Making Offers on Short Sales: Things Buyers Should Know

If you are actively looking for a home either as first time homebuyer or a move up buyer, you might have come across properties for sale that say short sale or short pay off.   The term ‘short’ makes our head turn, equating the adjective to ‘cheap’, ‘discounted’, ‘bargain.’  Yes, properties sold as a short sale have deep discounts, but it pays to know about the situation of the seller of a short sale, before putting an offer on one.

Selling a property on a short sale means that the homeowner is selling the property for less than what is owed to the lender.  Short sale is a foreclosure alternative that has gained widespread acceptance, and 2010 is considered to be “Year of the Short Sale.”

So, how do you go around putting an offer on a short sale? 

These are the things you should know about the property, the seller, and the lenders involved:

Full documentation needed on the part of the homeowner

Proving financial hardship on the part of the homeowner is key to a lender’s acceptance of a short sale request.  Job loss, divorce, death, furlough, cut work hours/overtime- these are the most common reasons that will qualify as ‘ financial hardship’.  Homeowners are required to submit current paystubs, tax returns, disability/unemployment letters, etc to support their claim.  In the same way that a loan application is treated nowadays, which is full documentation, a lender approving a short sale requires that the homeowner provide every single documentation required.  An incomplete submission will usually delay the processing and decision making on the viability of a short sale request. 

Homeowner’s Lender – Who Owns the Loan?

Short sale approvals are subject to the guidelines of the entity who owns the homeowner’s note/mortgage. Heard of Fannie Mae, Freddie Mac? These are government sponsored enterprises (GSE) who work in the secondary mortgage market, primarily by issuing debt securities in the domestic and international markets.   Once a loan has been originated by a bank, say, Wells Fargo, the GSEs buy the loan and re-sell them in the secondary market.  In this way, the funds are replenished and banks are able to sustain making mortgage loans to other borrowers.  GSEs and non-GSEs have their own guidelines for short sales, and the approval of a homeowner for one will definitely need to go thru the ‘investor.’  There are key differences & similarities to the criteria for short sale approval, especially now that the HAFA Short Sale program has been implemented.  For a seller, it pays to know who owns their loan so that they can take advantage of the many benefits that the HAFA program is offering, if they will qualify at all.

Condition of a Property in Short Sale

Properties offered as a short sale are sold as is, since lenders will not credit a buyer for repair costs.    Before submitting an offer, demand to see the interior of the property, and do employ the services of a professional home inspector, during the contingency period. 

The homeowner will usually not do further repair and maintenance, because they will be ‘leaving the house soon, anyway.’ Therefore, be ready to take on repairs, though, with the help of an experienced real estate agent, the homeowner might be persuaded to repair whatever they can do, with their resources.  Note that the sellers of short sale properties are in financial difficulty, and usually can no longer afford to spend further.  Pushing the homeowner too hard can kill the deal, so, know what you are willing to let go during the contingency period. 

Unfavorable Terms for the Homeowner

There are cases wherein a homeowner would rather not go thru a short sale, because the lender demands that they sign a promissory note, which is made part of the terms of the short sale approval.  The promissory note asks the homeowner to pay the remaining balance in staggered amounts.  A homeowner in financial distress will usually decline this, since a promise of future payment cannot be kept.  When this happens, the short sale deal usually falls off, and the homeowner goes into foreclosure.  The months you have spent waiting on the approval is just wasted. 

Rejection of the Offer Price

Most lenders will counter the offer price you have put in, especially when the offer is below fair market value.  The series of going back and forth in between buyer and lender lengthens the short sale process even more so, HOA dues are piling up, property taxes are added, homeowner’s financial documents expire, and the lender will ask again for updated documentation.  One virtue a buyer of a short sale must possess is PATIENCE. 

So, what should a buyer do prior to submitting an offer on a short sale?

Have lots of patience.   The short sale process can take anywhere from 2 months to a year, depending on the lender’s volume of short sales getting processed, and the type of short sale the homeowner is doing.  The new HAFA (Home Affordable Foreclosure Alternatives) Program promises to streamline the process across all lenders, and can take anywhere from 2 to 4 months. 

Make sure your financing is in place.   Once your offer gets accepted, the short sale approval has an end date, and lenders are strict on giving extensions without charging a per diem per day that escrow doesn’t close.  Start the prequalification process early, so as to minimize delays in the underwriting of your loan application.  The lender approving the short sale will require that the seller submit the buyer’s pre-approval letter, and proof of funds.  Secure your financing, so to speak. 

In today’s market, six out of ten properties will be a short sale, the other four, could be bank-owned, probate.  A regular sale that does not involve a lender’s approval is very rare, and if they do come by, these are usually investor-owned properties who are turning around after purchasing them from a public auction.  These ‘rehabbed’ properties will usually have a higher price tag. 

The year 2010 saw a lot of improvement in the processing of short sale applications among lenders.  The guidelines are getting to be pro- homeowner, therefore, pro-buyer.   Short sales are here to stay.  Your choice to gear up and get into the game is yours.  The risks are evident, but, every after risk comes success. 

Good luck!  

California Foreclosure Timeline - Beat The Auction Date!

     Highlights:

• Average foreclosure timeline is 5 to 8 months
• Loan Modification does not stop foreclosure process
• Short sale with purchase offers can postpone scheduled foreclosure auction dates

For many homeowners out there who have made a decision to do a short sale, the question I usually encounter is: “When is the best time to initiate the short sale process with my lender?”   The best way to answer this question is to present the foreclosure timeline in California that homeowners in pre-foreclosure should be mindful of.  Whatever stage of foreclosure/pre-foreclosure one is in, the time left to sell the property will be the most important factor to consider, given that marketing times differ, depending on the marketability, property condition, competing homes for sale in your area/city.

Note that when we speak of foreclosure in the state of California, we mean to refer to non-judicial foreclosure, which does not require court trial, and lender gives up the right to pursue a deficiency judgment.  Non-judicial foreclosure is what we know as the trustee’s sale.  A court trial/judicial type of foreclosure is rare in California. 

For loans originated between 2003 & 2007, the following summarizes the foreclosure process in California:

Pre-Foreclosure

The very first mortgage default initiates the pre-foreclosure stage.  From Day 1 of the default, the lender contacts the borrower and offers alternatives/payment plans such as forbearance, refinance or loan modification.   After the missed payment, the lender waits a few weeks to months (1 to 5 months) before starting the foreclosure process.

Foreclosure

Usually on the 30th day after the missed payment, a Notice of Default (NOD) is filed by the lender at the county where the property is located.  A copy is mailed to the borrower within 10 business days after recording.  The NOD details the attempts of the lender to contact the borrower and arrange for foreclosure alternatives. It is at this stage when a lender expects a borrower to make contact and initiate a short sale. 

Trustee’s Sale/Public Auction 

Three months after the NOD filing, a lender may record a Notice of Trustee’s Sale (NOS).  NOS are published in the newspapers under Public Notices, once a week, for three consecutive weeks.  The actual sale date is 20 days from the first publication of the NOS.  A copy is also posted at the subject property.

On the day of the auction, the property is sold to the highest bidder.   If there are no bids, the property reverts back to the lender automatically, lender markets it, at this point, the property is known to be bank-owned or REO (Real Estate Owned).

This chart below summarizes the various stages a homeowner can be at any one time, and the minimum time left to sell the subject property before a trustee’s sale kicks in:

Stage of Foreclosure/Pre-foreclosure	Minimum Time Left to Sell
Homeowner missed mortgage payment for the 1st time	6 to 8 months
A Notice of Default is filed & recorded	4 months
A Notice of Trustee’s Sale is filed and recorded	5 days before trustee’s sale

A common misconception many homeowners have is that the foreclosure clock stops once there is a loan modification or a short sale request in place.  This is not true, because the clock ticks from Day 1, whether a homeowner takes a proactive step towards foreclosure prevention or not.  

LOAN MODIFICATION

There is, however,  an additional 90 days ‘cooling off’ period beyond what is already given before a lender files a Notice of Trustee’s Sale.  If a homeowner has a pending loan modification request, this California state law (ABX2 7 and SBX2 7) was enacted on February 20, 2009 and took effect on June 15, 2009.   Not all lenders, though, are subject to such state law- lenders who have implemented a comprehensive loan modification program can file for an exemption.

Here is a list of mortgage lenders/servicers who have been granted exemption by the DRE, and therefore, could file a Notice of Sale against your property without the additional 90 day cooling period:

http://www.corp.ca.gov/FSD/CFP/pdf/ExemptList.pdf

Foreclosure Timeline from 1st missed payment to NOS (with additional 90 day ‘cooling period’ for homeowners with pending loan modification) 8 MONTHS

Foreclosure Timeline from 1st missed payment to NOS (without additional 90 day ‘cooling period)   5 MONTHS

SHORT SALE

Since a pending loan modification request does not stop the clock from ticking, it is almost always necessary to proceed to short sale, when the loan modification is not going anywhere and will not seem likely to be approved.  The months spent waiting on loan modification could have been used to market the property as a short sale, where in, more often than not, a seller could be granted postponement of the trustee’s sale, to give the seller time to generate an offer.