What is Involved in Buying and Selling Distressed Properties

There are many common mistakes that folks don’t know when it comes to a short sale and a foreclosure.  Believe you me, there are a lot of differences between a Short Sale and a Foreclosure (also known as a REO).

A Short Sale is when a homeowner still owns the property, may or may not be living in the home, and has a mortgage (or two or three mortgages) where they owe more than what the home is currently worth.  Many folks think that the bank has to sign the contract –that is not true; however, this is a common mistake made by someone who isn’t familiar with short sales.

Here is what happens.  When a listing agent has a listing that is a Short Sale, the agent has to disclose that the property is a short sale.  The listing agent is trying to get every penny for the seller that they possibly can while also making sure that the property will still be able to appraise for value it will sell for.  The listing agent gathers every document that is needed for a short sale to go through and all the necessary listing paperwork.  They then market the home to get every single person they can to come see the home. If the listing agent is wise, the agent will have many different websites that their listings can go on (since 89% of the buyers look on the internet first before they even talk to a Realtor to go view any homes).

Hopefully, the process doesn’t take a long time, the listing agent gets a contract on the home, the seller then accepts it and signs and then the fun begins! Again, hopefully not too long after we get a contract that we can agree to terms and then get all paperwork is sent off to the bank.  We start with getting every document needed to the mortgage company.  We have to plead our case and get the bank all the necessary paperwork.

The bank looks over the documents and our BPO (Broker Price Opinion) of value which includes what is currently on the market and what has currently sold. The bank is looking for homes sold in the last 6 months or less. They also look at old comps (sold properties) of other homes that are similar to the subject property being sold as a short sale.

In the process the bank looks over the documents and then will have at least one independent party who is not involved in the transaction, and sometimes two or three Realtors they will do a (BPO) and give the bank their opinions. Of course the bank chooses the Realtors whom they want to use for the market analysis they want to have.  Sometimes the bank will have an appraiser to come out to see the home or a representative from the bank will come out to see the home.

They then decide what is the least amount they will accept based on what value is and if they are insured through mortgage insurance and all parties basically decide what is fair.  This process can take from 30 days (highly unusual) to as long as 6 months.  Hopefully, all parties are still keeping in touch with the progress made on this deal.  Then one glorious day if your file is on top of the pile, it will finally happen that all parties involved can come to terms.

At that point the bank has the right to many options.  They may agree to the sale price we gave them, they may want more than what the seller and the buyer have agreed upon, they may want the seller who is involved in the short sale to bring money into closing, they may even ask for the seller to hold a note of a certain amount they have deemed necessary to make this short sale work.

After all parties have agreed, the buyer then can proceed with getting the closing completed. The buyer’s mortgage can be finalized or if this is one of those fortunate transactions with a cash buyer you can prepare to close.  The process should be another 30 days or less after the bank has sent us an agreement of terms. Hopefully all stay into the process.

Many times, what happens is that the buyers get frustrated and move on because they don’t want to wait for the bank to decide on what it will take to get this transaction completed. If this happens we may have to start over again if we don’t have a back up buyer waiting.  So it is important that all parties communicate throughout the process. So no one walks away.

A foreclosure also known as REO is different.  What happens is the bank now owns the property, there is no homeowner is involved usually there is no one living in the home and the bank is looking to sell the property fast.  They want it closed within 90 days or less.

Usually a foreclosure is priced right, several BPO’s or market analysis are done on the property. The bank wants to see everything upfront.  They want to see a full approval or proof of funds from the buyer that is less than 30 days old. The bank usually will want to wait at least 3 days that the home is listed to give a chance for all to see the property.

The listing agent receives from the bank the proper documentation for multiple offers to be presented to the listing agent. The listing agent will then send all offers to the bank.

They may negotiate and if there is multiple offers they may come back an tell all the potential buyers to come back with their highest and best offer.  It is important that you have a realistic offer because they wont usually negotiate again after highest and best.

The earnest money needs to be a cashiers check and if it is a cash offer at least 10% of the offer will need to be accompanied with an offer.  If it is a finance offer the buyer will need to come up with at least 3% or more if they can to show they are serious in buying the home.

The bank then decides what works best for them.

• If it is an offer subject to financing, they will evaluate whether the property is  passable for financing?
• If it is cash offer how fast are they looking to close.
• Cash offers should be ready to close in two weeks or less to have the best chance with the bank.
• The bank may require  a longer closing but will want to see again the readiness of the buyer.
• Financing must be in place.

Sometimes banks will ask that the buyer goes through their financial institution or a preferred lender to verify that the buyer can actually get the financing they are stating that they can get.  This does not obligate a buyer to use this financial institution in closing the loan, the bank just may request this to verify the buyer can obtain financing.   The banks dont like a mortgage brokers preapproval in this market, you really need to be preapproved completely with a large lender like  Chase, Bank of America, National City, Coldwell Banker Mortgage are examples.  Banks know who the larger lenders are and can see the terms of the loan upfront and know that the foreclosed home is being taken off the market so they are expecting the buyer to close.

A good agent should be able to go over comparable properties and can help with getting all in order so that you have all info given properly the first time.  It is important to work with someone that understands the difference and is willing to explain it well to a buyer.

Stay tuned for situations that can happen with both short sales and foreclosures in my next blog…

Looking for the right spot to call home? Ask why my clients think my marketing plan is the cats meow!