What You Need to Know Before Making an Offer
So you’re in the market to buy a home. You have done a ton of research online and you might have even talked to some real estate agents. If you live in Southwest Riverside County in Southern California almost all of the properties you have researched are bank owned or short sales. With so few options to choose from other than short sale or bank owned listings you might be wondering; is a short sale a good buy? Let’s look at some of the facts about short sales.
A short sale occurs when the lender(s) agree to accept less than what is owed on the mortgage balance(s) at the close of escrow. The mortgage balance not only includes the principal balance due but also any delinquencies, penalties, taxes, association fees and seller costs (if the seller can’t pay the mortgage their probably not going to have the cash to pay any of these associated costs).
So at this point you might be asking, “why would a lender agree to foot this bill?”. The reality is that lenders don’t want your house. They want the mortgage paid. As our current housing crisis has persisted the lenders have become overwhelmed with foreclosures and many are much more amenable to accepting a short sale offer in lieu of processing a foreclosure. There has also been added pressure from federal and state regulators to “work” with homeowners to find solutions short of a short sale. You put all of this together and soon begin to understand why so many of the listings are short sales. So back to our topic at hand; Is a Short Sale a Good Buy?
There are several factors that should be considered before making the plunge and writing an offer to buy a short sale property.
PRICE - Not all short sales close.
The Lender ultimately decides whether or not an offer is acceptable. If the price is perceived below market value by the lender the house won’t sell at all. The lender has no obligation at all to accept the highest offer or any offer for that matter. So before you make the plunge talk with your real estate professional to understand how the home is priced versus current market values.
MORTGAGE – How much is owed on the current mortgage(s).
Even if the home is priced at the current market value the lender(s) may not accept any offers. If there are multiple lenders the Junior Lien Holders will likely get only pennies on the dollar. If the mortgage balance(s) are too high relative to the offer price the lender(s) may simply choose to complete the foreclosure process. Knowing what the lender(s) stake to lose can help you avoid wasting time with properties that have little chance to close.
LISTING AGENT EXPERIENCE – Not all agents are the same.
Only the listing agent can talk to the bank (provided the owner has signed an AUTHORIZATION TO CONVEY AND RECEIVE INFORMATION). This means the buyer agent can’t talk to the bank. Negotiating with lenders to accept less than what is owed on a property is a difficult and time consuming process. You may be spinning your wheels making an offer on a short sale property listed by an agent that has little to no experience in negotiating acceptance with banks. Talk with your real estate agent and have them call the listing agent to get a better understanding of their knowledge and experience of the process. Better agents will steer you clear of deals that likely won’t close and help you find ones have a decent shot of going through escrow.
QUALIFICATIONS – Banks require extensive qualification for short sales.
Simply missing payments and becoming delinquent on the mortgage does not qualify a home owner for a short sale. Remember, the bank ultimately decides whether a short sale offer will be accepted. Making sure that the seller has met all of the qualifications and has provided all of the required documentation will ensure that you have the best chance at making it through close of escrow. An experienced real estate professional will make sure that the bank has received all required documentation whereas an inexperienced agent probably won’t even know what documentation is required. Have your real estate agent make sure the following documentation has been received from the seller and provided to the bank:
1. Hardship Letter
2. Tax Returns
3. W-2’s
4. Payroll stubs
5. Financial Statement
6. Bank Statements
OFFERS – How many offers have already been received.
Listing agents have a fiduciary responsibility to their client. You won’t be able to find out any of the details of offers that have been submitted but you should be able to find out how many you are up against. Your goal is beat the competition while making a good purchase, i.e. buy below market value. As more offers come in the price needed to beat the competition goes up. Knowing how many offers you’re up against will help you avoid getting into a bidding war or writing an offer that has to be so much higher than the asking price to be accepted that it may be higher than the current market value.
LISTING AGENT POLICY – Is the Bank going to see your offer.
A REALTOR® is required by REALTOR Code of Ethics to treat everybody fairly. Unfortunately not all real estate agents are REALTORS. There are many conditions of the purchase agreement that may impact the Banks decision about which offer to accept. Have your real estate agent talk with the listing agent and find out if they are submitting all offers received or only the offers they choose to submit. Knowing that your offer may not be submitted may be all you need to know to move on to the next property.
At this point you might be wondering how you are going to ever buy your next home. With all of the competition the limited supply of turn-key properties it’s easy to get frustrated with the process. Working with a professional REALTOR® can make a huge difference in your home buying experience. Your next dream home is out there. Do yourself a favor and search around for the right agent to represent you. The right agent will make your experience a lot less stressful and their knowledge and experience will help you avoid the many pitfalls of buying a home during this current economic climate.