosures have risen to near-record proportions. The ability for real estate agents, buyers, and sellers to understand the process and implications of short sales and foreclosures is becoming a crucial element of success. Unfortunately there is much heat and little light when it comes to the discussion on short sales and what to do about the growing menace on our markets.

RE/MAX Chairman, Mr. David Liniger, is one of the foremost experts in residential real estate around the world. He warned of overexpansion of credit, the potential problem of low down payments spreading to too many sectors of the market, and of the bubble-fueled housing market in general. He is now of the opinion that the incidences of short sales and foreclosures are nowhere near at a trough.

There are endless numbers of people masquerading as “short sale specialists” in the market today. I give you this fact: I have spent much time studying the market and procedure for short sales, and it is a complex and ever-changing maze. The main reason such a small percentage of short sales reach final sale, and  why the majority of listed short sales create so much frustration that many buyers simply avoid them (and hence, avoid potentially outstanding opportunities) is because sellers are often lured into short sale listings by inexperienced people who claim expertise, yet have little, if any. I personally consider it foolish for any real estate agent to engage in the listing of short sale properties without the assistance of truly knowledgable third party with lengthy experience in short sales. In my practice, I  use a triangulation strategy which has the seller, the Realtor, and the third party working as a team to present a listing which has a high probability of success from the beginning. The third party gets paid out of my commission, not by the seller, and only gets paid if the sale closes. Using this methodology, the seller has the expertise of both a trained Realtor AND a trained short sale third party at his/her disposal, and the buyers have a higher degree of confidence that an offer will be accepted in a timely manner.

RE/MAX agents are strongly encouraged to increase their expertise in the short sale/foreclosure process, and in that regard, I have studied and achieved the professional designation as a Certified Distressed Property Expert (CDPE). If you are thinking of a short sale on your own property, or of buying into the short sale/foreclosure market, I strongly recommend that you only deal with real estate professionals who at a minimum, have a proven designated knowledge of the market, and who show an inclination to learn more as the winds of change continue to force the market to evolve in a way to accommodate more short sellers.

I have done much research and financial writing over the years. I am flattered when someone adopts something I write as a piece worthy of distributing to those seeking knowledge. In that regard, I want to dedicate the remainder of this section to Ms. Dian Hymer, a writer for Inman Real Estate News, and flatter her by repeating her comments in this section. On February 9, 2010, Dian published a brief piece on the short sale/foreclosure market which I regard as the best summary of the situation to date, and how we should deal with it. Given that I am unlikely to improve on her quality of presentation, I want to share it with you in its entirety:

“Buyers often shy away from considering short-sale listings, either because they’ve had a bad experience or have heard horror stories about the deals that take forever and never close. Buyers’ agents sometimes steer their clients away from sales that are subject to the lender agreeing to accept less than what they’re owed, because it can mean a lot of work for nothing.

Short sales will probably be a part of the home-sale market for the next couple of years. They provide opportunities for buyers, particularly those attempting to buy a home in a low-inventory market.

Before you enter into a contract to buy a short-sale listing, make sure that you understand the process and set your expectations accordingly. One of the biggest differences between a short sale and a conventional sale is that short sales take longer. Although many lenders are streamlining the short-sale process, it can still take 45 days from contract acceptance to receive lender approval.

Make as clean an offer as possible, but be sure to include contingencies for inspections and appraisal and loan approval. Your contract should also include a short-sale addendum that includes a time frame for lender approval.

Listing agents often want the buyers’ contingencies to begin when the offer is accepted by the seller. However, buyers usually prefer to pay for inspections and the appraisal after lender approval. As in all home-sale transactions, these items are negotiable.

Your short-sale offer will stand a better chance of lender approval if you are preapproved for financing. Include verification of the funds needed for your downpayment and closing costs and a preapproval letter from your lender with your offer. The ratified purchase offer and supporting documentation from the seller and listing agent will be submitted to the lender.

Short-sale approval is often contingent on the buyer and seller making concessions. This means that the the lender could ask the buyers to pay a higher price. The seller could be asked to bring money into escrow so that the lender nets more form the sale than the contract provides. If either party is unable or unwilling to do so, the transaction will fail unless the lender reconsiders.

HOUSE HUNTING TIPS: Regardless of how committed you are to buying, it is not wise to bid on every short sale you come across that might work for you. Approximately one-third of the short-sale listings on the market don’t close, either because the lender won’t approve a realistic price, or because there are multiple liens secured against the property. Generally, if there are more than two liens, the likelihood of the short sale going through is slim.

Don’t look at a short-sale listing until your agent has talked with the listing agent to find how much ground work has been done. Does the listing agent have the sellers’ written authorization to negotiate on their behalf with the lender? Has the listing agent been in touch with a representative of the lender’s loss mitigation department? Have the sellers provided all the documents that will need to be submitted to the lender when an offer is accepted, such as a financial statement, hardship letter, bank statements, pay stubs, etc.

Stay away from short-sale listings where the listing agent doesn’t have the seller’s cooperation. For instance, the sellers may not have their paperwork in order to present to the lender. Understandably, it’s difficult for most people to face losing their home and good credit. But without the sellers’ cooperation, the sale won’t go through.

THE CLOSING: Short sales require a lot of patience, a cooperative effort between the buyers, sellers and agents involved, and frequent communication to keep everyone involved in the process up-to-date.”

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