Short Sales: Fact Vs Fiction – Sell Side
March 16, 2009
Similar to a normal transaction:
- Banks look at offers much in 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.
- The seller is still responsible for making the home presentable and accesible for showings. Remember that despite the circumstances, our goal is still to generate the highest sale price possible. This will aid you in getting out of the home by making the short easier for the bank to approve
Different from a normal transaction:
- Even though you as the seller will negotiate the contract, the bank will make the final decision on acceptance. It is crucial to have a professional aid you in initial pricing of property as well as negotiating the contract. The last thing you want is to accept an offer only to have the bank reject it a month or more later.
- Unlike a general closing, sellers will not receive a check at closing. Moreover, the difference in loan value and purchase price has been considered income and the distressed seller would be on the hook to pay taxes on that amount. There are currently plans to do away with this stipulation making the option of a short sale more viable for many borrowers.
Things to know:
- 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.
- There is no iron clad explanation as to exactly what the ramifications of short selling a property are as it may very from lender to lender. What is clear is that in no case is a foreclosure the best option for a seller, the bank, or our economy. In some cases, depending on the banks procedure, a short sale can do very little damage to one’s credit. These are generally cases in which the borrower can prove some sort of hardship ( loss of job, death in the family, etc.)
- In order for the bank to accept a short sale, the borrower must be able to prove that they can not finiancially fulfill the obligations of their loan. In order to do so, be prepared to offer extensive financial documentation of your current situation.
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
Short Sales: Fact Vs Fiction – Buy Side
March 10, 2009
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:
- 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.
- 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:
- 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.
- 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.
- 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:
- 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.
- 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.)
- 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
National Media Starts to Agree, It’s Time to Buy
March 3, 2008
Amidst all the doom and gloom scenarios, some members of the national media are beginning to suggest that it is in fact, time to buy. In a recent article in Time Magazine Dan Kadlec states, “anything you gain by a further drop in prices might be offset by rising financing costs.”
Moreover, “Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today’s rate of 5.5%. Monthly principal and interest come to $994.31. Let’s say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you’d have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate. And you have spent a year living someplace you’d rather not be.” – Time Magazine
A couple points for clarity:
1. Chicago did not see close to the price drops seen in many other major metropolitan areas. We saw gains of 2% down to decreases of 4% depending on the index you consult.
2. “The irony is that in the time Kadlec did his research and when the magazine came out, interest rates were already back over 6 percent, making his example all the more compelling.” – Realty Times
3. While Kadlec mentions the possibility of “living someplace you’d rather not be” for an extra year, his example does not touch on the inevitable loss of equity a buyer will experience by waiting an extra year to purchase. Equity build up is fundamental to building wealth through real estate purchases.
For the Time Magazine article click here:
http://www.time.com/time/magazine/article/0,9171,1713483,00.html
For the Realty Times commentary click here:
http://realtytimes.com/rtpages/20080229_realtyviewpoint.htm
Best,
JLC
