Short Sale Senario in March 2012

It is mid-March and I am thinking, “Where did February go?”  I only managed to get three posts written and the last one was mid month.  I have not been vacationing or slacking – the real estate market in Sonoma County is on fire.

A great deal of my time these days is handling short sales – both as a buying agent and as a listing agent.  I get many questions about short sales and think it is time to write a primer for the uninitiated.

What is a short sale?   A short sale occurs when a home is sold that the sales price of the home is lower than the loans secured by that home.  In most cases today, the lien holders, usually banks, agree to take less money than they are owed instead of foreclosing on the home.  But the banks will do this only if they cannot get all of the money from the borrower.  The banks require a hardship and proof that the borrower cannot pay the loan amount.  If the borrower has sufficient assets to pay the loan down to where the sale will cover the loan, the bank will require payment in full.

How long does it take to get a short sale approved?  That depends.  And I really cannot tell you what it depends upon.  I have had a short sale approved in days and I have had one take over a year.  I recently heard that the average time for approval by the lenders on a short sale is three months.

Why does it take so long?   To the best of my knowledge, the process for a short sale starts either when the property is listed for sale or when an offer is accepted.  Different lenders have different guidelines as to if an offer is needed before they will accept a file.  If they do not accept files prior to receiving an offer, the process just starts later.  Once there is a file, it is put in a pile to be assigned to a loss mitigation officer.  This can take weeks.  Once it is assigned,  the loss mitigation officer examines the seller’s financial information and reviews the “hardship” letter.  Add at least a few more weeks for this to happen.  Most of these folks have hundreds of files on their desks so the first one in is the one they are working on.  If the seller is accepted as a short sale candidate, the file is passed on to someone else in the bank.  Again, it goes to the bottom of the pile.  When the file surfaces to the top, an appraisal is ordered which can take another few weeks.  The bank determines what they are willing to accept (this seems to go rather quickly) if it is the same person but if it goes to another department, it can take time to get to the top of the pile.  At some point during this process, the listing agent works with the escrow company to determine what the net proceeds will be based upon the offer accepted by the seller.  The document the escrow officer prepares is called a HUD-1.  The listing agent then prepares a package that includes the offer, the HUD-1, the seller’s financial information (updated), the buyer’s proof of funds to purchase and whatever specialized forms that lender may use including some government forms.  At this point, an acceptance can be issued.  After all of this waiting, the lender asks that closing happen in 30 to 40 days.  If there is a second lien, the whole process may need to be repeated with the second lender.

Why would I want to do this?  Good question.  With short sales becoming the preference over foreclosures, more and more homes are being sold short.  You may not be able to find the home you desire without considering a short sale property.  One benefit of purchases from an owner (other than from a bank after foreclosure) is that the seller must provide information on the home i.e. repairs made, nuisances in the neighborhood.  Banks are not required to provide this information.  There was a time that short sales were considerably lower priced than other sales but that differentiation has gone away.  Today the varying factor is the condition of the property.  Some short sale properties have not been maintained due to the financial hardship of the seller.  In those cases, you will find that the lower price is often below the amount it would cost to bring the property up to good condition.  This is why there is an active business of purchasing and remodeling homes – flipping is what it is called.

Who is the best buyer for a short sale?  The ideal short sale buyer is patient, can move quickly when the bank says to move and can is comfortable with not knowing what is going on.  If you are that person, you can have a great transaction.

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