A Buyer’s Dilemma: The Short Sale Backup Plan

by Marcus Fleming | 19 Comments
Today, 39% of homes for sale in the Phoenix Valley are short sales (homes where the seller owes their lender more than the home is worth). Six months ago 20% of the homes sold were short sales. Meaning, home buyers looking for a home today will find it impossible to avoid them. Are you ready and willing to deal with the complexities involved with buying a short sale?

In the best case scenario, a short sale is nothing more than a traditional transaction that takes 90-120 days to complete; you purchase a home in good condition below market value. But in the worst case, you could be looking at any of the following:

  1. It could take up to 6 months to close, it also might never close
  2. The home could be trashed by the owners (with no recourse)
  3. The home could be foreclosed upon and go to auction before your short sales gets bank approval
  4. You might be missing out on other great opportunities (homes)

When you decide to go under contract on a short sale you have to be willing to deal with all the uncertainties involved. All too often buyers don’t ask the right questions and they don’t get enough information and education about short sales to feel comfortable waiting for the bank to respond. Often buyers will continue looking for homes. Initially this sounds like a good idea, we all like having a backup plan especially when the odds are stacked against us. However, continuing to look at homes, while you have one short sale under contract, might not be the best idea. As buyers continue their search guess what they find? Another short sale, priced below market and looking as good or better than the home they already have under contract.

Offering on Many Short Sales; A Cautionary Tale

Let’s say you get a couple short sales under contract within a couple weeks and you decide you can stop house hunting because you know within a few months you’ll have at least one home to purchase.

  • Home #1: You loved the gated community, so we refer to this one as “Gated House”
  • Home #2: Your kids fell in love with the designer pool so we refer to this one as “Pool House”
  • Home #3: You loved everything about this home, except the power lines in the backyard. So we lovingly refer to this home as “Power Lines”

The Gated House

Three months go by and your offer on the “Gated House” gets approved. Before making your decision about the home you want an update on the offer/approval status for the “Pool House” and the “Power Lines”.

As it turns out, both homes appear to be close to receiving approvals. The question is, do you buy the “Gated House” or do you roll the dice and hope the other two come through? After all the “Pool House” and “Power Lines” are slightly better homes and you might get a better deal on those homes. Since you like the other homes better, you decide to pass on the “Gated House”.

Side note: Don’t forget the home owners you decide not to proceed with will have to start this entire short sale process all over, continue paying for the mortgage they may not be able to afford and have their lives put on hold until they can get the home sold.

The Pool House

A week goes by and your offer on the “Pool House” gets approved by the banks. Since you’ve had some time to think, you’ve decided “Power Lines” would be the better home. Once the very large trees you are going to plant grow tall enough to hide the power lines (in 10 years) the home will be perfect. So you pass on the “Pool House”, confident “Power Lines” will also get approved.

Twisted Power Lines

A month goes by and you’re starting to wonder when the “Power Lines” home will get approved. Furthermore, what happens if the bank doesn’t approve your offer? You’re down to one home and all your eggs are in one basket (or mailbox if you will). You realize you are running out of options and you’re wondering, should I start looking for homes again?

So of course you start the home search again while you wait for a response on the “Power Lines”.

The following week, you find out the “Power Lines” home was approved, but there’s a twist. The bank requires you pay $35,000 more than your initial offer. Suddenly the “Gated House” and the “Pool House” look like far better deals, unfortunately they already went back under contract. Not to mention the sellers are so frustrated with your cancellation they wouldn’t be open to considering your offer.

The thought of paying an additional $35,000 for the “Power Lines” home has you feeling like you’re paying too much for the home. After all you’ve waited months and months for this approval, watched other homes sell for less and you passed up two other excellent homes that were less expensive. No matter how you look at it, this feels like you’re getting the short end of the stick.

In reality this new price is most likely well below the market value for the home. Not to mention the home will have to appraise in order for you to obtain financing. You have to separate your emotions from the facts and just focus on the deal as if you just made the offer yesterday.

Pay More or Start Over?

Most home buyers give up at this point and reluctantly pay the higher price because they don’t want to go through all that stress again. From our viewpoint, you’re getting the home you want and you’re paying at or below market value for the home. From your viewpoint, you waited four months to pay $35,000 too much and you just want to be done with this, so you accept the offer.

Our Advice…

Treat a short sale like a traditional transaction; 85-90% of short sales are getting approved today in Phoenix and the prices are at or below market value. Ask lots of questions and make sure your agent knows a lot about short sales.  When you decide to go under contract, have your agent qualify the listing agent and get all the details of the short sale. Make sure your agent can explain the short sale situation in detail and don’t hesitate to ask for the listing agent’s information. The listing agent might be able to explain it and answer a lot more of your questions.

Most importantly, resist the urge to keep shopping. Looking for more homes will only increase your anxiety about your deal not coming together and it will only complicate your situation. If you can’t deal with the uncertainty of a short sale, that’s alright! You just need to stick to the bank owned homes and traditional sales :) .

Author of this Post

If you have questions or comments just leave them below or get in touch.

Marcus Fleming

marcus.fleming@redfin.com
Serving East Valley, Cave Creek and Scottsdale
Homes Closed: 50+

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  • http://profiles.google.com/mataron Mathew Aron

    Or it could play out like this:

    Home #1: After months, the seller backs out to negotiate a loan modification just before bank approval. The deal falls through.

    Home #2: Foreclosure date is not extended. Deal falls through.

    Home #3: The bank doesn't approve.

    Under this scenario, if the buyer waited for each short sale offer to fall through before submitting another offer, he/she would have wasted three times the amount of time in looking for a house.

    Getting approvals on all three short sales is unexpected and great news for the buyer. He/she was given the opportunity to choose. Putting multiple offers on short sales wasn't the buyer's problem; it was the buyer's inability to be satisfied and make a commitment (possibly a case of analysis paralysis).

  • Marcus Fleming

    Hi Mathew,

    In today's market we are seeing short sales get approved more often than not. The buyer's agent should be doing their homework and making sure the short sale has a strong listing agent and good likelihood of closing. 95% of the short sales we go under contract on get approved by the bank and for the same price the buyers put in their original offer.

    The message isn't that putting offers on 3 different short sales is a bad idea. The message is, the short sale market has shifted for the better. Two years ago, this strategy made sense, but today its doing nothing more than causing the home buyer a lot of headache and wasting a lot of the seller's time and resources.

    • RJ

      Hi Marcus,

      This is a great topic and analysis as well. I feel a little more confident now in knowing that it's taking others 4-5 months before receiving a decision and, that the success rate is pretty high if a solid offer has been presented up front. I understand that there are no guarantees, however a good offer presentation usually helps out. I'm in the waiting process on a current short sale purchase.

      I fully went into this purchase with plenty of patience in mind, however the updates from the seller's agents have been less than desirable. Wanting to get bi-weekly updates, I've had to have several strong face-to-face talks with my agent, my brother ( BTW, he deserved it) about being a little more agressive on this sale.

      Since my house hunting is confined to such a small area, it only makes sense for me to not waste my time looking in other areas. However, if I were looking in a much larger area I would be very tempted to make another back-up offer on another short sale because of being left in the dark so much. To me, it is really important that when entering into these short sale transactions that both of the agents keep the buyer and seller informed or else he/she may stray elsewhere.

      • Marcus Fleming

        Hi RJ,

        Thank you for the great feedback. I'm glad the blog post was beneficial.

        Getting weekly updates to my home buyers is always the goal I set when we get into a transaction. However during the first couple months the updates can be absolutely minimal and might only consist of “the bank required more documents and the Seller sent them in”. Providing such weak updates over and over again gets frustrating for both agents. Which is why a lot of agents just don't follow through with providing weekly updates.

        That being said, as agents in short sale transactions we all know how important those updates are to you the home buyer. Its frustrating and discouraging if you are left in the dark with no updates for months. With no updates, you are left to assume the deal isn't going to work out. I'd give your brother a little slack and only ask for weekly updates. I'd also suggest sending him an email every week on Wednesday to gently remind/ask him for an update.

        By the sounds of it you know what you are a looking for and it sounds like holding out for this short sale is the right move. I hope it all works out for you!

        Marcus

  • Steve

    Hi Marcus,

    I appreciate your article. I'm currently awaiting a decision on a short sale offer we put in about 2-1/2 months ago. The last we heard the bank approved our offer but was asking for 20k from the seller. Obviously they are not going to be able to afford this and they said no but they would be able to give a couple thousand. I have since found out that the Mortgage Insurance company is the one asking for the money from the seller. Do you have any experience with this, as far as the MI company asking for money from the seller and if so what have been the outcomes of those.

    Steve

    • Marcus Fleming

      Hi Steve,

      Thank you for the feedback. I've had the MI company get involved a couple of times, but its not much different than a 2nd bank or lien-holder and what they are doing is exactly what a 2nd bank would do. They ask for $20k or $40k from the Seller to see if they will pay (and occasionally they do). From the Seller's perspective they are being told, “pay us $20,000 or you will have to foreclose”. With that in mind I can see why some Seller's give in.

      The majority of the Sellers tell them to take a hike because they truly can't afford to pay $20k. Then negotiations start up and that number gets reduced to something either the 1st bank will pay, the Seller will pay or a an amount the Seller will agree to pay back (promissory note).

      Keep in mind, if the home goes to foreclosure the MI Company and the 2nd bank will receive nothing from the sale. Its in their best interest to take something small instead of taking nothing at all.

      For the most part the MI Company/2nd bank agrees to take a smaller amount in one way or another and the deal closes. Its rare to have the deal fall apart over this. But don't be surprised if they come to you asking for you to pay for it.

      • RJ

        Hi Marcus,

        I'm happy with the typical scenarios as you mentioned above with the fact that the 2nd bank and MI usually go to the seller asking for the additional monies. When I made a decision to go into a short sale transaction as a buyer I anticpated that there would be an outside chance that the 2nd bank and the MI may come to me asking for additional money.

        With that I mind, I had to make a personal conscience decision at that time as to what my “take-a-hike” point would be. In order to do that, I crafted 3 letters that I will be delivered to my agent in any case I should ever need them. He has been asked to deliver one specific letter to the seller agent (after 1 small adjustment) if needed. The purpose of the 3 different letters is they each letter support a different set of arguments of why they (all lenders and mortgage insurance companies) should not be asking me for more money. Each letter is drafted on a different, but anticipated price range, i.e 3-5K, 5-10K, and 10-25K. Each letter has documented, specific and measurable reasons to support my argument.

        I realize that I may have to walk away from from the home ultimately, but I also realize that a small price paid may be better for me in the long run if my argument(s) win out. I'm banking on the lenders, seller and their agent have something to lose as well.

        For instance, if it's a small increase requested, I figured that I could meet with the seller and agent to possibly resolve the difference in price. Since most of the homes that I've looked at are medium-to-med. higher priced homes, I figure to possibly offer some furnishings buyouts so that the seller can satisfy the smaller price increase with the lenders, provided they give me something in writing stating that we have deal. I don't need the furnishings, but the seller need the money to satisfy the lenders. So, if that should occur, I'll consign the furnishings or donate to charity to write off later. So, I'm getting a few cents on the dollar, but I won't have to look for another home much longer.

        In the larger price increase request, I've documented very well what all of the comparables and what features they have are in the area, past and present. I did a footage/feature/neighborhood analysis. In addition, I've documented and received estimates of out-of-pocket cost to me to bring this home in compliance of what the others tip-top homes are in the area, along with any safety or privacy concerns I may have. My intentions as you see is not to pay much more to get this home closed, if I can get an approval first. But in reality, I'm not going to fall to the dangling carrot syndrome for the big money as they would like me to……I rather walk away.

    • Jason Kush

      If the home has MI insurance, they must agree to the short sale as they have “Skin” in the game. And depending on the sellers financial situation, it is not uncommon for the MI company to want very high participation from that borrower. In my experience, when the MI company will not budge on some kind of participation, you can get them down to around $3-$5K, either a a lump sum or paid out interest free over 5 years. This is something they will only take form the seller.
      MI companies are insurance companies, so they do have a tendency to research and dive into the file much deeper. And like most insurance companies, they like to spread the loss if they can.
      I continually tell agents in this business that I much rather negotiate a short sale with 2 loans than 1 loan with MI. The 2 loans 95%+ of the time go through faster, easier and with better terms.

      • RJ

        Jason or Marcus,

        Has either of you had any experience negotiating with a short sale lender of a discount brokerage/investment banker type (such as a U.S. Bancorp, Merrill Lynch or similar) and, who was also the 1st and 2nd lender on the home?

        1) I'd like to know how smooth or NOT these negotiations have gone in the past.

        2) Have you approach them in the same way as the standard mortgage lender or not?

        3) Are they better or less prepared for short sales?

  • Marcus Fleming

    Hey RJ,

    I haven't closed too many deals with a discount brokerage/investment banker, but I wouldn't be quick to assume they will be more or less difficult to work with. When short sales were new in AZ nobody knew what was going on. The banks were half the problem and the listing agents were the other half. Since then banks and listing agents have implemented systems, shared their knowledge and the process is pretty smooth these days. When I talk to agents outside of AZ, they talk about short sales being a nightmare and nobody wants to touch them… why? Because those markets just have less experience dealing with short sales.

    While the entire short sale process seems cold and inhuman, on average 28-30 people will be involved in the typical short sale transaction. It only takes one or two people dropping the ball for the entire deal to start dragging out. I'd be more interested in finding out if the listing agent you are working with has enough experience to push the deal along if the asset manager isn't familiar with the process. I'd also want to know how long the asset manager or negotiator assigned to the file has been doing short sales. However, you might not get an answer (or a true answer) to either question.

    This is a people driven industry, all the systems in the world won't help a bit if you don't have the right people involved in the process.

    Personally, I'd be intrigued to work with one of the companies you mentioned. I assume they would be more flexible, faster to respond and it would be easier to get answers from them.

    • RJ

      A big thanks goes to you Marcus for the response. When I entered into this transaction, it seemed a little odd that such conglomerates were in this business. However, after a little thought and research it only stands to reason that in the mid 90s to early 2000s everybody wanted in on the housing boom for the money. So I guess that some discount brokerages opened up new products and services to their customers such as mortgages.

      I don't know this for sure, but stranger things have happened. What concerns me more is if they are equipped for the tough times. But as you say, this is a people driven business and that means sometimes they learn on the fly. Hopefully, not on my short sale transaction.

  • EH

    Marcus and everyone else:

    Thank you all for your valuable insights on the brave new world of short sales. While most of the information matches my experience, one point struck me as not the case in my still-fruitless search for a home: receiving information on listing agents and other involved parties has been for the most part very difficult. It has appeared almost as if this information were some sort of trade secret amongst real estate professionals. Any tips on how to be discretely forceful in learning more about who's behind the curtain? Thanks again, and as I continue plugging away at least I'll be better informed.

    • RJ

      EH,

      I share your pain. I did a lot of research, just to find very little. When you consider they we're dealing with hundreds of thousands of dollars, that's not a paranoid thing to do. I did stumpled across some links to my seller's agents website showing that one of my two co-agents was classified as a short sale expert in this market, however how much of that can you trust. Yeah, they spoke of updates in their website too.

      My buying agent seems to think that we should take our chances with them because they're a reputable agency and we have a contract with them. But the real catch is, there's nothing to reign in the lenders, the 4th, 5th and sometimes 6th parties.

    • Marcus Fleming

      EH,

      Always happy to help, I'm glad you're getting some good information from all of this.

      You're agent can pull up the listing agent's information and sales history. Which should give you a pretty good idea of how long they have been in the market and how many transactions they have closed. You can also research the agent on the Arizona Dept. of Real Estate website. Here is a link to search for an agent: http://services.azre.gov/publi… . You're looking for how long they have been in business, continuing education and any filed complaints.

      As for the lenders involved with the transaction, I've never had any problems getting the listings agents to reveal who is involved. I always ask that information before submitting the contract. But knowing what company you are working with doesn't always help. For example if you are working with Chase on the 1st loan, you will most likely be dealing with a Chase negotiator who will be dealing with at least two different investors, the mortgage insurer, BPO agents, appraisers, closing department and Chase management. The 2nd loan will have just as many parties and all are trying to agree on how to short sale the home. I'm not sure what good it would do you to know more than the name of the lien holders you are working with. Its not like there is a reliable database of information on each lien holder out there.

      I strongly doubt the listing agent's know much about who they are working with. When they take on a short sale there is no telling who she will have to work with to get the process completed.

      Personally, I'd focus more on qualifying the listing agent first and making sure the deal has a strong likelihood of being approved.

      I'm almost done with a 5 part blog post with questions you or your agent should be asking to qualify a short sale before moving forward. It should be published early this week so keep an eye out for it.

  • Pingback: Questions You Need to Ask When Considering a Short Sale | Denver real estate blog focusing on current market trends.

  • Hellen

    Is it a good idea to have the seller's agent be buyer's agent when deal with short sell? 
    What are the drawback? 

    • http://www.redfin.com Marcus Fleming

      Hi Hellen, 

      With any transaction the buyer and the seller should have separate representation. Since the listing agent was hired by the seller, their job is to do everything possible to help them sell the home with the smallest negative financial impact.

      Here is a very common situation that comes up in almost every short sale transaction. Lets say there are two banks involved in the short sale and after they do all their negotiations they decide the buyer's offer is $20,000 short of what they are willing to sell the home for. The negotiators assigned to represent the banks will start by going to the seller and asking the seller to bring in $20,000 cash to close the deal. The seller will say they don't have the money and the buyer will have to pay it or it can't be done. At that point in time, do you want to be working with an agent that represents your best interests or the seller's best interests?

      If you're working with the listing agent, they will tell you the seller's can't pay it and therefore you should pay the additional $20,000. This is exactly what happens as listing agents call us all the time with this wacky logic. As buyer's agent's we laugh and say our home buyer (you) will not be paying $20,000 above market value for the home. We push the responsibility for the $20,000 back to the seller and tell them to continue negotiating with the banks or have the seller agree to a promissory note. 

      The listing agent and the seller will want you to agree to pay the $20,000 so the deal can be approved which allows everything to move forward. By pushing the responsibility back to the Seller more negotiations will have to occur and it will push back the bank's approval by two weeks or a month.

      There are very few real estate agents that will agree to represent both sides due to the extremely high amount of liability that is involved. It is impossible for any real estate agent to fairly represent both sides. When the listing agent knows the ins and outs of the Seller's financial situation and has been hired to get them out of the short sale by all legal means necessary there is no way that listing agent can protect the buyer's interest without hurting the seller. 

      From time to time we'll see greedy listing agents looking to get paid twice as much by representing both parties. Those are the agents most likely to be sued in the years to come. Heck, Vegas has billboard advertisements posted by lawyers asking home buyers and seller's if they think their agent didn't properly represent them. 

      I hope that helps and let me know if I can answer any other questions.

    • http://www.redfin.com Marcus Fleming

      Hi Hellen, 

      Just another thought, having a buyer's agent represent you doesn't cost you anything since the buyer's agent get paid by the seller, or the banks in the event of short sale. 

      So why not work with a buyer's agent to make sure you are getting a good deal and to make sure someone is there to protect you?

  • buyer

    what is to prevent the seller's agent from telling them about higher back up offers and then they say no to yours  ( in this deal the seller's lender has two mortgages same lender…and I have to give them 60 days to accept or reject the offer.)  The seller has already accepted my offer…now just waiting for their lender.