Phone: (623)693-6509
Fax: (623)218-9055
How Do Offers on Short Sales and Foreclosures Work?

Making an offer on a short sale or bank-owned home

Can be quite different from making an offer on a traditional property.  Although these often appear to be incredible deals when listed on the MLS, sometimes their asking price truly is too good to be true.  Low-priced foreclosures commonly invite multiple offers pushing the sales price well above asking. Also, short sales frequently have no bank approval to sell at the agent’s currently listed price for the property.  Therefore, even full price offers are met with counter offers.

So with these types of so-called bargains currently flooding our local market, how can you stay on top of things and know how and when to make acceptable offers?  By first, understanding how these transactions actually work, and secondly, by retaining me to help you decipher the deals and navigate your way through the process!

Foreclosures

Bank owned, REO (real estate owned) or foreclosed properties are all common terms that refer to homes whose ownership has reverted to the lender who financed the sale to a buyer who has now defaulted on their loan.   Because the bank does not want to retain long-term possession of these homes, they are often priced aggressively and present a great value to buyers.  What buyers must realize is that prior to being placed on the market, banks have obtained multiple appraisals or BPOs (broker’s price opinions) and have already priced the home below what they perceive to be its Fair Market Value.  Therefore, they are expecting to receive bids that are very near that price.  In many cases, these properties are priced so well that multiple offers will be submitted and the bank can be selective in the offer they accept.

So what are the keys to obtaining these properties?  Always be prepared to make offers quickly and at or near the asking price.  Make sure that you have documentation from your lender stating that you are pre-approved for a loan, or better yet, that you have the cash available to purchase.  Often, banks are willing to accept a cash price that is slightly lower and can close quickly, rather than wait and take the risk that a financed offer will fall through.  The more solid your offer appears, (i.e. large earnest deposit, cash, quick closing) the more probable a bank will be willing to accept.

Important things to keep in mind when making offers on bank owned properties are that the home is being sold “as is” and that because the bank never occupied the property, no disclosures or insurance claims history must be revealed to the purchaser.   Although you typically retain the right to inspect the property and cancel the deal for unacceptable findings, unless those findings include extraordinary items such as mold or termite intrusion, you will have to take responsibility for making repairs yourself.  Many times, even these types of conditions will not be corrected by the bank.

Also, disgruntled homeowners may have stripped the home of items they believe they are entitled to such as appliances, light fixtures and even more.  You should make sure that any items that are missing do not prohibit your lender from granting a loan on the property, and if they do, make sure the bank that currently owns the property will allow you access prior to closing to replace or repair the items required to obtain your loan.

Finally, remember that there may be more than one party involved in the decision making process.  Often bank officers and investors have scheduled meetings to discuss offers and no matter how big your rush, it could be several days before they respond.  Be patient and realize that getting a great deal is worth the wait!

Short Sales

If you thought bank-owned properties were tough, you may want to avoid short sales altogether!  These are no piece of cake, but if you have patience, and trust me to guide you in the right direction, short sales can present great opportunities for amazing deals.

This type of sale involves a property in which the seller currently owes more for the home than it is now worth (an upside down mortgage).  A short sale occurs when a lender is willing to accept a partial payment of the mortgage and allow the home to be sold to a new buyer.  Similar to a foreclosure, before the bank accepts an offer, it will perform multiple BPOs to determine the Fair Market Value of the home and will not be willing to take an amount that is drastically below that.  Typically, the remaining balance of the original mortgage is forgiven, but in some instances, a seller is required to sign a promissory note for a portion of the remaining balance before the sale can occur.  If the seller is unwilling to do so, then the short sale may fall through and the offer you made becomes obsolete.  This, however, is only one of many reasons that a short sale may not ultimately go through.

For a short sale to be considered by a bank or mortgage holder, a seller must be able to demonstrate that they have suffered a hardship and that they currently owe more than the home is worth.  A few examples of a hardship include: unemployment or reduced income, divorce, a medical emergency, a job transfer out of town, bankruptcy or death.

Just because a homeowner has become upside down on their mortgage and wants out of the property and situation does not mean they will be considered for a short sale by their lender.  Almost all lenders require documentation for the short sale to occur; this includes an explanation of the hardship, recent pay stubs, bank statements and tax returns.  If the seller has money available to help with the shortfall, then the bank will expect them to bring a portion of that money to the table.  If the seller is unwilling, then the short sale will not be approved and the lender will allow the home to foreclose.

A HUGE element to the short sale process in the state of Arizona is that we have an Anti-Deficiency Statute in place that protects homeowners who default on their loan.  According to Arizona Revised Statutes, Title 33, Section 729(A) and 814(G), a person may not be sued by his or her lender if their property forecloses and is located on 2.5 acres or less, is a single family residence or duplex, if the decrease in value is not due to the home owner's neglect, and if the money borrowed was used solely for the purchase of the home.  In September 2009, this law was revised (Section 33-814) to say that the owner must also have occupied the home for at least 6 consecutive months for this protection to apply.  Therefore, if the current lien holder on a short sale requires the seller of a home meeting these requirements to sign a promissory note for a remaining portion of a primary loan, then in most cases, the seller is better off to let the home foreclose.

However, a seller with a first and second mortgage loan or a HELOC (home equity line of credit) is a different story.  If money was borrowed against the property for something other than its purchase, a foreclosure does not protect the homeowner from the bank’s right to pursue repayment of the deficiency.  Therefore, homes with more than one loan are typically much tougher to get approved for a short sale.

When a homeowner has multiple loans and the current offer is less than what is owed to the primary lender, that lender typically makes a small offer to the holders of any subordinate liens to gain their acceptance of the short sale.  If the second lien holder is unwilling to accept this small payment, then again, that lender can either request that the homeowner sign a promissory note for the difference, or simply deny the short sale and allow the home to foreclose.  Often, secondary lien holders believe this is the better route to take because as long as the money was not used for purchase, they can pursue the homeowner for the deficiency after the foreclosure.

So what is important to know before making an offer on a short sale property?

First, because the seller is still in possession of the home, odds are it will appear to be in better condition than a home that has already foreclosed.   Be sure to read the MLS listing closely for items that will be removed or ask the seller to compile a list of any fixtures that will be taken prior to closing.  Just because the owners have not yet stripped the property, does not mean they don’t have an intention to do so.  In addition, understand that the home is being purchased “as is”.  The lender will not agree to pay for repairs on a short sale and the seller is already losing their home and is also unlikely to be willing to pay for repairs.

Second, keep in mind that initially, a short sale contract appears to be much like that of a traditional sale.   However, just because your Offer to Purchase is signed and accepted by the seller, does not mean that you have a valid contract and that the sale will go through at your offered price.  Although the seller signs the contract, there is additional wording in the Short Sale Addendum that says that the acceptance is subject to lender approval.   That approval may take weeks or even months to obtain or may not even come at all.
  
Third, listings that appear to be available on websites throughout the internet may actually only be accepting back-up offers.  Because, as I previously stated, the mortgage holder’s review period can be extremely long on short sale transactions, quite often initial offers that are made on these fall through or are cancelled prior to acceptance.  To compensate for this, seller’s agents often continue to solicit additional offers after the first one has been submitted to the bank.  Only direct access into MLS through a portal such as I can set up for you, can differentiate between a home with no current offers (Active) and a home that is currently accepting back-ups (Active with Contingencies).

Fourth, as bleak as all of this sounds, some short sales are simple and can close just as quickly as traditional sales!  They have pre-approved sales prices, the bank responds quickly to offers, and the homes are even in great condition or will offer a warranty.  Actually, as the government’s newHAFA (Home Affordable Foreclosure Alternative) program continues to be rolled out and many lenders begin to implement the program, more and more short sales will become simplified.

…Which leads me to the last and most important step you should take in making an offer on a short sale… Hire me to represent you!!!   My fees will be paid by the seller’s lender so there is absolutely no agent’s expense to you.  I know how to represent my clients in a short sale transaction and make sure that they are treated fairly.  I will research what banks currently have liens on the property (and I know from experience which ones are easy to work with).  I will find out the seller’s status in submitting the required documentation to the lender and if they truly have a verifiable hardship.  I will make sure that ONLY your offer is submitted to the bank and that any subsequent offers are subject to your approval of the bank’s terms.  I will obtain frequent updates on your offer and let you know what stage the bank is at in negotiating or accepting your terms.   I will decipher any special wording in the seller’s short sale addendums and let you know your liability in making an offer.  (This is a very important step because often there are clauses such as an obligation for you to pay penalties of $500-1000 or more for canceling your offer prior to the bank’s acceptance.)  In general, I will guarantee that you have the most information, protection and best representation possible.  I can’t promise that your offer will be accepted, but I can promise that your odds of getting the home that you want, at a price that you want, will be GREATLY increased!!!

One last note, because I have been asked this question so many times- no matter how many liens are currently attached to a property in short sale or foreclosure- be it tax liens, HOA liens or judgments for unpaid debt that is unrelated to the sale of the home- once you have acquired title to your Dream Home, it will be YOURS, free and clear of any debt of the prior owner!

Sitemap:

Realty One Group
Realty One Group
7975 N. Hayden Road Suite 101A • Scottsdale, AZ 85258
Phone: (623)693-6509 • Fax: (623)218-9055



Paradise ValleyCarefree