Thom explains just why he tells his buyers that short sales are most often very bad deals, if they are even legitimate deals at all!

It seems that three years ago no one had ever even heard of a short sale. Now we just wish we hadn’t EVER heard of them. Short sales are the bane of the home buying market at this moment. Most buyers really don’t understand why they are so bad, so difficult, and in the end, so infuriating. I have been involved in many, from both sides. And while I am whining about them as a buyer’s agent, I can tell you it is actually much worse to be on the listing side, at least for the agent. From the customer’s perspective, it is generally worse on the buyer’s side. This is because if you are the seller, you already know you made a very bad mistake, and you are prepared for lots of unpleasantness in trying to unwind that awful thing.

But if you are the buyer, you ostensibly haven’t screwed up, and are just trying to buy that cute house with the low price. But what you don’t know in these situations will damn near kill you. In the early days, let’s say in late 2007 and early 2008 when shorts were beginning to rise locally (I am told by those in other areas Bend has been in the very forefront of short sales, as we fell so hard, so fast, the Vegas of the NW, so many have learned from our mistakes), we eagerly took our clients to them, as none of us really understood them either. Then came the hair ripping, the screaming, the crying, and the slew of buyers running for the hills, convinced the banks were evil and liars (I am not so sure they got it wrong there), and that the whole deck was stacked against them.

So if you are a home buyer, and you are looking in an area such as Bend, Florida, Vegas, Phoenix, or California’s Inland Empire, where prices are down 50% or worse from their highs, please, for your own sake, listen up.

1) PRICING-
First of all, the price you see on a short sale may or may not be legitimate, in fact, most often it is not. “But it’s on the paper”, you say. Yes, but it means nothing. A short sale is generally begun when a homeowner misses 2 payments. The bank won’t even let a seller consider a short unless they have satisfied that little detail. Then, the Realtor comes in, gets the bank information, and most often begins the short WITHOUT ANY communication from the bank as to how much they want to get out of the property. This is not the Realtor’s fault, because most lenders will not accept any communication from the Realtor UNTIL an offer is made. Therefore, the Realtor has to get an offer before he/she knows how much the house can really sell for. So, in order to show good faith to the bank that we attempted to get their money out of the deal, we generally start them at the break even price, where the bank will get all of their money back. Then, the price is lowered, often by 5%, each week or two, until an offer comes in.

So what generally occurs is that the house sits on the market for months as the price comes down, and that period is longer when there has been a huge drop from the boom prices, simply because the market is 50% or so below that price at the current moment. Finally, the price begins to look attractive to buyers, and an offer comes in. Then the Realtor is often allowed to speak to a negotiator at the bank. This negotiator is for the Seller, as, remember, the bank is not the owner of the home until foreclosure, and the seller still owns the house, so all negotiations on how much they will take to let the seller out of their obligation to pay the money back take place between seller and bank, not the buyer. So, the buyer sits, and sits, and waits for someone to get back to them while the lender’s negotiator negotiates with their board, their sub-lenders who really own the note, and the seller. What sometimes occurs in our market is that the bank finally comes back and says,”we won’t take that much, you have to offer more than the asking price”. So, that’s what I mean by the price often being illegitimate, as it means nothing at all until the bank says it does. And in cases where they are writing down over more than 35%, my experience says they won’t do it, and would rather foreclose. Now, this is where the price DOES get legit, as the Realtor is forced to raise it, and puts it back in the ACTIVE MLS category. These are your best bet if you want to look at shorts. I just closed one, in fact, where the previous deal fell apart, leaving a pre-accepted bank price for us to jump in and take advantage of. These are a needle in a haystack, but your Realtor can help.

2) SELLER CONTRIBUTIONS? Fahgeddaboutit.-
The majority of offers these days include what are known as seller contributions. This simply means the seller is kicking money in towards the buyer’s closing costs or down payment. As houses now require larger downs to buy, it makes sense that the buyer is putting the squeeze on the seller to help the sale come to fruition. But in a short sale, the seller is losing his or her house and accepting the mantle of years of bad credit. To even get a short sale to happen, they have to prove to the bank that they are essentially broke. Do you think they can, or will, kick in cash to help you make a purchase? Would that make any sense at all?

No, of course it wouldn’t. And, as you can’t negotiate with the bank (remember, they only deal with the seller and have no legal basis or right to negotiate with the buyer as they don’t own the house . . . yet), they also won’t help you. So contributions are exceptionally rare with shorts, and if you need one, don’t waste your time looking at them.

3) OFFERS-
So the buyer has made an offer, and is smiling thinking they are going to get this great house cheap. But not so fast. It often takes 1-4 months for the bank to figure out what the heck is going on, and it may take them that long to get back to you. You need to know this going in. Furthermore, there may be other interests involved. These include second mortgages, Home Equity Lines of Credit (HELOCs), and the worst, Private Mortgage Insurance (PMI). Now, your chances of actually getting a short sale with only ONE lender is somewhere around 25% at last check. Those chances drop significantly with each party attached to the debt. The First Mortgage has the power here, as they can legally take the whole offer and leave the sub-creditors with nothing, but of course then they really can’t do it as the sub lenders will foreclose. SO, all lenders and insurers must sign off on the deal, and IF this ever happens it will take a long, long time. There are bureaucracies in each, and therefore the slow wheels in those institutions have to deal with the slow wheels at the others, negotiations go back and forth between loss mitigation departments at each, and it just grinds to a halt. Frankly, these banks believe they have better things to do, and much of the time in these instances would simply rather foreclose than go through the mess of dealing with your offer.

My own advice would be to never get involved with a short sale if it has PMI involved, as there is very little chance it will ever happen. I also counsel against getting involved with short sales that have a second or a HELOC involved, as they also have maybe a ten percent chance of going through. Meanwhile you are wasting your time and missing good Bank Owned REO’s and traditional sales that may actually be purchaseable. Which leaves us with the single lender short sales. These are your best bet. There are certain banks which have a good track record of closing these, and others which are the kiss of death. I am not going to tell you which unless you are my client, due to legal issues, but it you have an honest buyer’s agent who didn’t just fall off the turnip truck, they should be able to as well.

3) IT AIN’T OVER UNTIL THE FAT LENDER SINGS-
But you’ve made an offer, and you are prepared to wait until something happens. Optimistic, are you? Well hold on, Kemosabe, this ride gets rougher. Now, if you make an offer on a traditional sale, or on an REO, once it is looked at by the seller and approved, which should only take a few days at worst, it is marked PENDING in the MLS system, and no one can offer on it again until the offer falls out of contract. But with a short sale, the ground is shaky as Jello, and because there really isn’t a deal until a third party lender signs off, it is marked CONTINGENT, which might just as well say “WE HAVE AN OFFER BUT IT PROBABLY AIN’T GOING TO HAPPEN- GIVE US A BETTER ONE!” Yes, “your” house stays on the market during the month or more of negotiations, and another buyer can come in behind you and get in line with a better offer (generally you are still first to get a shot these days, as banks only want to look at one offer at a time, but you know the listing agent is going to tell them that they have a better one waiting behind you . . .). Which means, you might fall in love with it, as clients of mine have in the past, and over months develop a real love for it, only to lose it at the last minute. Not a recipe for stability, is it?

4) REMEMBER AIG?
Another dynamic in place with short sales is that these lenders are insured against foreclosure risk, but often not against short sale risk. So, if they foreclose, some of that loss is made up by an insurer. If they sell a short, they often have to write it all off. This just makes negotiating the short sale even less attractive to them.

5) THIS IS/WAS SOMEONE’S HOME!
When I take young couples and families through short sales, people get bummed out. When you walk through a short sale, the pictures are still up, the kids’ toys are scattered all around, and the kitchen table has recently been used. And as you inevitably look at these things, you realize these are people just like you, who had dreams of a better life, but theirs were destroyed by the housing crisis. These people are losing their home, a home they probably love. A home they might have hoped to raise their kids in, watch one of them get married in, have family gatherings and holidays in. But now their dreams are dashed, and you really can feel the despair and sadness in these homes. Clients have walked out just crestfallen after looking at a great home, only because it hits home what is REALLY going on here. If you’re an altruistic type, a sweetheart, short sales aren’t for you, either.

6) CONCLUSION:

In my book, there are only certain short sales worth looking at, and they represent maybe 20% of those on the market. Here are your criteria for a Short Sale you may actually be able to buy:

A- Look for a short sale with ONLY ONE LENDER! More than that and your chances drop dramatically.

B- THAT LENDER BETTER BE A GOOD ONE! There are good banks, and bad banks. The worst in terms of getting these closed was once the industry darling. I think you can guess that one. I wouldn’t get involved with them, they supposedly close only single digits percentage-wise. And that monster that swallowed a big NW bank is not much better. You’ll do better with small banks. They need the money. The big guys are too cash rich these days to care. Caveat- Wells Fargo has proven to be very good and conscientious about closing these, one reason I have switched to them for my own banking needs.

C- Better yet, find one that HAS ALREADY HAD A SALE FAIL AFTER MONTHS ON THE MARKET. This one may have the rarest of items- a legitimate price.

D- BE PATIENT! Constantly emailing or calling your Realtor won’t help. All he/she’ll do is call the other Realtor, and get the “I haven’t heard anything and they won’t talk to me” line we always get. If you are getting involved with a short, that’s your choice, and you must be prepared to wait and be ignored.

E- BE REALISTIC! If the price looks too good to be true, it almost always is. And don’t go looking at short sales if you need to close a house in the next two months or so, chances are it won’t happen, and then you will have only yourself to blame, NOT your Realtor (unless that Realtor hasn’t told you all of this, and in that case, you have my permission to yell at them).

F- Looking for the perfect home? Is the most important thing to you getting the right house? THEN DON’T EVEN LOOK AT THEM! Short Sales are for the buyer who wants to get the best price and doesn’t care if it is an ugly process after which they might never even get the house. They are not for people who are at all emotional about their home purchase. These are brutal, ugly, faceless deals, and if you are looking for the perfect place for your family or get emotional about homes, do yourself a favor, look only at REO bank owned homes, and at traditional sales. You will thank yourself, and so will your Realtor!

Thom guides the buyer through the combination of Disney Theme Park and Cambodian mine field that is the process in buying a foreclosed home in Bend, Oregon. Yes, there is a lot of good, and really it is the only way to buy right now, but I think you need to know about the tough stuff as well.
So, you want to buy a foreclosed/ bank owned property, eh? Well, you’ve come to the right place! (He says as he peeks around, then opens his trench coat to display a good dozen listings that look too good to be true.)

The truth is, if you are letting me help you find a home, that’s mostly what I am going to show you. Unless you don’t care about money, and then I have some fantastic plots of land 475 feet under Lake Mead I’d like to talk to you about. Right now, nothing comes close to foreclosed homes as far as value for the buyer- certainly not conventional homes, which represent the very top of the current market, and which are generally priced 20- 40% higher than the foreclosed home next door. Short sales are often even worse, because the price you see on a short sale rarely is the price you will pay (it’s most often higher, sometimes a LOT higher), and short sales generally take 90 days to close, and to make matters worse, during that ninety days you most often have zero idea of whether or not you will ever get the home. It takes the banks a long time to respond on shorts, and the entire time you are waiting for them to answer you (weeks to months), the house is still on the market, and offers are still being accepted. It is not uncommon for buyers to sit and wait, all the while becoming more and more attached to a home, only to find sixty to ninety days out that someone else has made a better offer. Bye- bye dream home, and hello pissed off buyer.

Foreclosed properties, however, combine the best aspects of both conventional sales AND shorts. Like shorts, they are priced far under the rest of the market. It is my belief at this time, owing to improved economic numbers that come out almost daily (have you seen the stock market this month? how about durable goods orders? how about new home sales? how about home resales? how about same store sales? how about Bend home sales? how about oil prices? I could go on and on, but all of these are up in the last months, not just the market itself- these underpinned the market’s rise), that foreclosures represent the coming bottom in home prices, a bottom that I think will arrive sometime in the first days of Summer or waning days of Spring. But, if you get my point, foreclosures are already representing early Summer numbers, and quite often numbers so low we will never see them again. And the difference between a short sale and a foreclosure is that the price you see on a foreclosure is the ACTUAL price, not a BS number made up by a Realtor. I was at a Principal Broker’s meeting last week, and many of them want to do away with short sales altogether, as they believe they represent false advertising and set us up for bad things to come. I do not disagree.

Bank owned properties, like conventional sales, do NOT take 90 days to close, and once a deal is reached (often within days to a week), they are marked PENDING, and cannot be shown to other buyers like shorts can, AND they can close as fast or faster than a conventional sale- (30-45 days in the current lending climate.) Let me put it this way, if I was buying a home right now (you have no idea how much I wish I could- but my debt to income ratio is too high for the new standards- usually around 30%, then there is the self employed problem, etc…), I would ONLY look at foreclosed properties. Besides that, as many as there are out there, they will be gone before any of us even knew what happened, and we will all be looking back, wishing we had known they would disappear so quickly, just as we wished we had known the downturn was coming.

Sounds pretty good, right? Well . . . there ARE banks involved, after all, so how could they be perfect? Is there anything less perfect than a bank, ANY bank in 2009? I think not (I’m looking at YOU, CHASE, you pack of weasels). So, let me tell you about the negatives.

FIRST, we get no signatures on offers, or counter offers, until a deal is reached. This can be disconcerting to those who are control freaks, but we will have quick and regular communication from the bank, often communicated verbally or by a brainless computer to the agent on the other side. So, this one is really just an annoyance.

SECOND, and this is the big one, once you get past the standard right of refusal for a) a loan you could not get or did not like, and b) a bad inspection, both of which you can still pull out after, provided it is within the time limits specified in the contract, once you get past those? Yep, you get the house, or you lose your earnest money, and sometimes damages as well. All banks on foreclosures make you sign a really nasty addendum that makes lawyers nervous, saying that you cannot sue them for anything once you have blown through the inspection and the loan process. They are all sold as-is, so it is the buyer’s responsibility to be sure that as-is works for them. Really, this is just a grown up way of doing business, unlike the hand-holding that often accompanies traditional real estate sales. It’s put up or shut up time, essentially. They don’t want to waste their time with a buyer who is wishy washy. And who would?

THIRD, they won’t fix anything. It is paramount that you get the best inspector you can find, and for years we have queried our clients as to whom is the best, and we have a list from 1st choice to last. I will of course always recommend Mike Wilson, the first on that list. But several others are good if he is too busy to get it done in time. So, as-is, really means as-is. We may be able to get them to reduce the sales price based upon a poor inspection on a house that you still want to keep going with, however, so be sure to let me know immediately, as we usually have 7-10 days AFTER SIGNING to pull out or whine, based on an inspection.

FOURTH, they won’t listen. Now, this is a much worse category with short sales, because there they won’t even listen to you throwing your money at them, much less your desires and wants about this or that problem with the property, or the fact that you think it’s basically a tear down, or that you’d really like them to replace the carpet before you reach a deal, or any of the things you can often push for with a regular sale. REMEMBER, YOU ARE GETTING IT FOR WAY UNDER MARKET VALUE, so they aren’t going to play that kind of ball. The only chance we have for those sorts of caveats is the one I mentioned above, the post-inspection period. That’s it.

FIFTH, there is an icky little thing called a PER DIEM. What this means is that if YOU, THE BUYER, go over the closing date for some reason, usually because your loan guy can’t get it done, (Please think about using Carl Salvo if you want as close to a trouble free, well informed, HONEST process as you will ever see- he saves me trouble, pain, and sleep, and he saves you trouble, pain, AND money), then you owe the bank some extra money at closing. This can be $50 per day, or $100 per day. Either way, it is trouble. And they will neither rescind this stipulation, nor will they pay it if THEY go over. Not exactly fair, but a cost of getting a great deal. Hey, I said they weren’t perfect. But they still are the best thing going out there. SO, the key with this one is that you check with your loan guy and be sure he can get it done in the time allotted. If he doesn’t, at least he gets yelled at, not me! Happy

Now, you will get a Special Warranty Deed at closing, which is basically the same as a traditional sale. Only, as they have never been to the property nor lived there, it is a Special Warranty Deed, not a General Warranty Deed. This really is just a name thing, with no real troubles ahead for you in reality. And, your title insurance policy that you pay for at closing insures you against some creep coming back later and saying he has title. Guess what? He doesn’t. And even if he could prove he did, the title insurance would pay him off, or for your home, or whatever remedy is necessary. But these are so rare as to be akin to the Dodo.

The last major thing to tell you about foreclosed property sales is that you can’t be that guy. You know the guy, the one who think he is going to get everything at a huge discount, or he’s walking away? Now, we all have a little of that guy in us, but it’s important to keep him on a short leash during a foreclosure negotiation. Foreclosed homes are, again, WAY BELOW MARKET VALUE, so they are rarely going to go more than 10% to at the most 15% lower than the listed price. We can offer lower to try to get bargaining position, and I always recommend we do to start, but it is important to get real about how much you want the home after the first counter, because they will often not continue negotiations unless you quickly get in the ballpark. The other minor thing to note is that the best ones go very, very fast. Often under two weeks on the market. If I have been working with you on foreclosures, you have probably heard me say, “Whoops, that one’s gone”, at least once. It is not uncommon for me to pull a batch of 5-10 homes one week, only to discover the next week that 2-3 of them are outta here. So, find what you want, get serious, and move fast. The deal you get will be worth it, especially a few years down the road.

So, if I haven’t scared you away with my usual, full disclosure style, and you want to check out some foreclosed/ bank owned homes, email me at Bendbrokersrealty@gmail.com, or call me at 542-480-7554. Let’s go get ‘em!