Short Sales- Secrets From the Inside

Know anyone who has experienced one?

14% of all San Luis Obispo County real estate

sales in 2011 were short sales.

Short Sale Definition

A real estate transaction, when a

lender accepts a payoff of less than

the amount due on their loan.

Short Sale Players

Seller

Lender

Real Estate Broker

The Seller

The Seller How did they get

from this …to this?

Typical Example

Year 2005 Smith Bought House for $500,000. $400,000 Loan $100,000 Downpayment 2007 Notices property value is decreasing, home worth $400,000 2011 Something happens. Lost job, divorce, job transfer, possible medical disaster. 2012 Decides to sell, can’t afford payments, property worth $300,000, puts up property for sale as short sale

Short Sale Math- Part 1

The Variables:

$500,000 Property Value in 2005

$425,000 Loan balance + back due payments+ legal

fees for foreclosure + unpaid interest,+

delinquent impound payments, etc.

$300,000 Property value in 2012

$290,000 Agreed-upon sale price with new buyer

$290,000 Sale price to new buyer

$29,000 Estimated closing costs: Title fees, escrow costs,

commissions, home repairs, etc.

$261,000 Net proceeds from sale to new buyer

So what is the Short?

$261,000 Net Proceeds from sale to new buyer

<less> 425,000 Balance due to Lender

<$164,000> SHORT

Bank take was $ .61 on the dollar

(They wrote off 39% of the amount due to them)

Seller Foreclosure Timing-

(or the short sale clock ticking)

1. Usually after several months with no payments, lender files NOD (Notice of Default). Could be sooner or later than this.

2. 90 days later, the lender files Notice of Trustees Sale. Sale date, time & location are made public record.

3. No sooner than 21 days later, the foreclosure sale can be held.

Seller Considerations

Include:

• Do we want to stay in house or move?

• Is there a hardship? Pay off the short if they have cash?

• Scams?

• When to stop making payments?

• Neighborhood impact of a short or distress sale?

• Shame? Embarrassment? Morality questions?

• What are credit, legal, and tax implications of our decision?

• Can a sale close in time to beat the foreclosure sale date?

The Buyer

The Market Conditions (according to buyers)

San Luis Obispo County Total Real Estate Inventory

Buyer Competition

Are short

properties

trashed?

The Short Sale Process for Buyers

Hurry Up… …and Wait

Offer Process for Buyers-

Can take 2-6 months A. Qualify with a lender and/or have cash to purchase

B. Find house & make offer

C. Buyer and seller negotiate offer, seller accepts offer, subject to lender approval

D. Agent submits offer package to bank: offer, seller financials, required forms (90+ pages)

E. Agent pursues approval with each lender and lienholder, sends updated paperwork as months progress.

F. Lender makes decision, additional lenders make decision

G. THEN in last 30-45 days Escrow opens, buyer’s deposit into escrow, buyer investigates property

H. Escrow closes, before the foreclosure sale date

Buyers- What can go wrong? • Low Rates, but lending standards are tight

• For new loan, appraisals can come in under price, lender may

not approve property

• Unexpected monthly expenses: property taxes at old value

• Buyer can be asked to kick in $ to deal for seller expenses

• Foreclosure sale comes too fast

• Lender can reject deal or stall, or even sell loan mid-transaction

• Agent not knowledgeable, doesn’t anticipate well

• Loans recorded on wrong property

• Hardship doubtful or unbelievable? Uncooperative sellers

• Sellers sometimes change their minds, due to tax/legal/debt

consequences

Should Some Buyers Avoid

Short Sales? Yes.

If moving truck is on the way

If completing a real estate exchange

The Lender

The Lender Players

Private Lenders, Not a Bank

Question: Are lenders a

party to the

transaction?

Answer: No

Lender Math Do we want the property back?

What will we get in a short sale vs. foreclosure?

Declining market vs. strengthening market?

Do we have the loan paperwork? Or none?

Is there a government incentive for us to complete the short sale?

Can the buyer close quickly? All cash?

Lender-

Who makes short sale decision?

Are there more liens

on property?

The Real Estate

Broker

The Real Estate Broker

The Lender

Real Estate Broker Reality

Listing broker must be director with the strategy,

and monitor information to parties.

Manage buyer expectations- if buyer’s agent

Manage seller expectations- if seller’s agent

Evaluate property conditions, motivate bank to

accept sale instead of foreclosing

Knowledgeable about current short sale matters

Defend against inexperienced agents.

Real Estate Brokers

(Dirty Secret #1)

In my experience, over 50% of active

agents have never touched a short

Real Estate Brokers

(Dirty Secret #2)

Most California agents that do short

sales have only closed 30%, the rest

went to foreclosure.

Real Estate Brokers

(Dirty Secret #3)

Many agents/brokers have lost their

own homes because they didn’t

understand short sale negotiation.

The Real Estate Broker as Seen

by Lender & Buyer & Seller at

Successful Close of Escrow

Short Sale Benefits Seller is relieved of

crippling debt and moves

on to better life, possibly

to buy a home in future

Lender avoids further loss

Buyer gets property at a

fair price

Davies Top 5 Tips

for Buyers

Or how to be a smart investor, with any

kind of sale, including short sales.

Tip #1

Know what can go wrong

Tip #2

Know the math

What does the seller and lender need to

make the deal be acceptable to them?

Tip #3

Be patient and flexible

Tip #4

Remember all sellers are in same

market conditions today

There are opportunities for

buyers in all types of transactions, not just

short sales.

Tip #5

Buy real estate. Because more estate building, sooner,

is better.

DaviesCo.com

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Short Sales- Secrets From the Inside

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