Monday, July 15, 2013

Should You Buy a Short Sale Home?

Although the number of short sale homes may be declining, the overall supply of listed homes is low. Potential home buyers must therefore consider the possibility of buying a short sale. What are the advantages, and what are the challenges?

A short sale property is one where the sales proceeds will not pay the underlying debt. The owner is underwater, and the lender(s) is (are) stuck. If the lender wants to get paid anything at all, it can either foreclose or consent to a short sale, which means it will settle for less than the mortgage.

As a rule, lenders hate foreclosing. By the time they've endured their own bureaucratic delays and stood through the foreclosure statutory waiting period, as much as three years may have elapsed, during which time they've been paid zilch. The home they take back is  nearly always trashed, sometime badly. It may even have squatters, which requires another legal process to get squatters out. The lender also has to deal with an asset manager, a specialized company which liquidates foreclosed properties, and still pay a full real estate commission.

How big a loss does a lender take if it forecloses? On average, around 35%. Sometimes it's less and sometimes it's more. But lenders have strong motives for allowing a short sale and taking a smaller loss.

Here are some challenges for buyers to endure and, if possible, overcome:

  1. A short sale home with one loan is rare. While they exist, expect the home to have a first trust deed, a second (often a home equity line of credit, called a HELOC), and a mortgage insurer. Sometimes, other debt may be involved, such as HOA fees, mechanics' liens, court judgments, etc. All of these creditors have to sign off on the short sale.
  2. The company you're dealing with on the first lien (mortgage) is usually the servicer, not the owner, of the loan. Wells Fargo, Bank of America, Chase and most others are active servicers on loans that aren't theirs. Yes, it can be confusing.
  3. The investor(s). Almost immediately after issuing a mortgage loan, the lender sells it off to an investor. Examples are Fannie Mae and Freddie Mac. But during the real estate froth ending in 2008, companies such as Goldman Sachs bought the loans, divided them into fractions and sold them to other investors such as pension funds, insurance companies, hedge funds, etc. all over the world. A single first mortgage could have dozens or hundreds or thousands of investors, and they all have to be satisfied.
  4. While short sale homes tend to be less trashed than foreclosures, they nearly all need work. Most of it is cosmetic, but it can add up. And owners are known for taking out the appliances before leaving. It all adds up to more cash the buyer needs to come up with. These items can affect the underwriting from the buyer's loan.
First mortgage loans that aren't Freddie Mac or Fannie Mae loans are generically referred to as "Treasury loans." When the U.S. Department of the Treasury issued its Home Affordable Foreclosure Alternative (HAFA) guidelines to expedite short sales, the program covered only treasury loans. It took Fannie Mae and Freddie Mac a while to come along, but they now have their own short sale guidelines (this was weird, because Freddie Mac administered HAFA but wasn't guided by it). VA and FHA loans have their own special protocols.

While it's not important for buyers to know these detailed rules, they should appreciate the work than needs to be done when the seller assembles a short sale package, usually a minimum of sixty-five pages long and often more. The listing agent does need to know them, and know them well, and if he or she doesn't, the sale could blow up at the last second.

The second lien holder, under HAFA, is allowed up to $6,000 for it's loan. This amount often translates to less than ten cents on the dollar. Second lien holders, as you might imagine, are less than enthused about agreeing to such a hit. But if the first lien holder forecloses on the home, the second lien holder usually gets nothing.

The mortgage insurer usually stays silent on its acceptance until the final seconds. Other lien holders'
 acceptance or rejection varies. Also, the Broker Price Opinion (BPO)--a kind of appraisal-lite servicers use--can add time.

How long can it take to get approval for a short sale? The olden days of two years and up are gone. Certainly, a few close in 30 days or so, but plan on waiting 60-90 days. If the process takes 120 days or more,my guess is there's a problem and you should move on.

Be prepared for the listing agent to not return your or your agent's phone calls. It's frustrating when this happens, but it does. When I was licensed, I found unprepared listing agents to be a major cause of failed short sales. It's to the buyer's advantage if the listing broker uses a short sale firm or negotiator, who are experts. Also, find out if the listing agent is using the Equator platform. Servicers and brokers handle protocols and communications online, here, and Equator offers links for buyers to check on the progress. You can also find short sale homes for sale on Equator.

Fannie Mae, through it's Homepath Program, offers fixup assistance and financing. Wells Fargo also offers help. The most reliable is the HUD 203k program, where borrowers can get enough to make the repairs but not complete them until after escrow closes. The 203k program is detailed, so be sure to use a lender who specialized in them as well as contractors who know the paperwork.

For all that, good deals are to be had. There's no set amount of savings, but a 10% - 20% savings below market isn't unreasonable to expect. With patience and understanding, a buyer could do herself a favor by buying a short sale home.

Questions or comments? Let me know!