Short Sales: Fact Vs Fiction – Buy Side

Over the past couple weeks I have heard tons of questions about “Short Sales” and how they work.  With my next couple posts I will provide some clarity as to how they work and what to expect.  This post will cover the buy side of the transaction.  If you are unfamiliar with the process of purchasing a home as a whole, scroll to the top of the page and take a look at my “How to Buy a Home” page.  It will provide you with a basic understanding of the process and make the rest of this post more cogent.

I chose to separate this post into the following three sections: Qualities that are similar to a general transaction, qualities that are different, and general facts for buyers to know about short sales.

 

Similar to a Normal Transaction: 

1. Banks look at offers in much the same way an individual seller would.  Meaning a cash offer will be most viable, followed by conventional financing, and lastly creative financing or a home sale contingency.
2. After negotiating with the seller, a buyer can still expect to have a home inspection and an attorney review period, but after this point the similarities come to an end.

Different from a Normal Transaction:

1. Because the seller is distress it is often difficult to negotiate for repairs.  Not to say it can not be done, but not with the flexibility found in a conventional transaction.  So while you should have a home inspection, in a short sale situation it functions more as due diligence for the buyer before fully committing to the purchase.
2. The Bank is making the final decision on rejection or acceptance, not the seller.  Over the past year banks have been inundated with short sales and currently do not have the capacity to process them efficiently, therefore buyers can expect to wait 45- 90 days to receive final confirmation that the offer has been accepted.  Rejections generally occur in a more timely manner, approximately a month or less.  
3. Closing dates are not set in stone and are often not locked in during the initial negotiation with the seller.  Due to the soft time lines, it takes a buyer with a certain level of flexibility to purchase a short sale.

Things to Know:

1. Banks will take between 75%-90% of fair market value.  Due to a declining market and a lack of recent sales, the  issue in many situations lies in determining that fair market value.  So while a buyer can find a fantastic deal, short sales are not absolute fire sales in which the bank will take pennies on the dollar.
2. Because you are buying from a distressed seller, a buyer should expect to do at least some cosmetic work to bring the home to your standards.  (changing carpet, painting, etc.)
3. As a buyer, of course you want the lowest price possible.  From what I have seen and read, the 75%-90% of market value is accurate as to what banks will accept.  The best way to move closer to the low end of that spectrum is to make your offer as “clean” as possible.  Clean meaning low on contingencies and repair requests.  Remember, banks look at this much like a normal seller would.  For example take a $100,000 home.  Given the option would you sell to someone with a cash offer of $75,000 who will buy it as is, or the $90,000 buyer who has his own home to sell before closing and wants you to do $5,000 in repairs?

 

Short sales are here to stay for the next few years at least.  My goal is to function as a valuable resource for my clients so please feel free to contact me if you have any questions regarding your personal situation or what you have read here.

Best,

JLC

ARRA – American Recovery and Reinvestment Act

This was posted at www.financialstability.gov yesterday.

“On Tuesday, February 10th, Treasury Secretary Timothy Geithner outlined a comprehensive plan to restore stability to our financial system. In the address, Secretary Geithner discussed the Obama Administration’s strategy to strengthen our economy by getting credit flowing again to families and businesses, while imposing new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent. And Secretary Geithner explained how the financial stability plan will be critical in supporting an effective and lasting economic recovery.”

Geithner’s outline was short on details and even shorter on positive reception from both markets and pundits alike.  There is still much to be sorted out, but here, I’d like to provide you with the basics regarding the First Time Buyer tax credit of $8,000.

* The Tax Credit is available to all “First Time Buyer’s”.  The current definition of a “First Time Buyer” is anyone who has not owned a primary residence in the past three years.

* The Tax Credit is for 10% of the purchase price or a maximum of $8000.00.

* The Tax Credit is available for those who purchase between January 1st of 2009 until December 1st of 2009.

* You must be a U.S. Citizen to qualify

* Single taxpayers with an income up to $75,000.00 and married taxpayers with incomes of up to $150,000.00 qualify for the full tax credit.  Partial credit is available to taxpayers with incomes up to $95,000.00 or married couples with incomes up to $175,000.00.

 * The Tax Credit does not need to be paid back unless the property is sold within the first three years.  In that event the credit is taken back out of the proceeds at sale.

I will follow with more details as they are specified.

Best,

JLC

Reliable Sources Offer Mixed Messages

The debate rages on.  Is it time to step off the sidelines and buy or is waiting the better option since interest rates and prices may continue to fall?  Difference is, instead of local experts supporting one side while the national media suggests the other, national sources are standing on opposite sides of the fence.

In this post I will provide commentary on the following two articles:

For the MSNBC article click here:  The Argument Against Home Ownership by James Surowiecki

http://www.msnbc.msn.com/id/23439843/

For the CNN article click here: Housing: Best Time to Buy in Four Years by Les Christie

http://money.cnn.com/2008/03/04/real_estate/markets_less_overvalued/index.htm?postversion=2008030413

1. Argument Against Home Ownership  (all quotes taken from web copy of article)

The principle argument of this article is that in a falling market, the commitment of owning a home can tie down an owner limiting autonomy and cash flow.  The reasons for these limitations are threefold:

First, it used to be that a hefty down payment was required to purchase a home.  Averaging 18% for first time buyers in 1976.  In contrast, “a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent.”  Therefore, a borrower is in essence starting from zero and paying back their loan month by month.

Second, “homeowners took out more than six hundred billion dollars in home-equity loans between 2004 and 2005 alone — ten times as much as they had a decade earlier — and are spending much of it on personal consumption.”  So now, not only are many borrowers starting from zero equity when they begin paying off their mortgage loans, but also homeowners that do have equity are borrowing against that equity and depending solely on appreciation to pay off those loans.

Third, the article draws a strained correlation between  home ownership and unemployment rates based on a study conducted from 1960 to 1996 by British economist Andrew Oswald.  The research states that a “10% increase in home ownership correlated with a 2% increase in unemployment.”

While the article seems to denigrate home ownership in and of itself, it stands to reason, the true culprits of our current housing slump are the knockout collaboration of irresponsible lending practices and irresponsible consumer spending.  Currently, lending standards have become much more strident.  Moreover, borrowers with a 5 to 10% down payment that do not borrow heavily against their equity are well leveraged and safe.

2. Housing: Best Time to Buy in Four Years (all quotes taken from web copy of article)

There’s no way around the numbers.  Housing prices have dropped in the vast majority of the US over the last 18 months.  While this article illustrates that fact quite well, it also illuminates the silver lining of that downturn.  “Housing valuations are almost back to long-term norms,” said National City’s chief economist, Richard DeKaser. He called current affordability “the best in the past four years.”  He does caution that they could fall further.  The trade off here is that price decline directly increases affordability.  The article goes on to say that “there are still 21 housing markets, or 6% of those surveyed, that are severely over valued…That’s down from 56 overvalued markets at the peak of the housing bubble in 2006.”

As with all forecasting of markets, this article would not be complete without a source of ambiguity.  In determining market value the report “…compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued.”  Let me tell you why that makes me nervous, I count one control (median home price) and five variables in that sentence.  We all remember grade school science, it was all about many controls and one variable, right?  The only true source for determining market value is an agreed upon price between a buyer and a seller.  I’ll call it the elusive obvious.

The long and short is there is no clear answer.  A home buying decision must be made individually based on simple personal factors: budget, housing preference.  Each situation will vary so plan to consult with a professional.  A good realtor and mortgage lender can illuminate this murky market.

Best,
JLC