Friday, November 2, 2012

Short Sale Snafus

As documented in one of our previous blog posts, short sales continue to grow in popularity.  Lenders both large and small have learned to cope with short sales and work to make the process a smoother one than in the past.  Sellers more times than not prefer to short sell their home as opposed to going through the foreclosure process.  People still hear horror stories about short sales taking up to or longer than one year to close, but those types of deals are becoming more of the exception than the rule.  Despite positive advancements in the battle to simplify and shorten the short sale process, numerous pitfalls must still be avoided to get from contract to close. 

The National Association of Exclusive Buyer Agents (NAEBA) provided a list of some of the most common situations that can lead to the demise of a short sale deal.  We will discuss a couple of these with some added commentary.

Multiple Remedies for Lenders

Although the seller may focus his attention on working with the lender to get the short sale approved, the lender may at the same time have plans to foreclose if the short sale gets sidetracked.  A foreclosure in some instances can take place at any time during the negotiations.  The lender can foreclose on the property and kill a deal even if the buyer and seller have been under contract for several months.  The lender ultimately controls the situation so if the lender does not like the terms of the short sale, then it can kill the deal.  The seller might also discuss modifying the loan as a way to keep the home.  As the lender is working on approving the deal, if it sees that modifying the existing loan is a better financial decision than a short sale, then the lender or seller can cancel the contract.

Pricing Issues

Not every seller has a lender approved list price before putting the home on the market.  The seller wants to have the home under contract as fast as possible and a way to do this is list the home at a very low price.  That way the seller is certain to at least get one buyer to make an offer and start the approval process.  However, the seller might not have a very good idea of what the lender will accept as a sales price.  We have heard seller’s agents comment to potential buyer’s agents that they just need an offer to start the process and see what the bank says.  The seller is essentially going on a fishing expedition.  The first offer could end up being a guinea pig for the seller.  Both the buyer and seller could end up wasting time, money and effort on a contract price that is destined to fail from the onset.

Uncertain Time Periods

A lot can happen in a month, six months or a year.  The buyer and seller face many unknowns as they begin the short sale process.  The stories of short sales taking one year or longer are less common than when the first wave of short sales hit, but most buyers still prepare for a process that will take several months.  The real estate market continues to change so a price that seemed financially reasonable one day might not appear so reasonable six months later if the market shifts one way or another.   If the lender sees that the contract price is much lower than the current market conditions support, it can kick the contract back to the buyer and seller and say renegotiate or start over.

Once the buyer and seller get approval from the lender, the lender might require the deal to close in a short time period.  Now the buyer has to hurry to have the home inspected and tie up any loose ends with financing.  The buyer’s financing might have expired while waiting on approval thus throwing one more variable into the equation.  It is often a hurry up so you can wait type of situation where the buyer and seller rush to provide all the necessary paperwork as quickly as possible only to have the lender say “thank you” and that we will get back to you as soon as we know something.  Then the lender comes back and approves the deal and says close in one week.    

The lender is truly the rules official and timekeeper who can speed up or slow down the clock at any time.

It is important given all of the unknowns involved with a short sale for the seller and buyer to enlist the services of an experienced real estate attorney.  Certain documents must be provided to the lender at each step of the process.  Explanations or legal arguments are oftentimes needed to support why the seller’s deficiency needs to be reduced or eliminated and the short sale approved.  The lender will certainly have attorneys working on the deal from its side and so should you.

See Our Related Blog Posts:

What is a Deed In Lieu of Foreclosure?
Bank of America Pays for Short Sales

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