Nightmare on Elm St or Short Sales - why we hate 'em
Perhaps the biggest reason we avoid short sales like bad shellfish is that they are five times as much work, exponentially more frustrating and then we get a reduced commission for our trouble. If my buyer clients [link to IREC agency brochure] are dollar conscious and who isn't we will be seeing a lot of homes in various stages of forclosure and pre-foreclosure. I do what best serves my clients but when the short sale lender takes another offer the day before we are supposed to close it becomes decidedly un-fun for everyone and it's really not appropriate to then say "told ya so".
The problem lies with the short sale process itself from start to finish. The earlier we join the fun the more frustrating the whole thing will be. I delineate the mess into three distinct phases. First is a "Possible Short Sale". Next comes "In Foreclosure". If no offers are accepted then the property goes to foreclosure and becomes bank owned. I don't care for the acronym B/O so we'll call this last phase REO or real estate owned which is a common banking term along with TARP and Stress Test.
Here's the time line from missed payment to foreclosure. Let's assume the sellers acted on the problem and did not wait for the sheriff to break the front door down. They missed one, then two, then three payments. The lender has been sending them a series of nastigrams of escalating intensity. After about the third missed payment the lender finally records (file with the county) a Notice of Default which alerts junior lien holders that the wheels are about to come off. The clock starts ticking with the recording of the Notice of Trustee Sale and the home is officially in foreclosure.
In order to avoid foreclosure the sellers attempt to sell the home and negotiate an agreement with their lender (all banks are lenders but not all lenders are banks) to take the money and call it good. 120 days later the lender can foreclose if they have met certain conditions of proper notice etc. etc. The homeowner has 115 days from the NOTS date to pay up and reinstate his loan. Hold it. The title report shows an IRS lien! That means there is a 140 day window from the foreclosure sale date during which the IRS can give you your money back but not the cost of the new in-ground pool and ask you to kindly get the hell out.
S/S defined
Short sales were named from the lender's point of view. There is more owed against the home than it will net at sale and lenders must accept less than what is owed them. The homeowner cannot consummate a sale without the lender's permission.
S/S in the real world
There is nothing short about a short sale. They should be named long sales because they take longer than many buyers are willing to wait. Studies show that one third go all the way to foreclosure and many are doomed from the start. If there is more than one lien such as a equity line of credit, the odds go way up that it will be foreclosed upon. If there are more than two liens you might as well sit back and wait for it to go back to the bank. The tax man will get his first then the first secured creditor gets any remaining equity, the second gets theirs and on down the line.
I will never list another short sale unless it is a dear, dear friend or a direct family member. I educated myself on them only to serve my clients. They are awful. If you have a choice between buying a short sale and ANY other situation take the latter.
Foreclosures are a breeze by comparison. Val and I recently wrote an offer on behalf of buyer clients on a short sale property. It was listed for $134,900. We offered $134,900. After a week or more there had been no response. The seller's Realtor dug into it and we learned that our offer had been CHUCKED IN THE TRASH because the lender wanted $135,000. They s-canned our offer for $100 and didn't even counter. True story and I can prove it.
REO defined
Repo, Foreclosed, REO or Bank-Owned are all different names for the same beast. The borrower didn't pay, the home did not sell during the hellish short sale period nor did anyone step up to bid at the Trustee Sale. Renters are booted out, obligations are extinguished or cleared and the bank is now the seller.
REO's in the real world
Bankers are business people who have done this before and have a System. However, working with The System is like encountering a lumbering farm combine on a back country road. You slow down and move at their speed and look for a place to step on it. At least some of the Fed Billions apparently were spent staffing up to meet the demands of this distressed market and they usually close in 30-45 days. There will be a 15-20 page Corporate Addendum for you to sign which in effect says the property is where-is-as-is, buyer beware, don't even think about suing us for anything. The contract process is backasssward. I will be expected to initiate a Purchase and Sale Agreement, any Counter Offers and Addenda (not a typo) all without any seller signatures. There may be no final signatures until closing.
Theory of Three Tiers (I made this term up).
If you look up ten homes on the Ada County MLS about four of them will be in some stage of distress, either S/S or REO. The trend in Ada County is downward from slightly over half in March to 44% in April. If you are bargain hunting and looking for the best bang for your buck you are going to be viewing a lot of them. Sellers who are not in trouble (NITs) are listing middle-of-the-road homes well over $100 per square foot. My less than empirical view of the median home is something like this one [pic of home in Meridian]. At $80-90 sq ft we see homes listed as Possible Short Sales or In Foreclosure. Finally the bank takes it back and discounts an already discounted fair market price. And there you have your basic scream'in deal for under $75 per square foot. In other words you get the best bargains with REOS.
"Please remove your Shoes" What to expect when we open the front door.
NITs: Often owner occupied. More than likely well cared for and shows like it should.
S/S: Often vacant. Property condition falling off from acceptable to unkempt to disgusting. Spring brings all landscaping flaws into plain view and by summer neglected lawns are brown and weedy. Some agents are dialed into the process and have already established communication with someone farther up the IQ ladder at the bank. But many are babes in the woods and the odds are against a successful close. I always ask a series of questions of the seller's Realtor. If I get the wrong answers we move on.
REO's: Always vacant. Generally two scenarios
1. Appliances may have been stripped out [photo of classic range-ectomy] back door kicked in so the ex-owner could gain illegal access, brushed nickel lockset replaced with Home Cheapo brass knob [pic] that is a real pain to get open. Fist holes in the walls [pic]. (how do they always miss the studs?) Water and electricity turned off making inspections a nightmare. Dirt, grime and filth...you can't believe that people actually lived like that!
2. All major repairs done, interior cleaning and landscape service minimal but acceptable. Utilities on or can be turned on without undue delay and ripping of hair.
Plan on having all locks rekeyed and the garage remotes reprogrammed (if by some miracle they are still in the top kitchen drawer)
What to expect after we fire off an offer:
NIT sellers are not in a great hurry to sell and they know the market is soft. Some know they can sell low and buy bigger for less. Some really do need to sell and they think because they repapered the bathrooms and put 10k into a Koi pond that they will get all those dollars back. They are in for a drubbing and eventually either lower their expectations or give up. This market is tough on dreamers. Expect a prompt reply even if your offer is silly. They will execute all documents by the books. They will comport to most reasonable repairs suggested by the inspector. They will close as soon as humanly possible and be thrilled to be done with the showings and keeping the place spiffy. They get really tired of people disparaging the floral wallpaper.
S/S sellers: are stressed out, bummed out and you the buyer may be their salvation. The only reason anyone would put up with the hassle of a short sale is to preserve some shred of their already tattered credit score. A short sale will result in a loss of 80-100 points whereas a foreclosure will cause a 200-250 point hit to your score. If I am writing an offer I have already asked all the right questions and have determined that we are not tilting at windmills. If the seller's Realtor is on the ball and knows who to send the huge package of information off to, in triplicate, we might hear something back in a week. It might be four weeks to get a maybe. They may say "hey looks great!" and then lose it all. Everyone you have been talking to for weeks was just laid off. I'm not making this stuff up! If the other Realtor is not well versed I then dust off my S/S How To file and build the package myself.
REO sellers: picture some guy in a rumpled suite in a dim back room whose job it is to niggle every whining penny out of an already disastrous deal. Even though I write in "Buyer to pay appraisal", they add in, "Seller will not pay appraisal". Or they might pay the appraisal but most often not. They might not sign anything before closing. Their Corporate Addendum may violate numerous State Laws and may supersede our time and litigation tested Purchase and Sale Agreement. Or it might not. They use stamps for signatures and scribbles for initials. They cross things off original documents which is illegal and ignore all time constraints which makes any agreement voidable. They reiterate the obvious and belabor the pointless. 16 pages of the inevitable Corporate Addendum could be distilled down to the following sentence. "We, the buyers, waive the right to sue anyone for anything".
In most cases it is very simple. Offers within a secret percentage of the secret target price, contingent only on an inspection and financing will be considered. The Offer will be responded to in 3-5 business days, usually. We fill out their documents, sign off and wait for the home inspection results. If the results are untenable we walk. Never mind having the carpets cleaned and a screen door replaced. The bank may accept your offer including the $250 carpet cleaning allowance. Then at the closing table they say, "Oops. Forgot that part. Do you still wanna close today? They know you won't walk for $250. If we're lucky the bank might willingly pay for the appraisal but for everything else reduce your wishes to dollars going in.
Inspections:
On occasion a bank will fix a roof or repair a leak. They usually understand that cash buyers are rare and stupid people with cash are rarer still. Therefore there will be a lender involved and a roof that looks bad from the street is going to be an issue for whomever buys it. Put the the old lock set back on please? If you're lucky it's still laying on the entryway floor and the screws haven't been kicked down the floor vent. If the original sellers didn't pay the water bill the city will lien the home and cut service. To complete a proper inspection you need to fire up all the systems including the sprinklers. The water, gas and electric must be on. If there are past bills it could be an issue. Ya think? In winter this involves the services of a plumber coming and going. Now maybe you don't want to buy the mold infested fire trap any longer. Can you see a potential for some serious problems here folks? All those services have to be turned back off again. Believe me when I tell you that this scenario gets really old really fast. Think of the home inspection as a FYI and a baseline for future maintenance. If you don't like what you see, flee!
