When the private mortgage company got into the short sale at the very end and decided they wanted $8000 from the seller ( $54,000 house). They agreed to let her pay $100 a month towards the $8000 if she could not come up with the cash. An upside down owner, looking at bankruptcy, had moved in with family, had cooperated on all paperwork, buyer approved and the PMI company gets involved. This was something I did not realize could happen. I thought the PMI company was insurance to insure the first 20% of the mortgage- this caused the sale to cancel and the house will now sit empty without utilities on, probably be vandalized, and the neighbors get to look at a deteriorating yard and house for at least 18 months while the county works through the backlog of homes to get it to the sheriff sale.

It takes a few parties to accept a short-sale deal: owner of property, lender, possibly second lender, GSE (Fannie/Freddie) and insurer (mortgage variety, like a United Guaranty). Too many agents, particularly on the listing side, do not understand the process and end up frustrating the seller and buyer. Critical to ask penetrating questions of the listing agent should a buyer decide to write an offer. You'll know quickly whether it is a possibility or a lost cause.

And for all of the above 5 reasons, the lenders should be paying us bonuses for getting the buyer through the process instead of trying to make a few extra bucks by cutting our commissions.

I have a 6th to add to the list, not being able to find out who to contact to put a bid in to purchase a home. I have followed several properties for months on Trulia & Realty Trac that are listed as REO/Bank owned and know the home is empty but they no sign in the yard with a agent's name to contact. I have talked with several realitors, even found out who the bank is and the local gov't and can not get any contact information for the person to contact to put a bid into. That's irritating too.

I do a lot of Short Sales and Reo property.And a lot of the Larger banks after four long years ,have got things together.What took weeks in the past now takes days. Great artical can't wait to read one for sellers.

Tara needs to clearly define the difference between a Shorted property investment of the bank's investor and the bank's owned property REO. For there is distinction in the processing criteria like difference of the Broker Price Opinion and the court ordered price from judicial foreclosure. Therefore, mixing the two types of sales further confuses the buyer and delays the recovery.

I am buying a short sale (with cash) and we have settled on the price and the closing is scheduled for a few weeks from now. The seller is very upside down in this mortgage and he has at least two loans on the property. When we close, is there anything besides a title search and tiltle insurance that I need to assure that the property is mine free and clear? I keep hearing horror stories from people that it is too dangerous to buy a short sale because someone is going to show up saying I owe them a large sum of money. I know most of the people saying this don't know what they are talking about and are the type to live their life in fear, but want to be certain I have all my bases covered to keep my investment safe. Any suggestions other than a title search and title insurance?

I hope David is correct in his assessment that larger bankers are getting it together. It seems to me with the large number of REO"s that the banks would be motivated to put through a short sale and avoid a huge discount on the property. The market being saturated with REO and short sale properties I would assume a short sale saves them money in the long run. Am I understanding this correctly?

In our area, another big challenge for me as a buyer's agent is to get the listing agents to call back on REO's. Call backs can take from several days to several weeks. They sometimes use agents from other areas and they don't always have access instructions on the listing, no Supra keybox, and no contractors box code. They don't update their listings saying " verbally accepted contract, awaitng bank signature" (can take some time to get an actual signature), nor do they update to pending. Fun times. How do you tell a buyer, "I know it shows available, but it is not", 3 weeks after the agent - after finally calling back - says it is pending. Many times they are not even members of our board. Ridiculous.

This is why you avoid REO/Short Sales altogether and "find" traditional sales, If you look and prospect for them you'll find them... Happy prospecting..

Getting a buyer to not get frustrated is a problem. They know logically that they are not in the driver's seat and that the bank calls all the shots. They also know that the listing agent is the one that will be able to update if the bank is communicating. Knowing and feeling are two different things. The rules have totally changed and many times the purchase is a chore. The more buyers read from the professionals in the field talking about the purchase issues, the more they will go into a transaction expecting obstacles and hopefully dealing with them better.

Tara,
Once again, you are right on the money. All of this "drama" is to be expected when you deal with the "black box". thanks for outlining the process in an understandable way for the consumer.

@Bridgette- best of wishes to your endeavor!
@Gabe Orozco- sad that you are advising people to shy away from something that requires a bit of hard work and faith; shows what sort of effort you are willing to put into your clients..

On another note here; a short sale (I strongly think) should be renamed to "long, nerve-wracking, emotional, coupon sale".

Finding an experienced Realtor is the main key here, don't sign a buyers contract unless you TRUST TRUST TRUST your Realtor, or you may end up with someone like Gabe, who is unwilling to work hard to help a client pursue their dreams. An honest, trust-worthy, reliable, communicative Realtor is the best thing you could ever have going for you in a situation such as a short sale.

Shop around for an agent!

After finding someone who will work towards Your goals, help you to understand what is going on & Why, what steps are next, what docs are needed... you will be in good hands.

Also w a short sale, as buyers, take a lot of deep breaths, always expect the extreme worst. Become pleasantly surprised when the best happens!

Good article. However mixing the two (short sale and REO) into the same category is wrong. It is like comparing peanut butter and jelly. A short sale you are dealing with a loss mitigater at a bank or service company whose job is to get the barrower to make good on their dept and the extent of their tanning in dealing with short sales is to learn how to say “The file is in review” until the foreclosure process is completed, where with an REO you are dealing with a completely different company, being handled by an asset management company (with no surprise the majority of them now being handled by Fannie-mae or Freddie-mac, another means of a bail-out) that has the job of liquidating the asset within the parameters of their authority. Short sales have become an unfortunate joke, where as REO properties have become one of the only few means that home buyers can realize a short term positive equity position.

If you know that you want purchase a short sale make sure that at least one of the agents in the deal (listing or buyer rep) is a pro in that process. It makes a big a difference to have someone working on the process that really knows all about it.

Real estate ain't what it used to be. Another way to see it is -- paradigm shift.

Great read, excellent articel!

When we know that a neighbor is in a short sale , and we are interested in their house why can't we deal with the bank ourselves and make an offer to the bank directly without all the in betweens you have to pay for,
When we purchased our house in March 1965 we new the owner needed to sell, we made him an offer on the sunday. tuesday we meet with the bank and our lawyer assumed his loan .paid him his money and assumed his taxes our lawyer file the change of ownership and for a fee of $25.00 the house was ours in our name on the wednesday, no inbetween people to pay. by Ronnie

Short sales are a nightmare. We've been looking for a house in small unincorporated town near by. Almost all the listings in our price range are short sales. We've been looking out there for 4 years (seriously).

We've been involved in three short sales so far and all of them have fallen thru. The first had undisclosed serious roof issues. The second had a $16K tax lein that the seller and agent KNEW about yet waited for us to offer on it and had it come up in title. Getting our $5K good faith deposit back from that listing broker (Dennis Grimes) was a total joke-took a month and lots of threats of suing him before we got it back even tho the house at this time was out of contract. I never did get a clear answer as to whether the title was ever cleared on that house and it ended up going to auction anyway.

The third short sale was on a house we really loved, but the bank (ING) never did get back to us in writing that our offer was actually accepted. We only got a verbal from them, yet I was expected to pay $2K in inspection costs on a "verbal"? Talk about unprofessional! That house ended up going back to the bank at auction for only $2100 over what our offer was. I will be adding ING to my growing list of banks who will not see ANY of my business ever. I believe that they KNEW all along that the house would go to foreclosure and were just playing us. The right hand didn't know what the left was doing.

We later came to realize through an article I read on the San Diego Business Journal that banks are getting kick-backs thru the Fed and stand to make more on foreclosures and are purposely witholding property from potental buyers for this reason. ING would not have batted an eye at us blindly spending $2K of our hard earned money just to pull the rug out from under us at the last minute which is exactly what they did anyway! Thank God we didn't lose that money....

The banks have our bail-out money in the billions now and there is little if any motivation to work with or negotiate with buyers...at least that has been our experience. My advice is to stay away from short sales. They are nightmares and to say they are "frustrating" is an understatement - mostly due to the banks and their insatiable greed. When I think of all the hard work my agent, the listing agent and all the others involved with our loan put in to all this it almost makes me ill because it was all for nothing. They all deserve a medal for their efforts.

Short Sales require patience but generally do close. It's a hurry up and wait situation that gets you the home of your dreams. Buying a home is never a simple or easy process and short sales are as challenging and complex as it gets. If the home is worth it, make the offer and work it!

The article is good...Unfortunately it a sad commentary because most of the advice is to accept this behavior and expect it. The only useful piece of advice is to keep looking after you have made the offer (#4)...it is the only way the consumer has any control. maybe if people start walking away form some of these offers because they have found something else while the banks diddle away their time...they will be more responsive in the future...

Excellent article...
RE: #2: FMV-Fair Market Value....the key word is "fair."
I find if a buyer is "fair" they can get the property.
Fair also means....Seller pays for their closing costs and buyer pays for their's.
Buyers whom request Seller to pay for buyer's closing cost are taking themselves on step further away from getting the home that they want.
http://lvrealestatelady.com/SnapShot_of_LV_Market.html
Thanks all and have a great day!
Julia at Realty ONE :)

Where is the political power of the NAR ( and or CAR) in my case to make the short sales a "regualr" sale. We know where the politcal power of the banks is, no? Here is what banks hide behind. The will tell you that they need an answer from the "investors" to agree to the offer on the short sale. Well how much sausage (Italien or not) is that? Let's see. If it becomes an REO, how much agreement did they get from the investors then? Zero , zip, nada. So BANKS, stop hiding behind that riciculous lie and apporve the short sale within 7 days. IF there are any banks reading this, I can help you do that.
Last week I had an "apporved" short sales and the bank still foreclosed. Gone everything I worked on in the past 5 months or so. Nice going banks. BTW, they sold at foreclosure for 50K LESS.
A

But once you make the offer, aren't you binded by it until the bank repplies or can you walk away anytime? very confusing time, who can answer my question

We were offered a 'short-sale' option to avoid foreclosure, but the appraisal stated they'd at least like to get $91K for our house even though it's valued at $146K just last year when we bought it, and tax assessed at $120K.
How do these appraisers possibly come to such a low figure when the house hasn't changed in one year?

for Antoine Pirson "Where is the political power of the NAR ( and or CAR) in my case to make the short sales a "regular" sale"

Antoine, I was in Sacramento yesterday speaking with California Association of Realtors elected officers about how we can literally change the business model for Realtors working short sales. I proposed a solution that benefits loan services, sellers, buyers, investors, communities and Realtors. If you are a member of C.A.R. I invite your emails and interest in supporting this change, I will respond with further information you can take to your local association.

We have to assert ECONOMIC POWER not political power. Banks respond to economic forces quickly but buy legislators for political power to delay changes that aren't to their favor.

The key distinction is that rather than using Equator, this would be a system owned by CAR (or NAR). Rather than Realtors begging banks we literally are treated as valuable members of the team and PAID UP FRONT for our work that gathers verified fianancial information needed by loan servicer/investor to make decisions. This is standard HAFA documentation. It will become a Standard of Care and E&O issue to use this system for every short sale.

Repeatedly I have had to deal with incompetence at the loan servicer and their inability to hire management, design a process, compensate employees for retention, and engineer reliable systems. There is no reason a short sale should add more than 30 days to a normal process.

We lucked out big time on a short sale we bought...35 day escrow with only one hitch - the bank backed out very last minute on their commitment to provide the one year major home systems insurance . But, both the seller's realtor and our realtor split the cost of the policy from their own pockets to keep things running smoothly and on time and to avoid any bad feelings....it wasn't a lot of money but it was a very last minute surprise that could have really screwed up the escrow and title finales. These were two good realtors who knew that penny pinching would only mean bad press in the long run. Good job, guys...you were true professionals.

How did we do our short sale purchase?
We assessed the real value of the property using our long esxperience looking at homes all over the area, comparing the homes that sold in the neighborhood we were looking in by features and lot size and condition and neighborhood, and then evaluated what it would take to get a bank to let a FHA 3.5% down first time homebuyer win the bidding.
We went above asking pricce by quite a bit but our eventuall purchase price was far below the real value of the home. We moved in with equity already established by this anemic market. The seller was better off and we got our dream home.
The bank had low balled the short sale asking price to generate a bidding war - we had seen this all over our market. This was the second time they did this but the previous deal fell through because it would not be supported by the buyer's loaning institution. We worked with our realtor, the seller, and used our own judgement of what was a good deal to us.
We are very happy. Started to make offers on the property on December 12th, signed the contract on December 22 or so, and closed escrow and took possession of the home on January 29th. Our 2009 purchase price was $70,000 less than the property sold for in 2002 and $300,000 less than it sold for in late 2007. We have a 30 year fixed rate loan at 5%. We are proof that short sales work - but they do grind on the nerves a bit.

Re: Working directly with the bank on a short sale. We also are looking into purchasing a short sale home with CASH. We have tried to steer clear of all Short Sale properties and viewed may homes, but we were drawn to two and I fell in love with one of them. And wouldn't you know it, they were both Short Sales. We kept looking with no luck. So we bid on my favorite due to the fact the sellers agent stated in written form to our agent that the process would be speedy. The bank and sellers are very motivated at this stage. The house had been on the market for almost a year. With the fact that we could pay cash would also be a positive point. Someone got in before we could submit our bid. It fell through. And another bid came through and we submitted our bid as a back-up bid and waited to see if a counter would be submitted. No counter but the bank countered. The bank raised the price $85,000. Slick bank move #1, So we went in at $5000 over the asking price and we felt pretty good about it. Oh, but it gets even better. Our Realtor recently informed us that the two key Managers handling the property are no longer employed by them... Yes, that's right, the only two people that could get this sale completed up and QUIT, and of course neither one bothered to leave any notes or instruction for the replacements. So now we are looking at an estimated 90 days, and that's being optimistic because the entire process must be started from the beginning now, but, not until they have assigned or hired someone to handle the property. That may take an additional 30 to 60 days alone. It's CRAZY, and so very disappointing. The entire process is unacceptable, unproductive and disrespectful in so many ways. It truly feels like you are caught up in a poorly managed scam.

We have since found out that the bank is the very same bank we have our funds in for the purchase. But I have been told that it really wont make any difference, but I cant help but feel it might. Is there a reason why we couldn't go to the bank and present them with a bid and an option to work out a win/win transaction? We have Cash, we know what house we want and the Seller has already Accepted our previous bid amount.

Are there any regulations that would keep us from personally handling this ourselves? We would like to do them a favor and take this property off their hands. Sounds simple enough, right? This isn't our first home purchase so if we could, we would like to take it to the next phase ourselves.

Kudos to you Kirk!
You are absolutely right, the Short Sale process should be similar or equal to a standard Active home sale. Actually, it should be just what it's called, a "Short Sale" with some perks to stimulate interest, for instance a 14 day or less escrow time line on Cash sales and bonuses for agents who keep it all on track. The banks are already leaving vacant homes scattered throughout neighborhoods everywhere, they are going to end up with structures that aren't worth living in or investing in while bringing the comps down and affecting everyone else in the neighborhood. Making home selling and buying benefit to buyers as well as sellers could possibly get the banks more $ on these properties if they streamlined the process. Simple! Yes, the process must be reworked... It wouldn't be hard to do. Kirk, it's great to see that something is in the works to simplify. Don't give up! Wish there was something we could do to help.

I hate to say it but we may switch gears and look into FSBO properties. We've even considered just knocking on doors and politely talking with the owners and let them know we are interested in their home and was wondering if they have thought about selling it. Bold I know, but neither one has been scratched off our list of options yet.

Great responses and info from everyone above, they got me thinking. Thank You!

All buyers paying cash don't have to worry like a buyer needing and wanting to finance the purchase. Working with the right mortgage professional in dealing with floating verse locking at rate that might expire. If financing have all your ducks in a row so when the approval come over! Saves time, money and you control getting the best loan program.

Steve Morgan
http://www.bethanybeachlender.com
Fairfax Mortgage Investments

Great post. So many buyers watch too much TV.

Cash on a SS, does not mean that much, nor does even being able to close in a few days with Cash .. Sorry about the reality of this .. Banks regularly pull the rug out just before closing, when an offer of a paltry $5K higher comes in, contigent to loan approval which could also fall throug for various factors such as low appraisal, and last minute debt ratio problems, or the buyer gets cold feet .. pre loan approval means little to nothing .. the CA SS adendum offers little protection for the buyer, in enforcing a contract, nor the return of EM Deposti, since the seller must sign off, which at times they will not cooperate and the only remedy is to take them to small claims, with an uneforceable judgement in many instances .. keep your EM Deposit as low as possible, not over $1K .. the State should enact regulations setting the max EM deposit on SS's at $500 dollars ..rmember that Escrow Companies at the least little fuss, can legally eat up your deposit with their in house atty .. also, the RE types are always trying to convince buyers to go in at very close to Market Value (anything for a comission) .. no way paying retail in the still high SoCal market, when the economy continues to tank .. all of these RE types continue with the Mantra of buy now, before an upswing in prices or interests rates, which will only result in fewer buyers and lower prices .. also, do not move funds into escrow, before being in physcial possession of a signed contract by the bank with all of the appropriate figures in black and white .. btw, I'm a Cash buyer, who has been in escrows on short sales

Double Escrows on Short Sales, being sold out by either buyer's or seller' s RE Agents .. In Cal this does occur..at times they will utilize the same escrow company or go to another one down the street and remain stealth..this can occur to a buyer who has opened escrow first, if a better offer comes in .. remember many owners are deadbeats so sueing for breach of contract could be futile .. also, the standard CAR contract stipulates an arbitration clause with a small Cap on liquidated damages .. all of the brokers I know claim that a client must initial the liquidated damgaes clause, otherwise they will not process the sales agreement .. the double escrow situation is unethical on it's face, but supposedly falls into a vaque area of the law .. even in Arbitration, there can be substantial legal fees .. as a Buyer on Short Sales, the entire deck is stacked against you .. one side of the double escrow can close, and your deposit will be dangling in thin air .. all of these Bokers who claim to be experts on Short Sales usually only protect their commissions and there is a lot they will not tell .. DUE DILLIGENCE beyond belief is a must for the buyer

What a joke...
If I see a shortsale it almost always needs a considerable amount of work. If you buy a house most likely the owners could not afford to maintain it or knew they were losing it and trashed it.
The savings almost always is more than the headache of having to put the work into it or updating it.

Tara,
Good article and generally correct in your comments. Patience is the key to these transactions and they can and do blow up at the last minute. Pricing of distressed properties when done against the neighborhood comparables very seldom works. The amount of deferred maintenance and hidden issues (frozen plumbing here is often the culprit) and hiding behind AS-IS selling terms gives the loan servicer and end investor the belief that their house is as valuable as the pristinely maintained property next door. I look at 100's of these yearly and it is generally never the case. My (the buyer's) advantage in the current market is that 40% of the houses are the competition.

Excellent post, Tara! Very well written and remarkably accurate. Nothing was missed, or... mis-represented, like normally the media would do.

Great Blog Tara....as always, full of useful and insightful info.

Great article Tara !

Hey Tara - I always find your articles to be both informative and very interesting, and sometimes even humors. You did not disappoint on this one. You are so right in that buyers think that finding the home is the longest part of house hunting; if their going for a short sale it's only the beginning. It becomes even that much more frustrating as a REALTOR when your opposing agent is less than informative or forthcoming with updates. It makes us all look bad. Another article all together - Again, great job on this one!

It really takes a lot of patience especially when explaining the benefits and pitfalls. Its best to be honest and forward with buyers regarding Foreclosures, REO's and Short Sales. Also, you have to hope you are dealing with a listing agent who is on their game and on top of their sellers and the bank to ensure everything goes smoothly and all information the bank is requesting is submitted and done so on top to avoid any unnecessary denials or delays

When dealing with any bank always count your fingers after every hand shake! Leave the least amount of escrow as possible, none is even. If you are offering the asking it may be accepted, but start with asking, this should be what the Realtor for the seller says that the Property comes to in a normal CMA.. That's right, normal value, you see selling at normal value today most times is still less than what is owed on the home. Prices in the last 4 years have brought prices down by as much as 30-35 percent. most loans were for 80%, do the math.
So make the offer without escrow at first, this money would only be tied up for months without any decision. Word the offer as follows escrow of x amount to be made upon acceptance from the financial institution!

Great article! Short sales are so unpredictable you have no control over the process, I recommend short sales for people that have a lot of time on their hands, short sales are good deals, but the process will leave you stressed out and dissappointed! I have had the most success with the Bank owned properties for my clients, I recently got one of my clients a $10,000 reduction off the listed price, plus closing cost! On a nice newer home! My clients were very happy, and i was happy they were happy! What a win/win!

This is A Superb Article! Weather you are in the Industry or are the buyer or seller. In my opinion we will See More of them come down the Pipeline and the more familiar we are with the process the better opportunities we have Have. For the Next 3 to 6 years Inventory will consist of these and soon as some legislation can pass on speeding up the process with delayed bank responses we will continue to Clearly state Buyers Beware! know what you are getting Into

Another great article by Tara. She is awesome. I know the clients that work with her are in great hands.

I can not wait till short sales are a thing of the past. Best of luck to everyone involved. It is sad to say but the way they are now is better than in the past. I know the markets will improve.

Everything that was said is so true, I will be going to closing soon. I had a appraisel done, on the property and found out that the Air Cond. Compressor unit was stolen the the home ramp sack, Who responible to replace these items.

Great blog as usual!

I say stay away from short sales all together, if you can.

Great article. I know one thing that shocks buyers of foreclosed property are the taxes. The taxes stay with the house and the new owner has to pay them.

Thanks for this very informative article, and for sharing so many of the details that the average buyer overlooks or is not aware of. Much appreciated!

here is something you agents may NOT LIKE. 6% commission is ABSURD. The average real estate agent has approximately 15 to 20 hours into a deal. short sale maybe 20 to 25 hours and that deserve $18,000.00 commission split 4 ways? $180.00 per hour, I think not. Mortgage Co, Banks and Real Estate Agents along with wall street are the biggest reason the economy in the USA went south. Its all about GREED. AND YES I do hold a REALTORS LICENSE. I never list at 6% and always gift back atleast 1% in various ways. Banks should ask agents to negotiate their commission, why not. Don't most deals in life involve negotiations. IF WE ALL GAVE A BIT BACK the economy would recover 10 times quicker. Lets try being givers and not takers.

David rogers i was a short sales unit house waterville maine i was bank rupted forecloser pending i was in coldwell banker for a year couldnt sell it there got out of them relisted maine realty.com got paul dui master broker i did thhe shows sold the house in 6 month in the recession the worst time to sell i got an broker fee of 3 percent closing cost huge help too sell when you get flexible closing cost master brokers behind you i sold house 72,000 paided off home loan saved my credit thanks too master broker paul dui of maine realty im debt FREE plus renting again if we got all broker to cut there 8 percent screw over closing cost cut inhalf we could revive the buyers market and end the real estate recession night mare

Im purchasing a forclosed home and just waiting for escrow to close, passing by the home on my way from work I saw the roof blew off , at least 1/4 of it. what am I suppose to do now? have seller fix ? who is responsible for that?

Great information. Well written. Very helpful.

Very insightful piece, Tara. My partner and I are in the middle of a short sale purchase, and we walked into it knowing the rules of the game. We didn't low-ball, but we offered a bit on the low side--in cash. The seller had listed the property for much more that it would have sold for (our agent agreed). But, we backed our offer up with facts concerning sales in the area (three similar properties sold in the last six months within the window of what we offered), the condition of the property and photos to prove it. We also believe that the property is over-assessed by the county, so will be requesting a new assessment and a BPO.

There are a lot more "moving parts" to a short sale compared to a traditional sale or even a foreclosure. We took this on assuming that there will be no money paid by the seller and that the bank won't pay for any repairs (that's not the kind of business they're in, so why ask?). We *know* what it will take to fix and are prepared to wait.

One should also inform buyers and Tax payers.....That these BANKS are reimbursed by the FDIC for any losses sustained by them in a short sale/foreclose. People need to realize the banks are still making money on the backs of the TAX Payer. Once again the tax payers are losing.

This article was very informative, and the responses and comments were very interesting, Bottom line is that
short sale or foreclosure sale can be very profitable. You just have to be prepared knowing that you can get lucky and the bank accepts and truly having a good team of experienced real estate professionals, from realtors to attorneys to loan officers working together to make it happen. Then, it can be a good experience.

I am looking for 1 bed.condo in Rancho Santa Margarita area.Up floor,70 000-100 000$.Pay cash. Tanks.My e-mail T.Roesch@yahoo.com

Great article. Its definitely important to inform buyers and sellers about the difficultys they may face in the home buying/selling process. I like the addition of advice on how to avoid drama...really adds to your article!