Steven Keefe

Lenders in the current evironment in most instances are approving "Short Sales." A "Short Sale" is when the lender allows a homeowner to sell a property for less than the existing values of the loans against it, forgiving the difference.

As the number of homeowners in default on their mortgages began to rise over the last few years, troubled homeowners are now resorting to negotiating with lenders to take less than full payoff on their mortgage at closing.... and are getting the banks to go along with them.

The problem with "Short Sales" is that often they take significantly longer than a standard transaction an there is no assurance or guarantee that after the wait, the lender will approve the reduction in the payoff. This can leave buyers out in the cold after a long wait and potential expenditure of costs.

If done correctly, some of the concerns can be mitigated. There is a process that must be followed to effectively close a short sale transaction. Unfortunately, most real estat agents are not equipped with an understanding of the process which puts both buyers and sellers in jeopardy. My advice to anyone on either end of a short sale transaction is to ask the question of the broker involved... have you sucessfully closed a short sale and what is the process you follow. In a separate blog posting later today or tomorrow, I will provide a suggested process that will work. If your agent isn't following something similar, beware.

Under the short sale process lenders that have borrowers that are in default are ahead of the game because they do not have to take possession of the property and in turn go out and find a buyer. Industry averages show that lenders that accept a short sale are taking losses in the 19 to 20% range where homes that go through the foreclosure process yield 40% or more losses.

Mortgage companies are attempting to retool their loss mitigation departments to increase the efficiency of the process due to the anticipated numbers of short sale transactions. In many markets, homeowners owe more on their mortgages than the homes are worth. When this happens, often the only alternative available to sell the property is the short sale.

For additional information on the short sale process, or if you have questions, email me at steve@cbskyridge.com or contact me at my office.

What is a "Short Sale"?

A short sale is when a homeowner owes more than the property is currently worth at market rate. The bank(s) holding the trust deed(s) negotiate with the homeowner and accept a lesser amount than is owed, hence they are "short". (also referred to commonly as "upside down")

What are the basics in a short sale transaction?

A typical short sale involves many steps that are transparent to the buyer, but can take significant time. Approval of a short sale is dependent upon an agent representing the seller submitting a complete short sale package. That package contains information the bank will need to evaluate the offer and potential short fall. The first mistake often made is not preparing and organizing the required documentation in an effective manner. Generally, once the complete package has been received, it can take up to 2 weeks for a bank to assign a negotiator to evaluate the deal. If the basic criteria is met, the negotiator then assigns an independent agent, or appraiser to prepare a "Broker Price Opinion (BPO) to establish an independent value. This BPO is used by the bank to establish value and evaluate whether or not to accept the short fall. Once approved, the short sale lender will issue an approval letter to the homeowner/agents outlining the terms by which it will authorize the sale, along with the date by which escrow must close or the authorization may expire. A reasonable expectation with an agent who competently assembles the package and follows up with the lender(s) would be a 30 to 45 day addition to the normal escrow period. Any longer than this and something is wrong.

What kind of offer is going to be most acceptable to the bank? I really want this house!

The bank is interested in only one thing "the bottom line"... how much will go to the bank at the close of escrow. Part of the package submitted to the bank is a sellers net proceeds document which is generally prepared by the escrow company who is going to handle the transaction. This document clearly identifys all the fees involved in the transaction and the projected "net" to the bank. Banks are looking for clean deals. The cleaner the deal, the easier the approval process will be. The best kind of offer is a clean offer. No contingencies, minimal seller concessions. If the buyer needs to have the seller pay costs on their behalf, or if there are other required concessions, the deal may not happen.

How long can I really expect from the time I write the offer to the time we close?

Understand that there are two sometimes 3 approvals that must be obtained to close a short sale transaction. First the homeowner (seller) must approve the contract then the contract must be approved by the lender(s). If a seller has a first and a second on the property, both the first and second must approve. Even if the lender is the same for the first and second, an approval will be required for each loan because the first and second will be completely different departments. Keep in mind that there are factors outside of everyones control. Changes by the buyer and seller midstream can also affect the timeline. As said above, if done correctly 30 to 45 days more than a normal 30 day transaction is what should be expected.

What happens if the property is foreclosed upon? Is my offer protected?

No. Often if negotiated correctly the Broker can forstall the foreclosure process, but not in every instance. It happens frequently that the process is mishandled and too much time lapses and the lender forecloses on the property. If this happens any negotiated offers and agreements are voided. Even if they buyer has invested dollars inito the transaction, the transaction is void. This makes the communication process even more critical in that more than the opportunity to purchase the home can be lost.

Are short sales a good value? Would you buy one?

Yes, to both questions. Although the process can be extended, some of the best values in our market are currently being bought in this manner. It is important for both agents involved in the transaction to understand and be willing to implement the process. In order for a transaction of this type to happen, it must be a cooperative effort between all parties.

Where do I get more information about the process?

Contact me directly at steve@cbskyridge.com or contact me at my office at 909.336.2131. I have numerous agents who understand the process and can assist you in either selling a property using the short sale process, or purchasing a property that is a short sale.

The following chart shows all single family home sales reported to Rim Association of Realtors for the calendar year 2008 as of January 4, 2009

The following chart shows all single family home sales in the Crestline Market reported to Rim Association of Realtors, and Mountainlakes MLS for the calendar year 2008 as of January 4, 2009.

I did a recent study of our closed transactions, I looked at September, October, November and December to see where the buyers we represented came from. The following chart shows the percentage data. What this data tells me is that nearly 1/2 of the buyers that work with Coldwell Banker Sky Ridge Realty to buy homes found us through some relationship with the company or the agent. It is well documented that the single biggest strength of our organization is the wide reaching network that has been created by over 25 years of market leadership.

Other notable sources are our Kiosk location in Lake Arrowhead Village, Open House, and on the World Wide Web, we are able to source Realtor.com as most effective internet tool.