Tara Phelps

Searched the MLS for a house? Then you've likely seen the phrase... "Short Sale Approved". The implication is that the seller's mortgage holder has approved the sale of the home at the asking price. While some listing agents may lead you to believe this, the truth is that short sale deals are complex and are only "approved" under certain conditions. Practically speaking, there are really no short cuts when it comes to purchasing a short sale home. However, having a basic understanding of the short sale transaction process can certainly expedite the transaction and keep you from being involved in a questionable deal.

In a short sale transaction, the Agreement and Offer to Purchase is with the owner of the home. To start the short sale process the executed Purchase Agreement, along with substantial documentation from the seller is then submitted to the seller's mortgage holder. This officially, is the beginning of the negotiation process. The bank, because they are taking a loss, will determine what they are willing to accept. (We have found that how much that may be often depends on the loss mitigation rep from the bank, but that's a subject for another article.) Once an agreed price has been negotiated, the bank will then issue an Approval Letter outlining the price, the time to close escrow, and any additional terms. THEN, and ONLY THEN is the deal technically "APPROVED."

So you may be thinking, but if a sale is only "APPROVED" AFTER an offer has been submitted by a buyer and approved by the bank, how can a property be advertised as "Short Sale Approved" if it just came on the market?

Well, it seems that the de facto standard is to market the property as "Short Sale Approved" if there was once an offer that the bank accepted and approved with a prior buyer, that didn't work out. So, the underlying assumption is that since the bank was willing to take the prior offer, that another offer of the approved amount will be easily be "approved" or accepted by the bank.

The TRUTH about the short sale process is that each new offer is mutually exclusive from any prior offer submitted. While the prior "approved" price may serve as a guide for future offers, the bank will often consider offers that are less than one before. One example is a deal we recently acquired, where the agent had previously gotten approval from the lender at $900,000 in March. Unfortunately that deal did not close. But 3 months later, when we picked it up as the new buyer, after a new round of negotiations the bank accepted $845,000. We never assume that just because an old price was accepted that this must be the only price the bank is willing to accept. In this case, our lack of assumptions saved $55,000.

Short sales can be a lengthy and arduous process. Unfortunately, in this market there are agents, who likely out of frustration have turned to tactics that breach both ethics and standards. One that we run into quite frequently is the concept of submitting deals with a "straw buyer." This is where the listing agent or the seller may work with a "friend" who is willing to put an offer into the bank, not with the real intention of purchasing it, but for the purpose of determining how much the bank will really accept for the property. The fact is that this process is form of fraud. But, unfortunately, it is not at all uncommon.

Another scam we discovered came when we recently submitted an offer. Apparently, the listing broker took our offer and submitted it to the bank without even presenting it to the seller. When we held a conference call to clarify our offer, the broker explained to us that they went to the bank first, to "make sure we don't waste anyone's time." Again, this process is also a form of fraud and likely a breach of contract. (Obviously, we immediately withdrew our offer.) It's not hard to see how an uneducated person may easily think that these "short cuts" may be saving them time. But, unknowingly they could be walking into a deal that could leave them legally exposed.

As a short sale investor, we see the phrase "Short Sale Approved" as marketing hype. Experience has taught us that there are no real short cuts when it comes to short sale transactions. We can only bring to the table our commitment and cash and hope that the bank will work with us to get the deal "Approved."

As a short sale investor, our company is often approached by agents and brokers who wish to work with us, claiming to be "certified experts" in short sales, foreclosures, or distressed properties. The term "expert" means many different things to different people. It has often been my experience that being "certified" or making the claim of "expert" has little to do with having an in depth understanding of the nuances, complexities, or patience it requires to work with short sales or REOs. This is especially true with agents who struggle to understand these deals from an investor's point of view.

At last count, with a simple Google search, anyone can find hundreds of different programs to become "certified" in distressed property sales. I won't attempt to debate here which programs are better than others or even which of these is recognized as valid in the Realtor community. I can only share that many agent friends of mine readily admit that simply attending a course for a few hours or a couple of days and then receiving a certificate or credentials that allow the use of initials or acronyms after their title, doesn't prepare them for the realistic trials, obstacles, or sophistication of these transactions. A few even admit that the information being provided at these events is dated or outright wrong.

From my (and my investor colleagues') perspective, certifications have little to do with whether we elect to work with an agent. What matters is whether they can collaborate with us in the following ways:

1.) Can they understand our business model? And, can they work with it?

2.) Do they have an in-depth understanding of their local market?

3.) Based on our criteria can they locate potential properties for us to purchase?

4.) Can they maintain their patience and perseverance throughout the entire transaction?

I understand that the present real estate market has changed and support the idea that agents should have a basic education and nomenclature in distressed properties transactions. But labeling education as "certified" (in some cases) is a misleading marketing ploy and not appropriate. Maybe "certification" should be a matter of the numbers of deals completed, commissions earned, or the degree to which an agent can collaborate with their team. Bottom line, our view of the criteria that makes an agent an "expert" or "certified" is whether they have the experience, business acumen, and network savvy to put together and close deals! These are always the people we look to work with.

What is it that makes investors so undesirable to work with? Over the last week I've spoken with a number of friends who shared with me their struggles with working with agents who fail to understand what and how we do what we do. Stories ranged from agents who were very collaborative to others that were down-right hostile. Developing a good relationship with agents requires a bit of understanding, business acumen, and collaboration.

Let me state the obvious, as an investor I am interested in doing a real estate transaction that nets me a profit. It is not unlike you, the agent, who is expecting to receive a commission on a deal. Right? What we are both looking to do is successfully complete a transaction that solves problems and as a result makes us some money. Done right, this is a team effort. I rely on the knowledge and understanding of the market by my agents, and what they can rely upon me from me is to put the cash on the table and close the deal.

Not all investors are out to "screw" someone. The media does a good job at reporting and promoting real estate fraud and schemes that amounted to millions of dollars in losses, often for homeowners or lenders. While the word "investor" is often used in these stories a better word should be "crooks!" When you dig into these stories what you find is that legitimate business folks, at some point got greedy, and clearly engaged in illegal activities with the intent to deceive the parties in the transactions for their own benefit. While many agents can cut through the media dogma, many still see us as a threat based on misperceptions.

"I've got a deal!..." said the agent. But what they really meant was "I've got a short sale that is 2 days away from the trustee sale date", or "I've priced the property significantly under market to generate activity, but the price will not likely be something the bank will accept", or "I'm just frustrated and am having a tough time managing my seller." I can appreciate that some deals can be a challenge, but bringing us an opportunity that has been mismanaged or not carefully qualified is not the best way to develop a relationship with an investor. We like to collaborate and design creative solutions. The best relationships I have are with agents who understand my business needs, the guidelines for my investments, and carefully screen the deal prior to presenting it to me.

It is my opinion that some agents can have an exceptionally good relationship with an investor. I know this because I have a few awesome agents I work with. This, however is more the exception than the rule. Creating a great team is about relationship building and cooperation. The question is "Are there any agents out there that WANT to work with me? I am an investor."

As an investor in short sale properties, I work with agents and brokers every day and I get a lot of questions about my criteria is for a great investment property. While it is important that the deal has potential profit, I find that there are four issues that truly drive the best investment deals. These are primarily matters of business that tend to be overlooked in the rush to put together a deal. We all recognize that working on short sales can try our patience, but remembering some of these key elements can make the difference between a successful deal and one that falls apart.

1. Qualify your seller

As a part of our investor due diligence practice, we take the time to investigate whether or not the transaction is a good candidate for a successful deal. If we put in an offer, we are committing our time, energy and resources into the deal with the vested interest in seeing it through. We ask, in return, that the agent do their part to assure that the seller really does intend to proceed with the short sale. To have reasonable assurance, this requires screening the seller to determine whether they have consulted with their advisors such as an attorney or CPA regarding their options for bankruptcy or foreclosure.

2. Be prepared for the offer price

This is an issue that many of the agents and brokers who work traditional retail value sales may not understand about investors. As an investor, we are looking for an unusual bargain. We are looking to acquire the property at a wholesale or distressed value. This may be as much as 50-60% of the full retail market value, but typically is 15-20% of the distressed value of the property. We look at deals as business transactions, with the intention of making a profit based on our efforts. Neither you, nor your client should be insulted by our price. We understand that listing agents are in the business to ascertain the highest and best price, and by all means, if another buyer steps forward with a better deal, then your seller should take it. But if the time frame or situation dictate, our offer may be better than the alternatives.

3. Organize your paperwork

One of the biggest ways to extend or kill a deal is delivering an incomplete short sale package to a lender. Often I am brought a deal that has been in negotiations a couple times with buyers, but come to find out that the agent has been providing the lender with "piece-meal" paperwork, one or two documents at a time. As an investor, our first impression with the lender is the short sale package that is submitted. This is a huge factor in our negotiations. With a completed package, it puts the loss mitigator on notice that we are a professional organization and are prepared to do business. Before you ask us to look at a deal, be sure you have your paperwork organized and have advised the seller that they need to have all their paperwork ready to go.

4. Have patience

Short sale deals take time! While banks have been trying to improve their systems, it seems that the average deal still takes 3 to 4 months. As an investor, we will not "walk" from a deal just because it is taking a long time. But keep in mind that the negotiations may be a bit more intense. It is not unusual to have a couple of rounds of offer versus counter offer with the bank. This is normal. We are seeking the best price. We are confident in our strategy as it has been proven time and time again. We ask that you and your client have patience in this process.