Monday, April 6, 2009 - Article by: Lender411 Member
In one of my weekly newsletters I wrote about how you can streamline the short sale process.
I included information how to contact Counytywide's short sale department if you don't get an answer on a short sale within 45-60 days. If you need this information again, please contact me.
Someone posted this article online. Since then I have been getting emails from frustrated short sale buyers, all over the country, asking for my help. In each instance, the seller agreed to their short sale offer but the seller's bank has not responded to the offer.
In some of these emails, the offer is six months old or more.
Real estate agents that specialize in listing short sales estimate the chances of your short sale offer being accepted by the bank is between 10-35%. So, at best, you're likely to have slightly better than a one in three chance of that offer being accepted by the bank.
If you are serious about owning a home, and you want to be in that home in the next 90 days, you will want to consider avoiding short sale offers.
If you fall in love with a particular home and you understand that the odds are stacked against you and you don't need to move quickly, say in the next six months, then proceed. However, do so with caution.
Lenders have been slow to accept short sale offers. Accepting a short sale seems to make financial sense for them. Research shows that short sales losses for the bank typically result in a 20% loss. If the home goes into foreclosure, this results in a 40% loss.
For example, the bank has a note for $200,000 on a home. If they accept a short sale, on average, they will lose $40,000. If they let it go into foreclosure, which includes legal fees, maintenance, and more, they will lose $80,000.
The banks know this data. Although it makes financial sense, short sale acceptance is still about one in three, at best.
Here is how it works:
A short sale requires the approval of the buyer and the seller. The seller then has to go to his mortgage-servicing company for approval to go forward with a short sale.
One challenge is that the seller's loan has been packaged and sold into a security. A mortgage-backed security.
The mortgage servicing company then has to go to the actual investor of the security. This is where your seller's loan now resides. They need this investor's approval to allow this short sale. This is where the long delay occurs.
The investor has the final say on whether this short sale offer is accepted or not. This can take 30 to 180 days or longer.
A recent survey shows that it takes an average of four to five weeks to get an answer on a short sale. On average it takes less than two weeks to get an answer on a property that has already been foreclosed on.
It's very frustrating for many. Some agents today avoid showing their clients short sales.
I hear it all of the time. "Aaron, are these banks crazy?? I presented a fair short sale offer of $225,000 for this home. They rejected it. The home went into foreclosure three months later and is now listed for $175,000. It makes no sense!!!"
One agent I do business with recently told me he has represented over 25 short sale buyers in the last 12 months and has only had 2 offers actually accepted.
Why is this?? This is because a short sale is often more about the seller than your offer.
Investors will only approve short sales after they have determined there are absolutely no alternatives to keeping the seller in the home.
Their first goal, when you make your short sale offer, is to try and keep the seller in the home.
The seller is asked to send in a specific short sale package to have his request reviewed. Each bank has a very specific process for making short sale decisions. If this short sale package is not complete or done correctly, your offer will never make it through the process.
It's very important that you confirm with the seller that he has submitted a complete short sale package as requested by his bank. If he even withholds one item you may be facing a losing battle from the first day.
I recently worked with a buyer who had his short sale rejected by the bank after five months. He later found out that the seller refused to send the bank his bank statements. My buyer had no idea and held out hope for acceptance the entire time. He didn't have a chance because the seller was refusing important requests.
Among the items the bank will request from the seller is a hardship letter. A hardship letter is a letter from the seller explaining why he can no longer afford this home. A lot of weight is put on this letter. Some people ask their accountant or lawyer to write this letter for them. Successful short sale agents will tell you this is a bad idea. A handwritten, passionate letter is much more effective, according to these agents.
The bank is also going to ask the seller for current information on his finances.
Keep in mind, the seller is asking for debt forgiveness.
They review his hardship letter and financials closely. If they believe the seller has any chance at all of continuing to pay them, they are far less likely to accept your offer.
So let's walk thru it....
This Saturday, you go out looking at homes. You find your dream home. You can't live without it. It's a short sale. It's listed for $150,000.
You don't need to move for four to six months so you decide to proceed and take your 10 to 35% chance at a successful short sale purchase. You make a full list offer of $150,000.
The seller, Mr. Jones, accepts your offer. Mr. Jones then contacts his bank, Skytop Bank. He owes them $250,000 from his loan he took in 2006 but he is asking them to accept $150,000 today and forgive $100,000 in debt. That $150,000 is all the home is worth today.
Skytop Bank asks Mr. Jones for a hardship letter that details why he can't meet his financial obligation to them anymore. They also ask him for information about his assets and income.
Skytop Bank then contacts the investor of Mr. Jones' loan. The investor is Bank of Norway. Bank of Norway doesn't want to lose $100,000 so their first mission is to try and collect from Mr. Jones.
The acceptance of your short sale offer has less to do with your offer and more about Bank of Norway's determination to make Mr. Jones pay his original obligation.
Bank of Norway does their research. They review Mr. Jones' short sale package. They order an appraisal, talk to their agents, and discuss it with their loss prevention department. This takes them three months. They have a lot of these in today's times.
The appraisers at Bank of Norway determine your offer is fair at $150,000. That's all the home is worth today.
However, the loss mitigation department, at Bank of Norway, looks at Mr. Jones' most recent paycheck stubs. They see he makes $60,000 per year. When they gave Mr. Jones his loan three years ago, he made $57,000.
They look at Mr. Jones credit report. He has $1,000 in monthly obligations. When they gave him his loan three years ago, he had $1100 in monthly debt.
They look at Mr. Jones mortgage history. Before this year, he was never late. This year he missed one payment. He was late by a few days.
The guys at Bank of Norway decide that Mr. Jones can still afford this home. Four months after your offer, they reject it.
Although bank of Norway understands that this home may end up in foreclosure some day, they choose to go after Mr. Jones instead.
Loss mitigators will tell you banks usually make decisions based on today. They don't usually project what will happen six months from now when Mr. Jones goes into foreclosure.
The chances of your short sale offer increase based on the financial inability of your seller.
If your seller has a first and second mortgage on their home, the challenge becomes even greater. Now you have two investors to deal with. Both of who have to approve the short sale.
The reason why there are so many short sales today in our market is not only because of tough economic times but because more than half of the homes are upside in value. This means the seller owes more on his loan than his home is worth.
For many sellers, this is the reason they are short selling. This is not usually an acceptable reason for the investors. If the only reason for the hardship is the seller is upside down, you can likely expect rejection.
If you want to know your chances of success of having your short sale offer accepted, find out as much as you can about the financial state of the seller and his motivation for selling short.
If the seller is gainfully employed, has some liquid assets, is current on his mortgage, and is short selling simply because he is upset that his home has depreciated by $100,000 and he no longer wants to pay for $250,000 loan on a home worth $150,000, your odds decrease as a buyer.
If the seller lost his job, is going through a divorce, is in bankruptcy, is two payments behind on his mortgage, and has recently lost his car, your odds increase.
Here are some questions I would ask the seller, if he will answer:
"Why are you short selling?"
If the answer is financial disaster, like a layoff or demotion, relocation to another city, death of a spouse who shared financial responsibility, illness, and other unexpected catastrophes that cause financial ruin, the chances of acceptance improve. If the answer is "my home is worth $100,000 less than I paid for it" or "the market crashed," your chances decrease.
"Are you financially solvent?"
If the seller has assets, your chances decrease.
"How much income do you make in relation to the house payment?
If the house payment seems doable on his current income, your chances decrease.
Didn't find the answer you wanted? Ask one of your own.