Short Sale Buyer’s Guide

Short Sale Buyer’s Guide

“As we head into the winter of 2013-14, I believe that short sales are an especially good opportunity to buy at below market, if you can find short sales to buy.”  - Mike

Definition:

A short sale occurs when the total net proceeds from the sale are insufficient to pay all the debt secured by that property. (most commonly, the mortgages) Example, The home has a mortgage of $650,000, but in today’s market the highest offer the sellers gets is $550,000. The bank agrees to be paid back “short” and lets the sale go through.

Drawbacks for buyers:

You have to wait…and wait…and then wait some more. Don’t make an offer on a short sale unless you are prepared to wait 6 months or more before you own the property.

At the end of the wait, the price can change. Since the bank is not being paid in full, they have to approve the price and other terms of the sale. You don’t really know for sure what you are paying till you have the approval letter in your hand. However, if the bank changes the price, you can walk away or counter offer. There is no penalty to you.

Benefits for buyers:

Sometimes you can get a ridiculously good deal. The banks can be very inconsistent in their valuations, both high and low.  If they come back high, you can always walk away.   If they agree with your price, you say, “Thank you very much,” and put that money in your pocket.

The wait period works for you in an appreciating market. While the bank spends months processing the short sale, you have the property tied up with no risk and no "skin in the game." You can often get the property at last year's prices. 

There is also typically less competition for short sales and you may find yourself in the running for properties that would be out of your reach as a “normal sale.”

How to proceed

Use an experienced short sale agent. You need a savvy agent in your corner.  I have been involved with roughly 40 short sales over the last 6 years, usually on the seller side.  Believe me, they are definitely more complicated.

Offer strategy is important. Your agent must communicate to sellers’ agent that you are flexible and on their side. Sellers and their agents are under extreme pressure, dealing with a complicated, sometimes random, bureaucratic process with foreclosure staring them in the face. As long as you are getting a good deal, let them know you will do everything you can to make their job easier. 

Are you following me here? Price is not the seller’s primary concern. They just want an offer the bank will approve so they can get on with their life. The sellers get nothing, regardless of the price. 

If you need to pay for a month or 2 back HOA dues or a short sale negotiation fee or any other random item the short sale bank won’t approve, let the seller’s agent know you are open to that, as long as your bottom line still works for you. Again, you need an experienced agent to figure out the lowest price the bank is likely to accept. Low purchase price is where you make your money.

What to expect

60 to 90 days after your offer is submitted you will usually have an answer in the form of the approval letter which spells out the terms of the sale. Wait time is over and hurry up mode begins.  Most often they want you to close the deal in 30 days or less. At this point it becomes more like a regular sale. You usually have 17 days to do your inspections and get your loan approved. During this initial 17 days, after the approval letter is issued, you can back out with no penalty. Most short sales are approved at the offer price, but you never know till you get that approval letter.

Happy hunting! Do not hesitate to contact me if you have any questions.

Mike Young - Thunderbird Real Estate
Realtor, Broker Associate, MBA, SFR, CDPE, HAFA
(831) 234-1545
License 00952966
mike@MikeYoungProperties.com

Are we at the bottom?

I would like to say that everything will get better soon, but have to advise caution. What concerns me most is the number of mortgages in default and the high rate of unemployment.

Right now more than 10% of all mortgage loans are delinquent, meaning more than 30 days late. In addition to that, 4.5% are already in some stage of foreclosure. This indicates a strong stream of foreclosures for at least 2 - 3 years. These 9 - 13 million foreclosed homes will sold on the open market over the next 3-5 years and will tend to depress prices. (National numbers)

Nationally we have lost 8,400,000 jobs since 2008. Even if the recession is technically over the recovery will take years. Todays Job Report showed 200,000 new jobs in April. That is great news, but if you do the math it will take 42 months with a very optimistic 200,000 new jobs a month every month, to get back to 2008 levels of employment.

But... this doesn't automatically mean prices will continue to go down. Prices have been pretty stable in this area for the last year or so in spite of record foreclosures and very high unemployment. It is an election year, we will see more government programs trying to deal with our problems. There is at least some recovery in jobs. My prediction is the market will hobble along about where it is now for a couple years.

Right now, the $500,000 and under market looks strong. Houses in this range sell quickly for the most part. You could even argue that prices have increased slightly at the very bottom from a year ago. Prices over a million are very soft. Supply is much greater than demand. Look for these prices to continue to slide for at least the next 6 months maybe year. My theory is that sellers in this price range may have been waiting for 1 to 2 years for conditions to improve before selling, but sooner or later they have to sell. We are also seeing more foreclosures and short sales creeping into the high dollar ranges.

I think San Lorenzo Valley, Watsonville and Salinas are good buys right now just because prices there dropped 60% and more. I think you will have a little appreciation bounce. I see both conservative investors paying cash and holding the property for rental cash flow and first time buyers that can afford to own for the first time in decades.

I would be careful buying in Santa Cruz with appreciation in mind, especially in the over $600K range. Remember also that property flaws get magnified in this intensely competitive market. If the view is not pleasant, if there is road noise, if the house doesn't have curb appeal, if there is work that needs to be done it makes it really hard to sell. Buyers expect big discounts.

Everybody has an opinion, this is just my two cents worth. Real Estate is still a great investment in the long term. Wherever there is a downturn there will eventually be an upturn. Just be mindful that cash flow is critical. That is your bridge to the next upturn.