The current market is making me feel older than dirt. Mostly because there are fewer and fewer agents around who have sold real estate in a previous bad market. I find myself explaining what is going to happen next, to many who have never been through a short sale from beginning to end. Even if you take classes about what may happen, it doesn’t replace the experience of living through what actually does happen.
Everyone wants a bargain, especially in this market. But the truth is that many bargains go to investors and people inside the industry, because they can handle all the hiccups better than owners who plan to occupy the property. Whether it’s a short sale, a foreclosure, an estate sale or other “discounted” property, often it’s like buying yesterday’s donut. You can expect something to go sideways in a short sale, and often you can’t get it to go perfectly straight.
1) The closing date may be delayed. In fact you can pretty much count on it. For someone who is trying to coordinate a move, this can wreak havoc on their life. If you are trying to link together the sale of your house with the purchase of a short sale, well good luck with that one. If you are trying to give notice to your landlord and be able to move into the short sale property on a firm given date, not always a reasonable expectation. Most often short sales involve a series of extentions strung together until it closes. If someone is not planning to live in the house, such as an investor, not a huge big deal. But for someone trying to move into it, it can be a nightmare of uncertainties.
2) The bank does not approve the sale price. One of the hardest things to understand about a short sale is that the buyer and seller agree to a price, but the bank is the one calling the shots. Even when you get the HOORAY OK from the bank, the road can be very bumpy to the end.
Say you are buying a house for $820,000 and the payoffs on the seller side are $860,000 including a first and second mortgage and seller’s closing costs including exise taxes. The 1st mortgage is going to be paid in full, so it is the second mortgage lender who is agreeing to whatever is left after other costs are paid. You send them an estimate that they are going to get $60,000 of the $120,000 owed to them. They say OK. Now during the time you waited for them to say OK, guess what happened. Yup. ALL THE COSTS INCREASED! The first mortgage payoff got a lot higher than expected. The utility bills went into arrears and the utilities may even have been shut off. The arrearages grew and grew and now the 2nd lender who agreed to take $60,000 is only getting $50,000.
You can see how this can turn into a big yo-yo affect with the buyer feeling like someone is not telling the truth. Yes the 2nd approved the short sale. No the 2nd isn’t letting it close now. You must remember that the 2nd mortgage never approves the sale price of $820,000 in the example above. They approve the amount that they are going to be “short” on their payoff.
The buyer thinks the bank approved the sale price of $820,000 when we got the first Hooray OK, when in fact what they approved was receiving $60,000. Now when you do the final closing statement and the payoff is $50,000…you are back to square 3. You are not back to square 1. You have made progress. But not as much as you thought and the closing date is again delayed and the sale, again, may not happen at all.
3) Now you get to the final stage. The bank approves the $50,000 or the buyer agrees to come up with an additional $10,000. Somehow the gap between the $60,000 approved and the $50,000 left to pay the 2nd mortgage has to be bridged. Possibly with a little give and take on everyone’s part, including the agents. The buyer who is now being asked to give a bit more than agreed to at a sale price of $820,000 doesn’t understand why. “I thought the bank agreed to the price of $820,000?” Remember, the “shorted” lien holder never approves a sale price. They approve the “short payoff” which is a moving target! It can get very frustrating and difficult to comprehend and follow.
4) Now the buyer wants to walk through the property the day of signing. Uh-oh…the utilities are shut off. Anyone who can’t make their mortgage payment and who is not living in the house, is not likely to keep the utility bills current during this long approval process. Yes it is reasonable for a buyer…normally…to want the utilities on for the final walk through or for the inspection. But getting them turned on is easier said than done. Whose name do they get turned on in? If it is closing in the buyer’s name in 3 days, they likely don’t want the utilities in their name yet. In fact the utility companies may not even let a non owner/non-tenant put the utilities in their name. It clearly is not something a lawyer would advise a buyer to do prior to closing.
The seller isn’t forking out any money to get the utilities turned on, they have no proceeds and are not putting any money into the house. Same goes for repairs. You walk through and see something wrong with the house and want the seller to get it fixed. No way Jose. Seller is walking off with his tail between his legs licking his wounds. He’s often depressed and disgusted and beat up by life. He’s not coming over with a licensed contractor to make repairs.
5) The Buyer Agent often agrees to a short commission. So if you have arranged with your Buyer Agent to recieve a portion of the commission, don’t be surprised if that amount changes at the end.
Lots of headaches. Lots of uncertainties. The truth is that investors foresee most of this. They don’t care as much about the mundane things like what date it will close or making repairs. They are going to gut it anyway.
So the next time you wonder why investors and insiders always seem to get the best deals, ask yourself this. Who else would put up with all of this nonsense? Looking for a bargain? Great. Just remember this. It’s often like buying yesterday’s donut instead of a warm Krispy Kreme straight from the oven. The taste left in your mouth after all’s said and done…may be a little stale.