Last week the Wall Street Journal ran an article on short sales. The article is well meaning but I feel is poorly informed. I have added the article in its complete form below with my notes in brackets:
“Q: I am looking to buy my first home, and it seems like short-sales are priced much lower than regular sales. Are these prices negotiable, or are they the bottom line that lenders will accept?
A:Many lenders negotiate prices for short-sales [The lien holder is NOT the owner and cannot negotiate the price of the home], in which the seller is offering the home for less than is owed on the mortgage. But traditionally the only way you could find out was to submit a below-list offer and wait—often for many months—for a response. If the bank made a counter-offer, you knew you were in the ballpark; if they didn’t respond at all, you were too low [The author missed the point. The bank is NOT the seller and does not "counter the buyers offer". The short sale process is first and foremost to confirm that the lien holders will approve of a short sale for the seller. That in fact the seller is approved to do a short sale. Then the lien holders negotiate with the seller on terms acceptable to the lien holders/investors on what they will accept. The lien holders are looking only at the costs of the sale or the HUD-1 settlement sheet]. By then, you may have lost all interest in buying the property. [Lien holders are looking at what is best for them. Is a foreclosure more profitable? Is the offer within acceptable range to approve of a short sale for the investors without the expense and risk of a foreclosure? It is all about the net. Lien holders do not respond to offers per se, they respond to the owner of the home and a low offer only creates a barrier whereby the foreclosure route is the best way for the lien holders to go, thus a decline of the short sale.]
The good news is, on April 5, this frustrating system will change at least for some buyers and sellers. That’s when the federal government will begin to provide financial incentives to lenders to do more short sales. The rules also help standardize the process, so your chances of negotiating a distressed property bargain will increase. [No, in fact we really do not know what to expect but the author is still thinking that a short sale and a foreclosed home are one and the same. It is my opinion that in fact the author is right in the fact that more "bargain" sales are on the way but not for what is being said. In reading the new directive it appears that the banks may well use the short sale process to circumvent the expenses of a foreclosure. Only time will tell on this. Until a home is foreclosed on the banks do not own the home and the owner is the seller. Sellers today are finding that to approve of a short sale they must agree to financial terms on some form of loan payment. That does not happen when a home is foreclosed, though the banks have the legal right to pursue the owner for lost monies, but that is another subject.]
Under the old practices, when a financially-distressed seller brought a potential buyer who was offering less than the amount owed on the loan, the bank would order an appraisal or broker’s price opinion (BPO) and then decide whether the offer was acceptable [Correct, the banks are looking at fair market value, as a buyer looking for a "bargain" this is where they go wrong. Fair market value is what the home is worth]. Under the new federal rules, banks will order a BPO before the property is listed for sale, and will share information on the minimum net proceeds they’re willing to accept with the sellers. If they then bring in a buyer whose offer is equal to or greater than this pre-approved amount, the lender must accept it within 10 days. [This is correct, but actually seeing the lenders adhere to such a time line will be interesting to see. The new process if done correctly (something I have been asking for for two years) would be huge. By placing a home on the market that can close in a near normal fashion, we can slow down and even stop the falling prices, therefore the question on bargains we hope will also be coming to an end as well.]
Not all sellers are eligible for this program, called Home Affordable Foreclosure Alternatives (HAFA) (for the requirements see Help for America’s Homeowner’s Supplemental Directive 09-09). But since the process is likely to go so much smoother for those who buy and sell under HAFA, I suggest you wait a bit until the program goes into effect and concentrate on finding these “pre-approved” deals. [Agreed. In fact, based on what I know now many homes will fall outside of this program.]
Of course, when you do find a property you like, you may not be the only person bidding on it. [The days are long gone where only one buyer bids on a home. Today any buyer writing a low offer is pretty certain to fail, unless they are trying to buy a home that NO ONE else wants and that is also another story for another time.] To improve your chances of winning, make sure your offer is “clean,” with as few contingencies as possible (though I would never fore go a home inspection). Include tax and credit records, and a mortgage pre-approval letter. If you can afford to pay cash, that will put you in an even stronger bargaining position [This is not different than any offer, at any time, these are in fact standard items that any offer should include]. Still, in your eagerness to win the property, don’t forget that distressed properties often come with added financial burdens. Although under HAFA, the seller is supposed to provide clear title, to protect yourself your, your contract must make it clear that you will not be responsible for any of the seller’s unpaid property taxes, liens or second trusts. [Here we go again, the author is confusing short sales and foreclosed homes, what she says is true on foreclosed homes but on short sales the home is still owned by the owner and in most states the law says that the owner is still responsible for full disclosures] . Also, cash-strapped homeowners often stop paying taxes and homeowners’ association fees during the time between when the house is listed and the deal is closed. To make sure that you’re not on the hook for these expenses, Leonard P. Baron, professor of finance at San Diego State University, recommends that you ask that the bank escrow at least six months worth of taxes and HOA fees, to cover any potential shortfall. [We call this clear title and in areas that useescrow and title companies all recorded liens must be paid or the escrow cannot close. Again the difference here is short sales versus foreclosures.]
June Fletcher at fletcher.june@gmail.com”
It went on to explain how to get a good deal and how the new government guidelines will address how short sales need to be handled from April on. The general ignorance of the article was amazing and the lack of knowledge underscores the gap in understanding. Later today we are going to post 60 graphs giving a update on what is happening in the Reno & Sparks Markets with the three dominate types of sales, short, foreclosed, traditional.