Short Sales: A Perspective by Dick Boren

2010-11-25T07:54:00.000-08:00

by Dick Boren, GRI®, ABR®, ePro®, Broker/Owner

The Boren Group Real Estate Services

There certainly are a lot more questions than answers these days when it comes to understanding the process, and the impact a short sale has on the borrower/homeowner.

That said, the Boren Group has had a successful track record of compassionately helping our clients, friends, and associates through what can otherwise be a very stressful and frustrating process.

We’ve identified three phases that all short sales go through: Marketing, Approval, and Escrow. By understanding what happens in each of these phases, the frustration associated with it all goes down quite a bit!

What is a Short Sale: Before we go through the phases, we should understand what a short sale is, why a borrower/homeowner would engage in the process and why the lienholder would agree to it. The conditions that would indicate a successful short sale are:

A short sale is the sale of real property where the value of the property is less than the value of the promissory note that is secured by the property.
A borrower would engage in short sale when they cannot or are unwilling to make the payments on the promissory note.
A lienholder would agree to a short sale (or really a short payoff) when conditions 1 and 2 above are true, and the only other alternative is a costly foreclosure. Note that it usually takes the act of the borrower not making the payments in order to cause condition 2 to be true.

Now on to the phases:

Phase 1 – Marketing: Our goal is get the best possible price with the least amount of interruption. The lienholder will likely only agree to a short pay off if the amount offered represents market value. Market value is what a willing and able buyer will pay in a competitive situation. A competitive situation is where there is more than one buyer making an offer, such that the buyers must compete to get their offer accepted. Pricing is a very important part of marketing, followed by exposure. So the more attractive the price and the larger the exposure, the more potential buyers you will have, leading to that competitive situation that is necessary for a successful short sale. This is the most disruptive part of the process but with the right marketing the disruption can be minimized, often limited to a few weeks.

Phase 2 – Approval: This where were our expertise really comes in to play. In this phase we will prepare and submit a short pay off application. We’ll need a number of documents from the borrower, but then we’ll handle all of the details. This phase is also the most frustrating, because we find ourselves just waiting and waiting for our file to get processed in the queue. Often after the long wait (3 to 6 months in most cases), the lienholder will try to renegotiate; a test if you will, to see if the short pay off offer is really the best that they can get. In most cases we can either get the lienholder to understand that the current offer is market value, or if necessary get the buyer to accept the lienholder’s terms.

Phase 3 – Escrow: Once we have made it to this point things are mostly a matter of course. But some time will have passed since the offer was made, so the buyer’s lender will need to review the file and conduct an appraisal. It is also in this phase that the buyer does any investigations. The results of the appraisal and/or the buyer’s investigations may reopen yet another negotiation window; however that is rare if we have done the first two phases correctly. The Escrow period is normally about 45 days, but could be longer or shorter, depending the specific circumstances of the lienholder approval and the buyer’s lending situation. When we enter in to this phase, it is appropriate for the borrower/homeowner to prepare to move.

Impact on the borrower/homeowner: We are often asked “what impact will a short sale have on our credit rating?” The first thing we have to do is go back to the conditions above. If a borrower unable or unwilling to make the payments on an underwater mortgage, then the credit rating impact is secondary to getting the current spending in line with the borrower’s ability (and/or willingness) to pay. The Boren Group cannot advise on whether or not a borrower can or should continue pay on their current mortgage, but we can suggest that they analyze the increased cost of credit in the future as compared to the amount that they would “flush” if they continued to make the current mortgage payments. One should check with a credit and/or lending expert to get the most current information, but what we understand is that currently a short pay off impacts the credit score for about 2 years and a foreclosure impacts it for 5 to 7 years. It is important that the borrower make every effort to keep up on all of their other obligations, so the only negative is the short sale or foreclosure.

Finding a new place to live: Due to the high level of short sales and foreclosures, landlords will generally look past that element of a renter’s credit history when they evaluate an application. As a result is not very difficult to find a very nice home to rent after a short sale or foreclosure.

Obligation to the lienholder after the short payoff: In that vast majority of the cases the borrower will not have any future obligation to the lienholder after the close of escrow. However if the borrower obtained secondary loans, and those loans were used to buy personal property (like cars, boats, etc.), the lienholder may insist that the borrower sign a promissory note and repay the secondary loans. Those secondary loans could still be collectable by the lienholder even after a foreclosure. The non-recourse laws generally apply just to purchase money loans. All of that said, we have not had any requirements from lienholders for a post short sale promissory note on any of the short sales that we have helped our clients with (so far, knock on wood).

In summary, the process takes between 3 and 9 months on average, with most of the activity happening in the first 30 days and the last 30 days. We leverage our experience and skill to minimize frustrations and to protect our clients’ interests. We are looking forward to having an opportunity to earn your business!

How much can property's asking price be beat down?

2010-02-08T09:04:00.000-08:00

Most of our clients start asking this question as they closer to writing an offer. As it turns out we have very good data available that allows us to develop a clear answer to that question.

The first thing we look at is the comparable sale data. That is what have similar homes sold for recently. That is important because not only can we look at that but so can the seller and that is what the appraiser will use to establish value from a loan perspective. In most cases a seller will out until they get offers that are near the comparable sales number. There some cases where the seller has other pressures which may cause them to accept lower offers and we’ll try to figure that out to the best of our ability.

We’ll prepare those reports for you once we get to a short list of properties, but in the mean time we have some general charts on our web site that help us understand the relationship between what homes are listed for and what the end up selling for. You can see that chart by following this link: http://www.borenrealestate.com/default.aspx?pp=164441

What you can see on this chart is that unlike last year, the current selling prices are pretty close to the asking prices.

I hope that helps.

http://trends.borengroup.com
http://foreclosures.borengroup.com
http://facebook.borengroup.com

The Boren Group Real Estate Blog

Short Sales: A Perspective by Dick Boren

How much can property's asking price be beat down?