Archive for the ‘Sellers’ Category

The 5 Most Common Complaints of Short Sale and REO Buyers (and How to Avoid Them)

Roughly forty percent of the homes for sale on today’s market are short sales and foreclosures! Distressed properties are well known for their value (a reputation which is sometimes accurate, and sometimes not), but they also have a reputation for causing buyers to become distressed, too!
Transactional snafus, last-minute surprises and long, drawn-out escrows that never close seem to be par for the course.

Instead of avoiding these properties altogether, get educated about the most common dramas that go down in these deals, and how you can avoid falling victim.

1.  Run-on (and on, and on) escrows. When you’re buying a home (or selling one, for that matter), time is absolutely of the essence.  And buyers reasonably expect that the big time suck in real estate is in the house hunting process itself; seems like once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly, right?

Not so much, when it comes to some distressed property sales. I’ve heard tell of the occasional, swiftly-moving escrow on an REO (real estate owned – by the bank). But for the most part, these transactions take anywhere from a few days to a few weeks longer than “regular” sales, because of the extra signatures, supervisor-level approvals and even investor involvement required to seal the deal.  Banks don’t have the same sense of urgency individual home sellers do, and it’s not uncommon for the people who need to sign on the dotted line to be on vacation or scattered across the country, adding days’ or weeks’ worth of time to the escrow.

And short sales are also an entirely different animal when it comes to escrow timelines. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.

Avoid the drama by: expecting your escrow to run long, and being pleasantly surprised if it doesn’t.  Expectation management is everything. Make sure you take these extended timelines into account when you’re working with your mortgage broker on the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an allowance for the cost of extending your low interest rate, if rates are rising rapidly during the time you’re waiting for the deal to be done.

2.  Bank won’t take lowball offer. If I had a dollar for every time I’ve received a question from an outraged reader to the effect that a buyer has had their short sale or REO offer rejected on grounds that it was too low, even though the bank has no other offers, I could buy a foreclosure myself (admittedly, it’d be one of those $150 foreclosures in some blighted town with tax liens and no plumbing, but still).

Banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because you see it’s on the market and listed as a short sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s condition.  Fact is, many banks would rather see the listing agent reduce the price by a moderate amount, and wait to see what offers come in, than to accept an offer 30 percent below the asking price just because there are no other offers on the table.

Avoid the drama by: working with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with.  You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after lowball offer on distressed homes. Sit down with your broker or agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not bizarrely out of the realm of the fair market value of the property.

3.  Last minute postponements/cancellations. These transactions have an uncanny way of being delayed at the last minute – or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and just hopped in the moving truck, only to get a text from your broker that the deal didn’t close because the escrow company which was selected by the bank flubbed the checkboxes on a single sheet of paper (it happens). Or, you’ve been in contract (with the seller) on a short sale for four months, and the bank refuses the sale entirely because the seller refuses to kick even $1 of their own cash into the deal, despite having a flush savings account.

Avoid the drama by: staying as flexible as possible with your moving plans as long as possible.  Best practice is to plan on some overlap between the time you can be in your last place and your scheduled move-in date.  Also, if you’re in contract on a short sale, you should take the point of view that you don’t have a firm deal until you get the bank’s approval of the transaction. So don’t even think about starting to make moving plans or paying for home inspections and appraisals until you know the bank has greenlit the deal and that the purchase price and terms they’ve approved work for both you and the seller.

4.  The bank’s black box. Make an offer on a normal home and you’re likely to know what the outcome will be within a few hours or a few days, at the outside. If things take longer because the seller is out of town or some such, the listing agent tells you that, and you at least know what’s going on.

Make an offer on a bank-owned property or a short sale?  It’s a crap shoot – could be days, but could also, easily, be weeks or months before you know what’s going on.  And no amount of calling, pleading, prodding or nudging is likely to get you much information on how your offer or the seller’s short sale application is being handled or what (if any) progress is being made.  And that “black box” into which your offer disappears at the benk level is very frustrating.

Avoid the drama by: continuing your house hunt until you have an answer back.  Maniacally pestering the listing agent for answers or harrassing your buyer’s broker into spending hours on hold with the bank is highly unlikely to get you any insight. (With that said, it does make sense for your agent to check in regularly – sometimes even daily –  with a short sale or REO listing agent to stay updated on any developments with the property and to make sure your offer/transaction stays in the front of their mind.)

Most of the angst in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home.  You can only control your efforts and activities, not the bank’s.  So, consult with your own broker or agent about staying proactive in viewing and even pursuing other properties until you have a firm “yes” from the bank on your short sale or REO offer.  Until that time, and usually for a short time after you get the bank’s approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when your right to rescind your offer or exercise contingencies – i.e., bail – will expire).

5.  Double standards. In a “regular” equity sale with no bank involvement, both buyer and seller are obligated to meet various timelines.  Seller has to provide disclosures by X date, open the property to inspections – with utilities on – by Y, and close and move out by Z.  REO and short sale buyers, on the other hand, are often dismayed to find that  even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick-like.

Avoid the drama by: chalking it up to the (admittedly irritating) way things are – the price you pay to buy from the bank.  Realize that working with the bank on the bank’s terms is unavoidable when you buy a distressed property. Then, go into the deal with realistic expectations – including the expectation that the bank will drag its feet, despite expecting you to keep every deadline – and you’ll be less frustrated, and less likely to make poor decisions out of frustration.

Also, make sure you do respond in a timely manner to the bank’s requests and your obligations under the contract.  I’ve seen banks capitalize on buyer delays in returning signatures and removing contingencies to accept higher offers they received in the interim.  Don’t lose your home on a technicality because you assume that the bank’s lackadaisacal timelines apply to you as well.

Source: Tara-Nicholle Nelson, staff writer of Trulia

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The Consequences of Walking Away

Have you had a conversation with someone in the last 30 days about the consequences of walking away from your mortgage?

If the answer is yes, you are not alone.

With an estimated 11 million people underwater on their mortgage, (owing more on their mortgage than their home is worth), even the most credit-worthy consumers are considering walking away from their mortgage.

“Walking away from a mortgage,” or what’s known as a strategic default, usually results in either a short sale or foreclosure and many people in this position are asking one simple question:

What are the consequences of walking away from a mortgage?

Walking Away from a Mortgage: The Consequences

Generally speaking, if you are considering walking away from a mortgage the major consequences will include:

  • Impaired credit
  • Deficiency risks
  • Tax consequences
  • Moving costs
  • Professional implications

Impaired Credit

Most people are aware that walking away from a mortgage will mean their credit score will take a hit. What most people may not be aware of is between short selling and foreclosure, there is very little difference in how much your credit score is impacted.  The main difference between a short sale and foreclosure is how soon you can qualify to buy a home again after the event, not how many points your credit score went down.

In addition to your credit score taking damage points, it is also common for credit card companies to cancel credit cards or lower your credit limit as a result of missing mortgage payments.  It is also common that it will become more difficult to obtain financing for larger ticket items such as autos or furniture — or any other type of revolving account after walking away from a mortgage.

Deficiency Risks

Depending on which state you live in, there are varying deficiency risks associated with walking away from your mortgage. (See anti-deficiency laws by state)

Translation: Your lender may sue you for the difference between what you owe and what your short sale or foreclosure proceeds were.

Anti-deficiency protection is limited to a minority of states and for most states in the U.S., there is no protection for homeowners from a lender pursuing the difference between what they owe and what the home sells for in foreclosure.

Further, even if your state has anti-deficiency laws in place, don’t think you are free from deficiency risk.  Whether you have deficiency risk or not, depends on factors such as: whether you have a second mortgage; did you refinance and take cash out; is your mortgage the one you got when you originally bought the house, and more.

Which is why when it comes to managing your deficiency risk, keep this saying in mind:

Nothing is more expensive than cheap legal advice.

If you are concerned that you may have deficiency risk, you should speak with a real estate lawyer who can provide legal advice for your particular situation.  Only a real estate attorney can accurately provide you the specific advice for your situation. Don’t rely on your neighbor’s advice or your brother-in-law who just short-sold his house and recommends that you should be okay by just walking away.

Tax Consequences

If you are considering walking away from a mortgage on your primary residence, there is a chance that you may have some tax liability.  If you are considering walking away from a mortgage on a second home or investment property, there can be a significant tax liability and you should consult your tax accountant.

Moving Costs

One of the commonly under-estimated consequences of walking away from a mortgage is the expense and process of moving.  Some of the common concerns related to moving include:

  • Moving into a rental — perhaps after decades of being a homeowner.
  • Possibly explaining to the landlord any credit report concerns as a result of missed mortgage payments.
  • Paying for moving expenses. Utilities, deposits, moving trucks and other expenses can add up fast.
  • Moving family members school, work or community activities they have gotten used to.

Many of the people I have talked with who have went through the process of walking away from a mortgage cited “moving” as the one consequence they hadn’t fully considered before actually doing it.

Professional Implications

Depending on what you do for a living, you may have professional consequences as a result from walking away from a mortgage.  The number of professions where your credit profile matters has grown over the last decade and if you are in a situation where your credit profile matters, you should know what the professional implications are before you walk. After all, you don’t want to lose your house and your job at the same time.

Walking Away from a Mortgage: The Single Biggest Mistake You Can Make

When making the decision to walk away from a mortgage, the consequences are certainly something to consider as part of the decision process.  And in my our experience of handling many short sales for our Clients we discovered that  there is one big mistake that you can make in the process:

Not being fully informed of what the consequences are of walking away from a mortgage.

Once you have educated yourself about the consequences and researched all of the possible options…

… the choice is still yours.

Source: Justin McHood of Academy Mortgage.

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