Short Sales- Secrets From the Inside

Know anyone who has
experienced one?
14% of all San Luis Obispo County real estate
sales in 2011 were short sales.

Copyright © 2012 Davies Company Real Estate

Short Sale Definition

A real estate transaction, when a
lender accepts a payoff of less than
the amount due on their loan.


Short Sale Players

Seller
Buyer
Lender
Real Estate Broker


The Seller


The Seller
How did they get
from this
…to this?


Typical Example
Year
2005 Smith Bought House for $500,000.
$400,000 Loan
$100,000 Downpayment

2007 Notices property value is decreasing, home worth
$400,000

2011 Something happens. Lost job, divorce, job transfer, possible
medical disaster.

2012 Decides to sell, can’t afford payments, property worth
$300,000, puts up property for sale as short sale


Short Sale Math- Part 1
The Variables:

$500,000 Property Value in 2005
$425,000 Loan balance + back due payments+ legal
fees for foreclosure + unpaid interest,+
delinquent impound payments, etc.
$300,000 Property value in 2012
$290,000 Agreed-upon sale price with new buyer



$290,000 Sale price to new buyer
$29,000 Estimated closing costs: Title fees, escrow costs,
commissions, home repairs, etc.
$261,000 Net proceeds from sale to new buyer


So what is the Short?

$261,000 Net Proceeds from sale to new buyer
<less> 425,000 Balance due to Lender
<$164,000> SHORT

Bank take was $ .61 on the dollar
(They wrote off 39% of the amount due to them)


Seller Foreclosure Timing-
(or the short sale clock ticking)
1. Usually after several months with no payments,
lender files NOD (Notice of Default). Could be
sooner or later than this.
2. 90 days later, the lender files Notice of Trustees
Sale. Sale date, time & location are made public
record.
3. No sooner than 21 days later, the foreclosure sale
can be held.

Seller Considerations
Include:
• Do we want to stay in house or move?
• Is there a hardship? Pay off the short if they have cash?
• Scams?
• When to stop making payments?
• Neighborhood impact of a short or distress sale?
• Shame? Embarrassment? Morality questions?
• What are credit, legal, and tax implications of our decision?
• Can a sale close in time to beat the foreclosure sale date?


The Buyer


The Market Conditions
(according to buyers)


San Luis Obispo County
Total Real Estate Inventory
Down 50% in Last 15 Months

Buyer Competition


Are short
sale
properties
trashed?


The Short Sale Process for
Buyers
Hurry Up… …and Wait


Offer Process for Buyers-
Can take 2-6 months
A. Qualify with a lender and/or have cash to purchase
B. Find house & make offer
C. Buyer and seller negotiate offer, seller accepts offer, subject
to lender approval
D. Agent submits offer package to bank: offer, seller financials,
required forms (90+ pages)
E. Agent pursues approval with each lender and lienholder,
sends updated paperwork as months progress.
F. Lender makes decision, additional lenders make decision
G. THEN in last 30-45 days Escrow opens, buyer’s deposit
into escrow, buyer investigates property
H. Escrow closes, before the foreclosure sale date

Buyers- What can go wrong?
• Low Rates, but lending standards are tight
• For new loan, appraisals can come in under price, lender may
not approve property
• Unexpected monthly expenses: property taxes at old value
• Buyer can be asked to kick in $ to deal for seller expenses
• Foreclosure sale comes too fast
• Lender can reject deal or stall, or even sell loan mid-transaction
• Agent not knowledgeable, doesn’t anticipate well
• Loans recorded on wrong property
• Hardship doubtful or unbelievable? Uncooperative sellers
• Sellers sometimes change their minds, due to tax/legal/debt
consequences
• Inspections can have unpleasant surprises

Should Some Buyers Avoid
Short Sales? Yes.

If completing a real estate exchange

If moving truck is on the way

The Lender


The Lender Players

Private Lenders, Not a Bank


Question:
Are lenders a
party to the
transaction?

Answer:
No

Lender Math
Do we want the property back?
What will we get in a short sale vs.
foreclosure?
Declining market vs. strengthening market?
Do we have the loan paperwork? Or none?
Is there a government incentive for us to
complete the short sale?
Can the buyer close quickly? All cash?


Lender-
Who makes short sale decision?

OR


Are there more liens
on property?


The Real Estate
Broker


The Real Estate Broker
vs.
The Lender

Me


Real Estate Broker Reality
Listing broker must be director with the strategy,
and monitor information to parties.
Manage buyer expectations- if buyer’s agent
Manage seller expectations- if seller’s agent
Evaluate property conditions, motivate bank to
accept sale instead of foreclosing
Knowledgeable about current short sale matters
Defend against inexperienced agents.


Real Estate Brokers
(Dirty Secret #1)

In my experience, over 50% of active
agents have never touched a short
sale.


Real Estate Brokers
(Dirty Secret #2)

Most California agents that do short
sales have only closed 30%, the rest
went to foreclosure.


Real Estate Brokers
(Dirty Secret #3)

Many agents/brokers have lost their
own homes because they didn’t
understand short sale negotiation.


The Real Estate Broker as Seen
by Lender & Buyer & Seller at
Successful Close of Escrow


Short Sale Benefits
Seller is relieved of
crippling debt and moves
on to better life, possibly
to buy a home in future

Lender avoids further loss

Buyer gets property at a
fair price


Davies Top 5 Tips
for Buyers
Or how to be a smart investor, with any
kind of sale, including short sales.


Tip #1

Know what can go wrong


Tip #2
Know the math

What does the seller and lender need to
make the deal be acceptable to them?

Tip #3
Be patient and flexible


Tip #4
Remember all sellers are in same
market conditions today

There are
opportunities for
buyers in all types of
transactions, not just
short sales.

Tip #5
Buy real estate.
Because more estate building, sooner,
is better.


DaviesCo.com
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Short Sales- Secrets From the Inside

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