Update: November 14, 2010, see below
Okay, given the high number of ‘bank involved’ listings in Loudoun County right now, I thought I should clarify what many of you are hearing about in the media, or maybe even noticing in the comments section of listings of homes for sale. There are different types of ‘bank involved’ situations with homes for sale in our area.
When a listing reads that a property requires third party approval or bank approval, that means it is a short sale situation. What is happening is that the list price of the home is less than what the owners owe on their mortgage note(s). Therefore, while they are free to negotiate a contract to purchase with a buyer, the lender has the right to accept or refuse that offer because the lender has a financial stake in the situation. At this stage of the process, this is only a pre-foreclosure listing if the owners are behind on their payments, and the bank is moving toward taking ownership of the property. A true short sale does not have to involve the bank if the owners have the funds to bring to the table at closing to pay off the mortgage note.
(with me so far?)
SO, in my opinion, as a buyer’s agent, I would be very wary of a home on the market that is short sale, if the owners and listing agent have not already been in communication with the lender to let them know the home is on the market. Without having the lender’s involvement in the process, the list price could be nothing but a pipe dream if the lender isn’t likely to approve it. Because there are so many lenders out there, and each one is handling these situations differently, it is sometimes difficult for the listing agent to get the answers needed, and the process can take weeks or months to get to settlement. Some lenders are easier to work with than others, so there is no ‘typical’ time frame to get a short sale to settlement. Be prepared for it to be longer than the average 30 to 45 day contract to closing period.
Bank owned properties, by contrast, are homes that have already been foreclosed upon. The bank has title to the property, and has put it up for sale, typically selling the home “as-is.” And they truly mean as-is. They will do NO repairs. Most will allow you to have a home inspection for informational purposes (if you see something that you can’t live with, then you can void the contract based on the results of the inspection). Make sure that your buyer’s agent puts language in the contract that gives you the right to void the contract based on those results. Since the bank has ownership, the list price reflects what they want to get for the house, so you can negotiate in good faith with them. The prior owners of the property are gone, and the bank is who you will negotiate with. Again, as with short sales, some banks are more responsive than others, and in my personal experience I’ve seen response times of under a day! The drawbacks are that you are purchasing as-is, and there are typically lots of bank addendums holding the bank harmless should there be a problem with the property after closing (mold, radon, polybutelyn pipes, etc). There are definitely good deals to be had in the inventory of bank owned properties, just proceed with caution and a good buyer’s agent, as you will want help navigating the contract with the bank addendums. (Consulting a good real estate attorney is never a bad idea, either!)
This article is pretty helpful if you are considering buying a short sale.
Now, if you are a homeowner that is suffering right now, and you think a short sale could be in your future, please, please, please call your lender! They can’t help you if they don’t know what is happening. Most lenders have “home retention” departments set up now, trained to help homeowners before a foreclosure happens. If you qualify for a hardship exception, they might modify the terms of your loan. They will want to go over your financial situation with you, they will want to know why you are having a hard time making your payments, and they will try to find a way to help. They don’t want to foreclose on your house any more than you want to lose your home. If you still can’t afford to stay even with their help, the next step is to have a real estate agent give you a market analysis to see what your house would be worth. You can work with your Realtor and your lender at the same time to get the house sold. I won’t kid you, it’s not an easy process, but it can work with patience and a good Realtor. For clarification, I’m a Realtor, not an attorney or tax advisor. But, I can help you work with your lender to sell your home…and I can do my best to try to minimize your stress and help you through it.
Short sales and bank owned properties make for very complex transactions. I’ve only truly skimmed the surface here to try to give an overview. Feel free to comment on your own experiences or ask questions! And as always, call or email me if I can help in any way.
Nov. 14, 2010, update: To clarify on when lenders become involved in the short sale process, most do not become involved until the sellers have a contract in hand on the property. The full short sale package is then submitted to their lender(s), including a hardship letter, financial statements, AND the contract to purchase they ratified with the potential buyer. Many times, though, they price the home below market value to get an offer, and get the short sale process started, only to have the lender come back after they do their due diligence with a counter offer at or close to market value…causing the original offer to fall apart, and the home to be remarketed at the higher price. If you are looking to sell your home as a short sale, or are looking to purchase and want a better understanding of how this works, please reach out to me, I’m happy to answer your questions… ~~H.