Short Sales and Bank Owned Properties – How to Avoid the Most Common Complaints

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Roughly forty percent of the homes offered for sale in today’s market are short sales and foreclosures!  Distressed properties are well known for their value, but they also have a reputation for transactional snafus, last-minute surprises and long, drawn-out escrows are just a few of the issues buyers are likely to face. While many inexperienced agents advise avoiding these properties altogether, a better option is to find a short sale specialist and get educated about the most common issues associated with these deals, and how to go about avoiding them and making your experience a positive one.

1.    Drawn out  escrows…  Processing delays.  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 drain in a real estate purchase is in the house hunting process itself;  as once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly… right?

When it comes to bank owned distressed property sales this isn’t always the case and in most instances these transactions take anywhere from a few days to a few weeks longer than regular sales, because of the extra signatures, management-level approvals and/or 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.

Short sales are also an entirely different animal when it comes to  processing 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 3 to 4 months to complete. (your agent should be able to procure an estimated processing timeline from the listing agent, however, if your agent is a short sale specialist they should have an idea of the average short sale processing timeline for the bank involved)  

Avoid frustration by expecting your escrow to run long, and being pleasantly surprised if it doesn’t. Expectation management is key when it comes to distressed property sales. 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.  Banks won’t take lowball offer.  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 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 accept an offer 30 percent below the asking price just because there are no other offers on the table. Working with an agent who specializes in short sales and foreclosures is key to snagging the best deal as these agents will have insight into what the listing bank might realistically be willing to accept, and how to influence their expectations. There are ways of influencing the bank’s value assessment to the buyer’s benefit and an agent specializing in short sales will be able to best assist you in doing this, and securing the best deal possible on the property.

Buyers can avoid much of the frustration associated with short sales and foreclosures by working with an agent who specializes in distressed property sales and one who can assist them in making a realistic offer.  Sit down with your agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not completely 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 through no fault of the wanna-be buyer. You signed docs yesterday, just loaded up the moving truck, only to receive a call from your broker that the deal didn’t close because the title company which was selected by the bank failed to have a single sheet of paper signed (it happens). Or, you’ve been in contract (with the seller) on a short sale for three months, and the bank refuses the sale entirely because the seller refuses to contribute $1,000 into the deal to offset the bank’s loss, this despite their having a flush savings account.

Avoid the  frustration 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 written 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 signed off on the deal and that the purchase price and terms they’ve approved work for both you and the seller.

4.  Bank’s black out. Make an offer on a normal home and you’re likely to know what the outcome will be within 24 hours. If things take longer because the seller is out of town or 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 receive acceptance.  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 out is very frustrating.

Avoid the  frustration by continuing your house hunt until you have an answer back. Maniacally pestering the listing agent for answers or harrassing your buyer’s agent 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 the 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. The 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 documents when requested and in a timely manner.

Avoid the  frustration 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. Do not lose your home on a technicality because you assume that the bank’s lackadaisacal timelines apply to you as well. Yes it’s a double standard but there’s nothing you or your agent will be able to do about it.

If you’re a  buyer, or an  investor, interested in purchasing short sale or foreclosure properties,  please give us a call or send us an email as we’d be happy to assist you by sending over a an inventory of properties matching your criteria.    

The Opland Group  Specializes in  Real Estate Sales, Luxury Home Sales, Short Salesin;    Bexley    Columbus    Delaware    Downtown    Dublin    Gahanna    Grandview Heights    Granville    Grove City    Groveport    Hilliard   Lewis Center    New Albany    Pickerington    Polaris    Powell      Upper Arlington    Westerville    Worthington

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