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Posts Tagged ‘buying a short sale’

The sale of real estate is far different in Metropolitan New York than it is anywhere else. For one thing, we use attorneys from the start. For another, the attorneys handle the contracts, not the brokers. Another difference is that they won’t draw up contracts until after the inspections are done, unlike other locales where the inspection is a contingency of the contract. My personal feelings about this are immaterial; it is just how it is done. One area where the buyers sometimes get stuck is the timing of the inspection. Theoretically, a buyer can do their inspections and not get the house for whatever reason. The bank could reject the short sale. In those cases, the buyer paid for an inspection and cannot get reimbursed for the expense. That is the cost of doing business, and part of the risk all parties take when approaching a short sale.

We cannot mitigate a buyer’s risk by allowing them to delay their inspection until after the short sale is approved. There are many reasons for this, but not the least of them is that if the inspection reveals a problem that can only be addressed by adjusting the price, it is too late. We have, in most cases, spent 3, 4 or 6 months getting the lender to approve the short sale. We can’t go back and renegotiate the price. That has to be done early on, before we submit the offer to the lender.

While the buyer does incur risk, their exposure is still far less than that of the listing agent, who has to devote 6 months to negotiating the short sale and will never see a dime of compensation unless it closes successfully. That is not small potatoes. And if a listing agent is well versed in short sales, the buyer’s risk in getting the inspection completed prior to contracts is significantly minimized. I like their chances.

Recently, we completed some difficult negotiations for an offer on one of our short sales in Brooklyn (yes, I cover all 5 boroughs too), and the buyer agent informed me that they would not do their inspection until contracts were sent out. The seller’s attorney will not do that-  they send contracts out in all sales after inspections here, as I said. That agent lost the sale. Another agent who advised their client correctly got the house for their buyer, and I expect an approved short sale on that property this spring. It all goes back to the buyer needing to understand that the chronology of events is the same in a short sale as it is in any other transaction. If you are buying a short sale, it is a unequitable apportionment of risk to wait until the blood sweat and tears of the approval are done in 6 months to do the inspection, because no adjustments can be made once the approval is issued by the seller’s lender.

Forewarned is forearmed! Get that inspection done early and you’ll expedite the purchase.

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As short sales have become more common and are even showing up in new markets in Westchester, I find myself educating my colleagues on what can and cannot be done in order to have a successful closing. Lately, we’ve received offers that are unrealistically low; essentially, what the buyers do not understand is that the lender is going to evaluate their offer based on comparable market activity, not their speculative attempts to get a bargain. 

I don’t blame buyers for wanting to get a good deal. I want the same thing for my own buyers- who doesn’t? But the lender in a short sale is not nearby, so they hire a professional to determine the value. Typically an appraisal or a broker price opinion are done and sent to the bank. If the BPO or appraisal match or are close to the offer, and approval is likely. If the offer is considerably lower than the bank findings, the lender will ask for more money. 

This is where agents need to educate the buying public. It is irresponsible to tie a house under contract for  an unrealistic low amount.  No seller can risk several months waiting for the bank to issue an inevitable denial when the home could have been active on the market and attracted a better offer. “Short sale” is not code for a steal. Buyers should ask their agent for comparable activity and formulate their offer based on realistic events. 

The market in Westchester County is relatively strong compared to much of the rest of the USA. Local activity is relevant to the short sale approval, not the considerably more depressed values in other areas of the nation. Buyers should base their offers on comparable sales (which we have in abundance in New York) and not speculation. I would encourage any buyer to read my prior post on short sales and what you need to know before buying one

Previous articles on Short Sales from my Active Rain Blog.

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Here’s one from the other side of the closing table, where I represented buyers on a 5-month odyssey to purchase a short sale in Yonkers. It made me appreciate the waiting game that buyers must endure, and how valuable status updates are to home purchasers of a short sale in order to stay engaged and committed to the purchase. Buyers need to be updated to, among other things, time their mortgage application, appraisal, and rate lock.

Note that I did not say anything about ordering title work. Title work in a short sale MUST be ordered by the seller’s attorney in the beginning to ensure there are no 3rd party liens that might scuttle the sale later on. 3rd party judgments and liens are common in default properties because when there is financial hardship, there are other bills than the mortgage that go unpaid.

The home my clients sought to purchase was perfect for them- a recent build on a dead end street with a good location for their commute to work. Things on the seller’s side were not organized from what I could see, until I made substantive contact with the seller’s attorney, who entered negotiations later in the game when a private 3rd party hired to negotiate the short sale was sacked mid-process. I can’t judge their circumstances, only the scenery from our point of view. From contract signing in May until August, everything seemed to be in limbo.

In early August, the seller’s attorney spearheaded negotiations. The short sale was approved in late September with terms the seller could live with. We closed September 29, which was a nice anniversary gift. His communication with me was crucial to my buyer clients’ management of their mortgage financing. When they were ready, we were ready. No delays, no snafus, minimal drama.

This was a unique file in that I had a direct line of communication with the seller’s attorney, which brokers seldom have. Typically, I would deal with a listing agent, but that agent would be the conduit to their attorney. But the bottom line here is that the attorney’s involvement was indispensable, and the communication with our side affected a successful outcome. New York is different from many states where an attorney is not part of the process. But in New York, Connecticut, and New Jersey, it is clear to me through experience that without an attorney closely involved in the short sale, the closing may not succeed.

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An old wrestling teammate from high school referred me to his younger brother, who is also newly married and looking for his first home (Thank you Facebook!). Michael and Stephanie had been out looking for a while, and a prior agent had written an offer for them which didn’t work out. They didn’t have a good experience with this agent. It mattered to them that I was not a random agent, but a referral from a trusted relative.

They are a very earnest couple, and once we found the right place, it turned out to be a short sale. Now, when I represent the buyer I can’t negotiate the short sale. The listing agent did it herself, the seller’s attorney was no help (useless, actually. wouldn’t answer our lawyers calls for days, if that), and it took over 4 months. There were two mortgages, which complicated matters terribly, and the 2nd released the lien but the sellers had to repay some of the loan. This happens sometimes.

Luckily, when the approval came through they had their act together, and were able to close a day ahead of the lender’s deadline. The closing itself was not without drama, as the seller’s attorney was never on point and our lawyer had to do some fast work that morning to make everything come together. The closing lasted 3 1/2 hours. But close it did.

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A recent posting from an Ohio broker highlights how real estate differs from place to place. In it, she says that she advises her clients to not sign a contract with a buyer if the house is a short sale prior to getting the bank’s approval. While I won’t quarrel with what works for someone else in another market, I disagree.

That may work in Ohio, but it is ill-advised in New York. I do most of my short sales in Westchester, Rockland, Putnam, Dutchess, Nassau, Suffolk, Queens, Orange and Fairfield (CT) Counties. It is the same in each place- when the buyer makes an offer, it is submitted to the lender with the seller’s hardship package and a contract that is conditioned on the approval of the short sale. The contract is prepared by the seller’s attorney. If the short sale is approved, we have a deal. If it is not approved, my seller is not obligated to sell and incurs no financial obligation to the buyer. Most of the time we continue to negotiate with the lender anyway, but the contract protects both parties.

For the buyer, the contract ensures that they will not lose the house to another buyer after enduring the long process of short sale approval.

For the seller, whom I represent far more often, the contract ensures that the buyer will not simply walk away without penalty or recourse after that same lengthy process. If I list a short sale, my job is to protect my seller. Handshake deals do not protect the seller, only contracts and deposits protect them. This does not “imprison” the buyer. It is virtually the same sort of contingency as their own financing, which is in almost every real estate contract, and no seller objects to such contingencies.

Moreover, the lenders require a valid contract of sale before they approve a short sale. With no contract, the offer is hypothetical. Hypotheticals don’t help my clients whose goal is to avoid foreclosure.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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Buying any foreclosure is tricky, and a short sale is probably the longest process. Is purchasing a short sale right for you? Perhaps you rent in Westchester, Rockland, Putnam or Dutchess and are considering a short sale purchase in one of those areas. Here are some things you ought to know:

  • You can’t be in a hurry. Negotiating a short sale might only take a month but in most cases it can go 90 days or longer. So don’t hire a mover, end your lease or lock your rate until you have confirmation that your offer is approved by the bank. If the seller accepts your offer that isn’t an approved short sale; any offer the seller accepts still requires approval from their lender.
  • You are buying the house “as is.” In rare cases, such as in an environmental problem, the lender will pay for repairs but most if the time you are getting the house as is, as found. The seller is in hardship, so they won’t be able to help either. So make sure you do your inspections and know what you are getting into before going forward.
  • You can’t “flip” the house. Short sales are very good deals in most cases but not so very low that you’ll be able to turn a short term profit. They usually are retail value, less repairs and maintenance, and perhaps less a bit for speed.
  • Status updates take longer. Unlike regular transactions where updates are a phone call away, all parties are forced to wait on the lender, who is not, shall we say, committed to keeping everyone happy. This doesn’t mean that the purchase is lost in the ether; but it does mean that more patience is required than normal.
  • If the listing agent is not a short sale specialist, it may turn into a nightmare. You wouldn’t want a podiatrist giving you root canal, nor do you need a rookie cutting his or her teeth on the biggest purchase of your life. Short sales are hard for experienced experts like myself; an agent who is doing their first or 2nd short sale is in for a long ordeal. The best way to handle that transaction is to not enter into it. If the house looks right for you and a short sale is disclosed, ask how many short sales the listing agent has successfully closed. If the agent hasn’t done many, the best thing to do might be to pass the house by. Otherwise, you might be in for 6 months of frustration.
  • Subordinate financing takes longer. If the seller has a second mortgage, then two lenders have to render their approval, and coordinating the two complicates matters. Some specialists won’t even list those homes (I do.).  Ask if there is another lender, and even if they are the same institution, it will add a measure of difficulty (the same lender but two different loans means two different divisions or departments). Do a lien search on the home before going forward. If there is a 2nd lien the listing agent hasn’t disclosed you might consider walking- they may not be in command of how to close this workout.
  • Ironically, you have to be ready to close rather quickly. This is the “hurry up and wait” irony of the short sale process. The lender will make you wait far longer than a normal purchase for a decision, but when that decision is issued there will typically be a 15 or 30-day deadline to close or the sale approval has to go back to review. By this point you should have done your inspections and other due diligence completed. Once the lender approves the sale it is then time to lock the rate, call the mover and give notice on your apartment.

This is a broad overview, but it boils down to knowing when to hold and when to fold.  No two short sale transactions are the same, even with the same lender. If you are in a state where attorneys are used it helps to have an attorney represent you in the purchase with short sale experience, but at the very least make sure they are experienced at real estate.

The long process aside, buying a short sale does put you ahead of the market, as the prices are more aligned with where the market is heading. This is significant, because the places where the bulk of my short sales are done (Westchester, Rockland, Putnam and Dutchess counties), prices are so high that even a 5% reduction can mean tens of thousands of dollars to you.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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