Understanding The Short Sale Process

Posted by Joe Manausa on Thursday, December 3rd, 2009 at 10:52am.

Short Sale PictureOne of my agents relayed a story to me yesterday that I felt would make for a great post on the Tallahassee Real Estate Blog. He told me that he is helping a buyer buy a short sale in Tallahassee, and he shared with me the conversation  he had with the listing agent.

The listing agent told him something like "get an offer in and I'll make sure it is first in line, every other offer will be a backup." This comment sent all my alarms to the full scream mode, and I sat down with my agent and had a long discussion about the process of buying a short sale.

Most Real Estate Agents Don't Understand The Short Sale Process

The first thing I told him was the agent in question probably had limited experience with short sales. If you truly understand how banks work a short sale (this process is outlined in following paragraphs), then you would never "buy" the statement made by the listing agent.

If you are going to buy a short sale, take the time to hire the right real estate company with a seasoned real estate short sale specialist. As I will explain in the coming paragraphs, it will make all the difference in world.

You Cannot Be In A Hurry To Buy A Short Sale

If you are working on a time-table of less than three months, you are not a good candidate for buying a short sale. The process of buying a short sale can take from three to six months, and nobody who knows what they are doing is going to guarantee you a closing date.

Every detail and action that becomes part of the home buying experience is affected by a home seller who has to sell short. Loan lock-ins cannot be relied upon because of the nature of the bank-approval process. Home inspections are a gamble, because if you get one early before you decide to buy, you might not be "allowed" to buy that house. If you wait until the lender approves you, then finding a lot of broken systems at the last second is a shock you will not enjoy.

So what I am saying is there is a process experienced short sale agents will take you through to ensure that you get a great buy without taking unnecessary risks. Most real estate agents do fewer than 2 short sales in their entire career, and they typically are not up to speed on what is really going to happen.

The Banks Are Not Happy To Sell A Short Sale

I have never met an individual or an institution that planned on receiving less money than they invested in any transaction. Yes it happens, but that does not mean they will be happy about it.

And banks are not filled to the brim with stupid people either! They will do what they can to minimize their losses, so it is important that you understand the short sale process so you can best position yourself to succeed when buying one.

The Banks Are Not Staffed To Process The Short Sales In Progress

Think about this. Let's just say that the stories of loans in default in the United States are true, and this number could be as high as 25% of all existing home loans. Additionally, we hear that 20% of all homes are "upside down" on the mortgage, meaning that more is owed on the home than can be gained by selling the home. So, what does this all mean?

  • Banks are getting less money than they were a few years ago (read that to mean that banks are failing right now, or at the very least they are losing money).
  • Loan defaults are up (read that to mean that they have more work to do so more employees are needed than a few years ago, but no money to increase staff).
  • So, unlike most businesses, when business picks up, so do earnings, resulting in more revenue to utilize in "up-staffing" to handle the workload.
  • But with Banks right now, it's the other-way around. Work is up, revenue is down, so they cannot staff themselves accordingly to handle the additional work load. If somebody is trying to sell a house through a short sale, you can be assured that the bank employee(s) handling that file are grossly over-worked and seriously ill-equiped to get things done in a timely manner.

So when you hire a real estate agent specializing in short sales, listen to her advice! She knows who and what she is dealing with and is prepared to help you succeed because she best understands the short sale process.

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How To Succeed In Buying A Short Sale

♦ Determine your time table - where are you going to live if it takes 5 or 6 months to close on a short sale? What if you make an offer and three months later find out your offer is rejected? Do you start up again to find a short sale or do you buy in a normal fashion so you can still close inside of your goal time frame? The key is to figure out how to plan your move on a variable time schedule. A real estate short sale specialist knows this and will help you make these decisions.

Throw away logic - When you make an offer to a normal seller, you know that they are deeply, emotionally rooted to the outcome of the home sale. You know that if you make a sound offer, you will get a contract or at least a reasonable counter-offer. And you also know that they will do so in a timely manner. It is their home and they do not want to chase away a good buyer.

But when you make an offer through the short sale process, the seller will typically sign just about anything. Then it gets shipped to the lender where it is added to a stack of 500 other short sales going on at the same time. Some poor processor just sits there and watches the pile grow.

Hire The Best Real Estate Company And Short Sale Agent You Can Find - Your short sale agent will call that processor (or the listing agent) on a regular basis. Unfortunately, there is no "fear of loss" for the processor. That file will sit in that pile until the processor can review it and then assign it to a "negotiator" (who also has 500 files to sort through).

The point here is that normal negotiating tactics do not work. You have to understand the banks' interests, as well as the processor's interests, as well as the negotiator's interests, all come into play. An experienced short sale agent will be worth her weight in gold at this point in the purchase.

When hiring this person, ask them to tell you how many short sales they have done (and make them prove it!). If they have not done more than 10, get somebody better. Preferably, it is somebody who has quite a few short sale listings and plenty of closed short sale transactions so they bring experience to the table.

Have Your Finances In Order - When I was in the Army, we often used the term "hurry up and wait," as everybody was always pushing you to go faster to get to a destination prior to you needing to be there... You rushed, you hurried, then you waited.

The short sale process is similar to this. Your trusted home loan specialist needs to be able to close on your loan in a hurry once your short sale offer is approved. Of course, this loan specialist might first need to wait through the months and months of time it takes to get an approval, only to close in a 30 to 40 day time frame (at the longest). Banks are going to select the buyer who can get them the most money, soonest!

Select The Right Offering Price - Pricing on short sales is random at best. Sometimes short sales are listed at prices that would generate 100% of the funds needed to repay all the liens in full. Of course, these homes are The process of buying a short saleupside-down on the mortgage, so an offer would have to be far lower than the asking price.

But often times a short sale is on the market listed at a price well below what it will sell for. The bank allows this so that it can accumulate multiple offers (they don't care who is first, they only care about the bottom line!) for several months and then choose the one that they will approve.

All these low-ballers do is create a soft pile on which to put the serious offers. A great short sale specialist will know how to price the offer.

If you use this as a guide, and you have adequate time on your hands, you can find some exceptional buys in the short sale market. Remember, just because a home is being sold does not necessarily mean it will be a great buy. The key is to work with a short sale specialist and to follow the smart short sale process.

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

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