The "Dirty Little Secrets" of A Short Sale

You see a "short sale" home advertised at a price that's far below market value. You think "This is the bargain I've been looking for". However, very quickly, some major questions arise:

Why won't the seller accept my full price offer with a large deposit? Why does it take 2 or 3 months to find out if my offer has been accepted? Why does my real estate agent keep telling me that they can't find out any information about the transaction and that the selling agent won't return their calls? These are just some of the questions prospective buyers of short sale homes raise continuously.

A short sale usually arises when a home owner can no longer afford to pay their monthly mortgage and the the amount of the loan on the home is more than the home is worth, meaning that even if the home owner sold the home at fair market value, the proceeds would not be enough to pay off the loan.

For example: 3 years ago a person bought a $500,000 home with 10% down using an adjustable rate mortgage with an introductory "teaser rate" of 4.5%. The loan amount was $450,000 and the monthly payment was $2280.00. After one year the loan reset to a rate of 6.1% and the payments increased to $2727.00. The home owner can no longer afford the monthly payment on the loan so they try to sell the home to pay off the debt, however the fair market value of the home has now decreased to $300,000 leaving approximately $150,000 of the loan unrepaid. Consequently the homeowner has to request that the lender/bank allow a short sale and "write off" the $150,000 difference.

The decision to allow a short sale and to approve an acceptable selling price is the function of the lender/bank's loss mitigation or work out department. The loss mitigation department bases it's price approval decision primarily on how much money the bank can afford to lose on a short sale as opposed to going forward with a foreclosure process. This price is only loosely related to comparable market prices making it difficult for the listing agent to set an accurate price.

As you may have gleaned from this definition, the answer to many of the above-listed questions posed by prospective buyers are answered by the fact that short sales are, for the most part, subject to the demands of a lender/bank's loss mitigation department and the function of these departments is to save money for the bank rather than selling real estate in an efficient manner.

When a real estate agent agrees to list a short sale home, the lender/bank usually will not offer any guidance concerning what price they will approve. In fact the bank representatives usually won't even return a phone call or speak to a short sale listing agent until that agent submits the first offer to the lender/bank. This means the first listing price is usually just an educated guess of what the bank might approve. They could accept less or more likely they will require more.

This problem is compounded by the fact that it usually takes months for a bank to respond to an initial offer for a short sale property. Just like all businesses, banks have reduced manpower drastically over the past several years. Lender/bank loss mitigation departments are often very understaffed while being deluged with short sale transactions. Therefore, despite all good intentions, employees of these departments cannot physically manage all their files and respond to offers and inquiries in a timely manner.

When a prospective buyer makes a full price offer it is packaged with all the other initial offers and submitted to the bank. After several months the bank may finally respond by saying that the full price offer is not enough to offset their loss on the loan. However, more commonly, there will be other offers above this listed price and, of course, the bank will approve the highest offer. This is usually the first indication to the listing agent of what is an acceptable price to the bank.

By this time many of the prospective buyers who have submitted offers over the asking price may have lost interest or found more enticing opportunities and retract their offers. However, the damage is done. The bank now believes that they can receive more offers at this higher price. Consequently the original full price offer is rejected and the listing agent now amends the asking price to the lender/bank's new "approved price".

Meanwhile, several months have passed since the initial full price offer was submitted to the bank and many more offers have been received by the listing agent. The lender/banks often require that all offers be submitted to them so they can "cherry pick" the highest offer (above asking price).

This is why I tell my clients to offer the highest price (usually above the listed price) that they feel comfortable with. I tell them to base this on how badly they want to own the property.

Communication is a whole different issue. Unfortunately it has become common practice for short sale listing agents to follow the flawed practice of the lender/banks and refuse to communicate with prospective buyers until they submit a "superior" offer. As stated above the banks, arguably, have a reason to not answer inquiries and respond to offers in a timely manner. However, in my opinion, real estate agents have no such justification. Yes, I know there are agents out there handling literally hundreds of short sale properties at once, but I'm sorry, they stand to make tens of thousands of dollars in commissions for these short sales and refusing to respond to well qualified prospective buyers, and buyers who have submitted offers, is completely unprofessional.

Of course, part of the problem is that many listing agents want to "double end" the sale and won't even entertain offers from other agents. In this market, and with a low "teaser" list price, listing agents receive numerous offers from prospective buyers who are not represented by an agent. Therefore it is easy for the listing agent to represent both the buyer and seller and receive both sides of the commission. I don't slight listing agents for doing this as I have double ended my share of sales. However, the listing agent should still have the courtesy to return calls to other prospective buyers.

The best short sale listing agents I know respond to every single inquiry, even if it's just to say that they haven't heard anything from the lender/bank yet.

Tips for Sellers Competing Against Foreclosures and Short Sales

If you're trying to sell your home, you already know it's a challenging market. Not only are there a lot of other homes on the market competing with your house, but some buyers are finding it difficult to obtain mortgages. Plus, with distress sales-foreclosures and short sales-accounting for half of all home sales in some parts of the nation, it's hard to compete on price alone.

There are things you can do, however, to better make your home stand out. Here are some tips:

Price Your House Right. This is probably the most important thing you can do. With the market so competitive these days, buyers will completely ignore your home if it's not priced realistically. Buyers today don't care what your neighbor sold his home for a few years ago. A realistic, fair market price-or even a price slightly lower than fair market value-is the best way to attract buyer interest. This is where a qualified real estate agent can provide invaluable assistance.

Get Out Quick. Short sales are notorious for being, well, not short. Banks may take months to evaluate a short sale offer, and the potential buyer is left waiting helplessly during this time. By offering a fast closing, however, a buyer-who perhaps has children she wants to enroll in school-can move in and get settled quickly. That's a huge advantage over waiting for a short sale to be approved.

Offer Curb Appeal "Plus." Foreclosures often need substantial repairs because they're frequently abandoned by their owners. Often, they are sold "as is" by the banks that own them. A home that is in move-in condition can save a buyer time and money. Consider doing some minor renovations or improvements to update your home and make it more attractive to potential buyers.

Call our CENTURY 21 office today for more tips to sell your home.

Best and Worst Markets in the U.S.

According to a June 23 report by Local Market Monitor, a Cary, N.C. forecasting firm, Baton Rouge, La. is the large market where home prices are expected to do best over the next 12 months. The city with the worst expected performance, where home prices should continue to drop: Bakersfield, Calif.

Use of $8,000 Tax Credit Expanded For First Time Buyers

Qualified first-time homebuyers now have another way to take advantage of the federal $8,000 tax credit for the purchase of a principal residence.

The American Recovery and Investment Act of 2009 created a tax credit of up to $8,000 for buyers purchasing their first home before Dec. 1, 2009. Previously, homeowners could only use this credit after purchasing a home and filing their tax return with the Internal Revenue Service. On May 29, however, the U.S. Department of Housing and Urban Development (HUD) announced that the Federal Housing Administration (FHA) will allow state finance agencies to provide second mortgages "monetizing" the tax credit.

What does this mean in plain English? That homebuyers can immediately use the $8,000 credit toward their down payment and closing costs for the purchase of homes with FHA-insured mortgages.

This is great news for first-time homebuyers who want to take advantage of the low mortgage rates and competitive pricing of many homes today, but don't have enough money on hand for both a down payment and closing costs.

Homebuyers who obtain an FHA-insured mortgage are still required to have the 3.5 percent minimum down payment. But the tax credit can be applied to a down payment in excess of 3.5 percent of appraised value and could possibly help the borrowers obtain a lower interest rate by increasing the total amount down.

According to estimates by the National Association of Home Builders, 40,000 more homes will be purchased due to the new FHA monetization program, in addition to the 160,000 sales already expected, due to the creation of the credit.

For more information on the tax credit, or to learn about available homes in your area, call our CENTURY 21 office today so we can get you on the path to the home of your dreams.

* Consult a tax professional for details.

Five Trends in High-End Home Design

Planning to purchase a new home or redecorate your existing one? New York designer Robin Baron has identified five hot new trends in high-end home design. "These trends are simple to incorporate into your current décor while adding extra interest," she says. "They help to make your home uniquely your own."

Be on the lookout for the following trends:

Shine. Baron's favorite trend is a blend of metallic and reflective surfaces. In one upscale project, she used a combination of custom glass and mirrored tiles as wallpaper and bianco antico marble coated in silver leaf for floors. Baron suggests using metallic materials and finishes combined with natural stones and wood to create a rich, layered textural juxtaposition.

Green: Eco-friendly design is the new luxe. A popular trend is utilizing materials that are sustainable--made of responsibly harvested woods or organically manufactured fabrics. In the past, these designs were very basic, Baron says, but now high-end furniture designers are producing luxurious well-detailed pieces.

Color: Colorful designs are moving from the fashion runway to the home. Just like the red bottom of a Christian Louboutin shoe, bright accent colors are adorning the inside of new furniture and accessories. Be on the lookout for new furniture with splashes of color in unexpected places such as the inside of drawers.

Personalization: Everyone wants pieces that are unique and customized only for them. Many furniture manufacturers are making custom pieces more available, allowing buyers to receive a couture piece at any price point.

Details: Nail heads in various shapes, sizes and colors are being used on all kinds of materials. Although nail heads are not a new concept, the innovative use of them on new items looks fresh. Look for them on mirrors, headboards, ottomans and storage boxes.