Buyers Beware of Short Sales & REO
With approximately 40% of homes for sale today being short sales and REO properties, it's good to know what to expect and how to prepare for the differences between these transactions and regular escrows.
Timing Is Everything!
In my experience as an escrow officer, a standard escrow without any title issues or delays from the buyer, seller, or lender, typically only takes a few weeks. For REO properties and short sales however, it's not unheard of for the time in escrow to be weeks longer than that. In fact, for short sales it can take on average 3-5 months and as a short sale department manager, I saw some take even longer. Buyers of REO and short sale properties should be informed by their real estate agent that these transactions are not like typical escrows. In a short sale for example, the seller is dealing with their lender who is then dealing with the lender's investor, like Fannie Mae or Freddie Mac. The investor wants to ensure that the seller has a legitimate reason to short sell, isn't hiding assets, and isn't trying to take advantage of them. Seller financial documents have to be thoroughly checked, hardships have to be proven, and documents have to be updated every two weeks, or monthly depending on the document. Often, sellers may not be readily available either, causing further delays. Be sure to take these extended time lines into account when you’re working with your mortgage broker on locking in your interest rate and how long your rate lock will last. You may even need to plan to set aside an allowance for the cost of extending your low interest rate, if rates are rising when you’re waiting for the deal to be done.
Lenders Hold All The Cards!
It is not uncommon for lenders to reject offers on distressed properties, especially if they think the offer is too low and they can get a better bid. Lenders are obligated to recoup as much of the loss as they can for their shareholders and investors. The lender’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by comparable homes in the area and the property's condition. Buyers should work closely with their real estate agents to offer a realistic amount for the property based on the comparable properties in the area. This can be done with these type of properties while still getting a great deal on a home in today's market. For short sales, a BPO (or Broker Price Opinion) is typically done in lieu of an appraisal to indicate a fair assessment of the property value.
Anything Can Happen, And Often Does!
These type of transactions are known to be delayed even late in the game. While the buyer may have crossed every 't' and dotted every 'i', there are any number of things that can go wrong at the last minute. More often than not, the hold ups are caused by the lender or by an uncooperative seller. As a short sale manager, what I saw most often was hold ups on the lender's end. We would jump through hoops to fulfill requirements only to have the lender "lose" paperwork or require something additional that was never requested initially. Remember, the lender's short sale processors are making a minimal salary and handling hundreds and hundreds of files. This does not make for a motivated employee or an efficient system. Not to mention the often redundant demands coming from the investors. I also witnessed some pretty unreasonable sellers. Let's face it, this is not a happy time for these sellers. Hopefully as a buyer you are working with good agents who understand the process and educate their clients. Having said all of this, the only thing a buyer can do beyond providing everything requested in a timely manner themselves, is be flexible. Know going in that you can't schedule the moving van until you have the keys in hand!
Lenders Hold All The Cards!
Yes, I said that already. But it bears saying again. As I mentioned above, the hold ups in these type of transactions are often on the lender's end. In this market, lenders cannot keep up with the plethora of paperwork coming in. In a short sale department, you see it firsthand: "we never received your fax" or "these documents are not updated enough" and you hear this weeks after you submitted the paperwork because you can't reach someone in between; so of course, the documents are now aged and you have to get new ones. Or you might actually hear that by not sending the documents in a particular order, your file went to the bottom of the pile. No - I'm not kidding!
The only thing buyers can do is be patient and again, be flexible. Don't hold all your eggs in one basket either. Look at multiple properties and don't get your hopes up on just one. Have realistic expectations. And it certainly helps to be working with a broker and/or realtor who has experience with REO and short sale transactions and is doing their due diligence by communicating with their clients regularly as well as the other agent. The listing agent should be engaged and know what is happening with their client's file and when, and should then be communicating that to the the seller as well as the selling agent who should then communicate it to their buyer. A good escrow company will make sure the listing agent is well informed and updated regularly so agents should ensure they're working with one that is experienced and reputable. Ultimately, know as a buyer that until a seller's lender approves the transaction, you have a right to walk away. Be inquisitive going in about the exact terms on when you can rescind. This is crucial for the buyer in these deals.
Did I Point Out That The Lenders Hold All The Cards?
Pardon the redundancy but it's important to understand who is in control and not have unrealistic expectations as a buyer of a distressed property. Realize that working with the lender on the lender's terms is unavoidable and expectations are everything. Buyers who don't understand the process end up stressing themselves out and then walking away from the deal. My best advice is to be educated, get a good realtor, and know who you're dealing with. Beyond that, all buyers can do is comply quickly with requests made by the lender. Be educated, be patient, be flexible. And be prepared. This is a world where anything can happen, and usually does!
Michelle Trimmell, RA, MBA