Distressed properties make up 60% of today's listings in eastern Contra Costa real estate market. Of 3908 active listings, we have 1276 foreclosed (REO/bank owned properties) and 1078 short sales. Since nearly half of the distressed property listings and one-third of all active listings are short sales, many buyers are asking me "should I buy a short sale?" Like many area agents, I avoided showing short sales knowing that the close rate is low, but if you ask the right questions you can successfully purchase a short sale property. The following are suggestions for questions that I suggest to my clients need to be answered before considering making an offer on a short sale property.
1. How Many Loans and Lenders Encumber The Property? One is Best
It is much more difficult to accomplish when two lenders are involved. Often, there is a first and second mortgage with the same bank (piggyback loan). Typically, these are easier to negotiate, but beware. Even though both loans are with the same lender, they may be placed with different investors or asset managers and require separate negotiations. In most cases, the lenders are only servicing the loans and do not have final decision making authority. Also, beware of HOA liens. Often lenders are not willing to settle leins placed by homeowners associations.
2. Has The Short Sale Package and Hardship Documentation Been Submitted to the Lender? If Not, You May Be Wasting Your Time
In order for the lender to consider the short sale and taking the loss, proof must be made to them that the seller is in a hardship, Most lenders have a hardship package requiring the seller provide them explanation and proof of hardship, current cash flow (income & expenses), list of assets they have (cash, other real estate, retirement accounts, etc) and liabilities (monthly bills and loans). They also want proof consisting of two years tax returns, recent payroll records and bank statements.
Sometimes, but rarely, lenders will order a BPO (Broker Price Opinion) or Appraisal prior to receipt of an offer to set market value for the property.
3. Has A Notice of Default and/or Notice of Trusteee Sale Been Filed? Closer to Sale, Easier to Close
Lenders don't consider it a hardship if the loan is not in default. If the default is in early stages, the lenders' overloaded loss mitigation negotiators know that they have nearly four months before the property becomes part of their inventory after the Trustee sale and are not motivated. As the trustee sale gets nearer, the lenders, not wanting added foreclosure property added to their inventory become much more motivated to review offers and respond. Often, they will postpone the trustee sale if they are reviewing a valid short sale offer,
4. Do You Have Any Other Offers? How Are They Positioned and Presented? Know Your Position and Make Sure You're Offer if Presented Is Protected.
Many prospective buyers and investors will try writing low offers hoping to get good deals and listing agents take different approaches to presenting the offers to the lenders loss mitigation negotiators. Some present all offers to the bank as they come in. Others, present only one offer and hold the others in position. You want to make sure that you understand the agents' process. I suggest that you make sure that your offer is protected. If you have made a valid offer and in the first position, you want to make sure that your offer won't be bumped by another offer until you have received a response or counteroffer on your offer from the loss mitigation negotiator and have had an opportunity to respond. Remember, it's the listing agent's responsibility to get the best price for his client and to minimize the loss to the lender, so be prepared to negotiate and respond quickly. Know your top price before you write your offer. It's often better to be in a second or third position, since the ofer in first position gets the reponse from the lender and you may have an opportunity to modify your offer based on the lender's counter offer.
5. Was this an Owner Occupied Property or Investment Property? Banks Often Don't Consider Investment Properties Qualify as Hardships
Completing and closing a short sale is a long and difficult process but can be rewarding. Patience and diligence are required.