Let us describe the pitfalls of short sales:
Hi this is Daniel for DROdio. I'm in the car driving to see a client who wants to buy or view a short sale property, actually several shorts sales. He wants to see four properties, three of them are short sales and one is a foreclosure, REO, banked owned property.
So I'd like to tell everybody who's either listening or watching this or reading this kind of what the dangers of short sales are, because I have just seen the number of short sales absolutely explode in our marketplace in the Washington D.C. area. I don't think it's going to be down anytime soon.
The first thing you need to know is what the difference is between a short sale and a bank owned property commonly referred to as an REO or foreclosure property. REO just stands for Real Estate Owned. It's just a fancy way of saying that the bank owns the property. So there's basically, you know, two types of distressed properties, there's short sales and there's REO's. I'm not going to go into a lot of detail about the differences except to say, because I've talked about that in previous posts, except to say that in a short sale the owner still owns the property and in a bank foreclosure, REO sale, the bank has already foreclosed on the seller and now the bank is trying to own the property.
I love REO's. REO's are great for several reasons. The banks respond quickly to all offers within a couple of days usually. They are very motivated to sell the properties. So you can typically get a very good deal on an REO. As much as I love REO's I just absolutely deplore short sales for many reasons and I'll tell you about those in this post. First let me explain what happens when a short sale occurs. The seller of a property typically purchased it for more than the property was worth and for whatever reason the seller has to now sell the property for less than he owes the bank. Now usually that's because his mortgage has adjusted, maybe the seller has an ARM, Adjustable Rate Mortgage, where the initial payment was very low, but now the payment has gone up substantially and the seller can no longer make his payments. But that's not necessarily the case, it doesn't have to be the case.
There are also instances where the seller might just have to move and he has been making his mortgage payments, but he owes more on the property than the property is now worth. And so it's an important thing to know that not being able to pay your mortgage typically goes hand and hand with a short sale, but it's not a requirement of a short sale. But it's important, because when you're not paying mortgage the bank typically forecloses within seventy to a hundred and ten days of you missing your first mortgage payment.
So one of the first big problems with short sales is that the property may be foreclosed on while you have an offer pending. So if you as a buyer put an offer on a short sale and you're able to get it approved by the bank you might have a contract pending and then the bank forecloses and the contract is voided out. Which makes no sense, because the whole reason the bank is foreclosing on the seller is to try to get a new owner in there and you would think the banks would be smart enough not to foreclose on people that had offers pending. But I'll tell you we sell foreclosure properties for the nation's largest bank and we see it happen all the time. Where we contact the seller, we have to kick the seller out of his house and the seller says, hold on a second, I've got a ratified contract with a buyer and we have to say, I'm sorry the bank has foreclosed on your property. So while I'm sure as this process gets more efficient banks will be getting better at not foreclosing on properties that have pending offers. That's not yet the case and it still happens.
So the main reason that I really dislike short sales is just because it's a bad deal for the buyer in many ways. And the example that I just gave was where you as a buyer miraculously get an offer approved for a short sale and the bank forecloses on the property and you're offer is voided out. So that's one problem with short sales. Another big problem with short sales is that they take a long time to approve. What happens is the seller has to send the offer to the bank, because the seller just can't sell the property the bank has to approve the offer, because the bank's taking a haircut.
There's a truck next to me by the way so if it's a little loud that's why. I apologize.
So the bank's taking a haircut on the property and the bank therefore has to approve the offer before the offer can be ratified, that takes typically at a minimum three weeks and it takes up to three months for a bank to approve the offer. Why does it take so long? Because especially if there's a first trust, meaning a first lien or first loan and a second trust on the property and if those trusts are held through different banking institutions, the second trust is the one who gets wiped out on a short sale and the second trust doesn't want to be the only one who takes the hit so the second trust makes the first bank share the pain. And the banks argue back and forth about who's going to pay, how much of the haircut or the discount that has to be taken to sell this property. And it's just honestly a complete mess. The banks are not very good at working these things out as of, you know, the Spring of 2008, I'm sure they'll get better at it. But right now it just takes a long time for the banks to come to an agreement and therefore as a buyer, you know, your weapon as a buyer, your main tool is being able to be quick. Is being able to put in multiple lowball offers.
For example, we have an entire strategy built around the ability for you to just put offers in on five or ten properties in sequence with quick expiration dates to find that seller who has, you know, who really has to sell. Well that complete strategy breaks down when you're dealing with shorts sales, because you're on hold for six weeks waiting to hear back from the bank. So that really is a big negative to short sales. Another big issue with short sales is that these sellers have to get a hardship letter out to the bank explaining why they are suddenly unable to afford their property and the bank compares the seller's finances with what the seller said his finances were when he bought the property and if those don't match up the bank is going to go after the seller, because the seller was essentially not being honest or truthful when he originally bought the property. So if the seller's financial situation is not what he represented to be when he bought the property the seller's going to be in a world of trouble and hurt and very possibly legal trouble for being dishonest when he bought the property. And that just introduces another layer of complexities into short sales.
Another issue for example, if the seller has a nice car the bank is going to force the seller to sell that car before the bank is going to approve a short sale. The bank's not going to take a hundred thousand dollar haircut on a property only to have the seller go around driving a Lexus. So there's this whole other, you know, side of short sales where the seller has to either share in the pain and divest themselves of a number of assets or prove to the bank that he just has nothing left and that takes time. So for all these reasons I just really, really, really dislike short sales. And you know another just kind of F.Y.I. is the market has really been heating up in the D.C. area, meaning Virginia, D.C. and Maryland since about February or March. We are seeing multiple offers on every single type of asset under four hundred thousand dollars, even short sales. So just to add insult to injury, not only are short sales pretty much impossible to successfully transact, but to make it even harder you're competing with other buyers these short sale properties.Well if you're going to compete with other buyers you might as well compete on a property that you know you have a chance of winning, whether it's an REO property or just a regular typical old fashioned sale where a seller is selling his property. So those are my thoughts on short sales.
If you have any thoughts, we're going to transcribe this audio blog into written form then we're going to post it on our blog, FAQ advice page. Please feel free to give me your thoughts as well. You can reach me any time on my cell phone. call us toll free at (800) 705-2782, or locally at (703) 888-1505.
We are a technology progressive real estate company based in Alexandria, Virginia. I look forward to hearing your comments about short sales. Thank you.