August 2008
Community Paper
copyright ©2008 by Community Paper College Park, Inc. All rights reserved.

The Long and Short... of Buying Short Sales, Part II
by Mike Derenthal, Derenthal Realty Group and College Park resident

The Long and Short… of Buying Short Sales, Part II

Short sales. Oof!! They involve financial loss, bank bureaucracy, stagnant real estate markets, falling property values. What was I thinking when I decided to write a series of compelling, pleasant-to-read articles on this topic?!?! Apparently I wasn’t. This is about as pleasant as discussing increases in our property taxes. I’ll tackle that one next month.

Remember our first time buyers who had found a great short sale opportunity? They made an offer, and waited, and waited … It took almost three months before they knew if the bank was going to take their offer. They did proceed, and they did end up buying the home. But the process was gut wrenching. Many nights spent staring at the ceiling, wondering if they should be pursuing something else, or whether they should even try to buy a house right now in the first place.

But what does this process look like through the seller’s eyes? To understand that we need to travel back in time, several months before the buyers made their offer. [Cue harp music here…]

The first challenge for many sellers of a short sale is simply coming to grips with the fact that they don’t control their own destiny. A seller that is upside down on their house often has to spend some time paddling down that river called “da nile” before they realize that a short sale may in fact be their best case scenario. Keep in mind – a successful short sale prevents a home from going into foreclosure. While it is damaging to a seller’s credit score, it is considerably less damaging than a full-fledged foreclosure.

Once the seller has swallowed the short sale pill, the next step is to start working with the loss mitigation department at the bank. They say hell hath no fury like my wife scorned, but dealing with a bank’s loss mitigation department has to run a close second.

The loss mitigation department is charged with trying to minimize the bank’s losses on bad real estate loans. As you might imagine, most of these departments are staying quite busy these days. The bank is losing money on these deals, and a large part of what takes place during the long arduous process of a short sale is nothing more than the bank trying to make sure they’re not getting ripped off. Here’s how it typically unfolds…

As the seller’s broker, we first contact the bank and inform them that the seller is upside down in the home and has retained our brokerage to assist in getting it sold as a short sale.

Before the bank will discuss anything of significance with us, we must provide a written authorization from the seller that instructs the bank to talk to us. The bank will also want a letter from the seller explaining their hardship situation and the reason they are no longer able to maintain their financial obligations to the bank. Full financial records, including tax returns, pay stubs, and bank statements are often required. Keep in mind – the bank is tasking the seller with providing proof that they are financially incapable of hanging on to the property . If the bank thinks the seller is able to maintain their commitment, the bank will not agree to the short sale.

As this information is being organized and delivered to the bank, we have begun marketing the home. The bank will want to see that we have made a real effort to sell the home at a price that will allow full payoff of existing loans and transaction costs before the bank will consider any “short” offers. Different banks have different guidelines (and many banks have no guidelines) as to how long they want to see the home marketed at this price, but between 30 and 90 days is typical. Periodic price reductions are often necessary at this point to ultimately reach a tipping point at which buyers will then begin to submit offers on the property.

Once we begin to receive and submit offers to the bank, they will then require we submit a BPO, or broker’s price opinion (similar to an appraisal) that uses other recent solds in the area to justify the price that we are asking the bank to accept. If the bank finds the BPO acceptable, they will then hire their own appraiser to give them a full-fledged appraisal on the property before proceeding.

The bank then either accepts or rejects the offer, or sometime counters. In almost all cases, the banks will not disclose to any party the minimum amount they will accept for the property. This can be extremely frustrating for buyer and seller alike, but keep in mind – the bank is trying to minimize their losses as well.

Once we have bank acceptance, and assuming the buyer (remember them?) has stuck around through it all, the transaction starts to proceed in a fairly typical manner. How much time has passed? Well it often takes a buyer a good three months, sometimes longer, to get an answer on a short sale offer. But what about all the other stuff that was going on before the offer even showed up? From the seller’s perspective, it is not unusual for a short sale to proceed for well over six months before the property is sold. That can be a long time.

Is there a bright spot in all this? Yes. As short sales become more common, more realtors are becoming familiar with how the process works and this in itself can make a huge difference as to how smoothly a short sale proceeds. Another area of improvement has been the procedures and work flows of many of the loss mitigation departments. Most have been overwhelmed to this point but the larger banks are responding with more stream-lined procedures and less red tape. Ultimately, short sales are going to help clear inventory. The sooner that happens, the sooner we can anticipate a return to a more typical market. Hang in there…

Now, who wants to talk taxes?

Feel free to drop me an email at mike@derenthalrealty.com.

by: Mike Derenthal, Derenthal Realty, www.DerenthalRealty.com
1520 Edgewater Drive, Suite E, Orlando, FL 32804
407-965-1919

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