Short Sale Secrets Most Realtors (and Banks) Will Never Tell You
Short sales have become a recurring theme in my recent posts, but for good reason. Almost half of the homes for sale in the Denver Metro MLS are distressed, meaning a foreclosure or a short sale.
For Buyers
1. The List Price is Arbitrary –The list price on a new short sale is almost always based on the listing agent’s best guess at what will (1) attract an offer and (2) the bank will approve. When you see that new listing or price reduction with a price that is so low you think it’s a typo, it doesn’t mean the bank will actually approve it for that price. Often, this is done to get an offer FAST.
2. Not All Offers Get Submitted (or even presented to the seller) – You have heard of the term “gatekeeper”? Well, the Listing Agent is the gatekeeper in a short sale. Yes, legally the agent must present all offers to the seller, but not all agents do. It’s not right (and is even illegal), but some agents wait until they find their own buyer to double end the deal and then have their owner/seller accept that offer. Shady? Yes. Does it happen? Unfortunately yes. Make sure your buyer agent is barking up the right tree to confirm your offer is presented. However, at the end of the day, if the gatekeeper doesn’t want to go with your offer, it’s just not gonna happen.
3. Cash Is King – As noted above, in Colorado, the listing agent and the seller determine which offer to accept and send to the bank for short sale approval. Many times a lower cash offer will be accepted in favor or a higher financed offer. Why? Because there is a lessor chance of the deal falling out. If the seller and agent believe the offer is still within range that the bank will accept, they would prefer to go through all the hoops only once with one offer instead of a 3 month ordeal to get an offer approved, and then the buyer can’t qualify for a loan and they start all over.
For Sellers
1. The Owner Is Still The Boss (not the bank) – When an offer comes in, YOU DON”T HAVE TO ACCEPT IT! You can treat it like a normal sale and reject it, counter it, or accept it. Often, when I receive an offer on one of my short sale listings, we counter it. We take out inclusions like refrigerator, washer & dryer, etc. We move up dates for inspection, appraisal, closing, etc. Everything is still negotiable just like a normal sale and only once you and the buyer have accepted/signed a final contract or counter does it become a binding contract and get submitted to your mortgage holder for approval. The banks are notorious for playing hardball, but you Mr & Mrs Seller still have control in what offer, terms, inclusions, etc that you will accept.
2. It’s Based on Hardship, Not Being Underwater – When a bank reviews the offer submitted above and determines if they will approve it/counter it/etc….they are really looking at the seller’s financial hardship. They want to know with certainty that the seller does not have other alternatives based on their financial situation. Just because someone is under water and owes more than it will sell for is not the main reason a bank will approve a short sale. It is based on a valid hardship as to why a short sale is necessary for the owner.
3. Your Debt Isn’t Always Forgiven – It pains me to write this one, but not all short sales forgive the amount owed. If you owe $300k and the bank gets $250k from the sale, many people assume that the bank will write off that $50k as bad debt. Well, nowadays banks are sometimes asking for the seller to bring a % of that to closing. Some are also asking the seller to sign a promissory note for the % of that deficiency and make monthly payments after closing. Does it happen a lot? No. But it does happen sometimes, and often on a non-owner occupied short sale (investment property). These terms are not known until the short sale has been reviewed and approved by the bank. They will send an approval letter outlining the terms. If you (the seller) don’t like the terms, YES you can negotiate to get more favorable terms…and NO…you don’t have to go through with the sale if you can’t get terms that you like.
4. It’s Not Always Best To Accept The Highest Offer – Sounds silly but here’s why (from a real life example I had) We received an offer on a short sale listing, accepted it, and sent it to the bank for short sale approval. We received approval on it, but at the same time, received two other offers that were both higher than the first. We then called for a “highest and best” from all offers, meaning they all give us their best and final offer and we would determine which we would go with. One of the subsequent offers gave us a highest and best higher than the first was willing to increase to. We kicked out the first offer and submitted this new higher offer to the bank. The bank now approved that higher price. Life is good right? Wrong. We told the winning offer they are approved and those buyers got impatient and bought another home. Neither of the other offers were willing to increase their offer to the new approved price so I told the bank we need to re-issue the approval on the lower priced offer we initially had. Guess what they said? NO!
Why did this happen. Once the bank sees an offer price, they feel that is what the home is worth. If that high offer price falls out and no other buyer will pay that much, you are stuck because the bank thinks the home is worth the higher price and won’t approve a lower price until MONTHS go by and the home fails to sell at the higher price they want.
What’s the moral to this one….I may get in trouble for saying this….but sending in the highest offer is not always the best strategy for a seller. Many buyers on short sales get impatient and often the first buyers walk away before you have approval. So, the offer you submit should be at a price that, if approved, you are confident another buyer will be willing to pay too.
5. Submitting More Offers To The Bank is Not Better – There are several reasons for this. First, See#4 above. Second, the bank then feels it’s a highly competitive property and they negotiate harder with both the buyer AND seller on terms of the short sale. Third, you want the bank to focus on one offer and take it from start to finish with approval. Every time a new offer is submitted to the bank they start the 60-90 day process over and these are the stories you hear about short sales taking a year or longer for approval.
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