Inside San Diego Short Sales

Well, probably not a show we’ll see in the new HGTV line-up, but reverse staging is a form of short sale fraud that is becoming increasingly common.   Unlike traditional staging where a home is de-cluttered and dressed-up to present the best possible appearance, reverse staging accentuates the negative features of a home.  Reverse staging is part of an attempt get a low Broker Price Opinion (BPO) of the actual value of the home by inflating repair estimates and making the home appear to be in greater disrepair than might really be the case.

A Broker Price Opinion is a mini-appraisal, ordered by the lender in a short sale to determine how much they should expect to recoup from the sale of the property.  It is ideally performed by a real estate broker or agent who is familiar with the market and is a critical component of the short sale process.  If a BPOcomes in above fair market value it becomes more difficult to get a short sale approved, as it is likely the lender will want to hold out for a high offer in line with the BPO.

Trying to manipulate the BPOto reflect a below market price is usually done to accelerate a sale.   However it is also done by agents who will hide a higher offer from the lender, rig the sale, and then turn around and flip the property for a profit.  No two ways about it….this is fraud.

In most every short sale transaction all parties are asked to sign an “Arms Length” Affidavit that acknowledges that there is no fraud in the sale of the property.  As a short sale agent, it is my ethical responsibility to protect the best interests of my clients – this includes protecting them from any involvement in a fraudulent sale.  So, reverse staging might help short sale a home more quickly, but it could also land you in jail.

Whether you’re considering a short sale purchase, or the short sale of your own home, understanding the process will relieve some of the stress.  So here is what you can expect in a short sale. 

The first thing to understand about a short sale is that unlike a traditional equity sale there is an all-important 3^rd  party that controls the fate of the deal:  And that’s the lender.  In order for a short sale to occur, the lender or lenders must approve the transaction.  This involves 3 items for their consideration:

1. Can the current owner show sufficient financial hardship to prove that he cannot pay his mortgage?
2. Is the price offered consistent with comparable sales in the area?  Obviously the bank wants to re-coup as much of their investment as possible.
3. Will the bank or investor agree to settle for less than the amount owed, or will they choose to foreclose?

Step #1 – Pre-Qualification

Before taking a short sale listing it is the job of the Realtor to understand the financial requirements and pre-qualify the seller.  This involves having the sellers complete a financial worksheet and reviewing their income and assets.  Whether buying or selling, this is a critical step and one reason why working with an agent that is experienced in short sales is important.  If the sellers don’t financially qualify, there is no point going any further. 

Step #2 – It’s all about the Documentation

Once it has been determined that the sellers qualify, the Realtor or qualified short sale negotiator, will contact the seller’s lender and determine the exact requirements for submission as they are all slightly different.  It will also be determined at this point if the lender participates in the government HAFA (Home Affordable Foreclosure Alternatives) program as there may be incentives for both the sellers and the lender, and certain procedures may be streamlined.  In any case, the Realtor will work with the sellers and collect all the necessary documentation.  This will include:

1. A statement of general information
2. Financial worksheet
3. Handwritten letter explaining their hardship
4. 2 months pay stubs or year-to-date Profit and Loss statement if self-employed
5. 2 months bank statements
6. Tax returns for the last 2 years
7. Most current statements for all retirement accounts or other assets
8. Authorization form to allow the Realtor or negotiator to speak with the lender.

Step #3  – Selling the Property

The house is listed for sale as a short sale.  Both listing and selling agents must agree to equally split whatever commission the lender decides to pay.  Once an offer is received the Realtor should carefully examine it and make sure that it is an offer the lender is likely to accept; the price should be consistent with comps; the offer must not be contingent on the sale of the buyer’s home; and the buyer must understand that it is unlikely that the lender will pay for any termite work or other repairs.

Step #4 – Submission of the Short Sale Package

The listing Realtor or negotiator submits everything to the lender for approval of the short sale and the listing is noted in the MLS as “Contingent”.  Again, it is important to have an experienced Realtor who makes sure that the submission is not only complete, but that it is packaged neatly and easy to read and understand.

The package goes to a special department at the lender where it is reviewed.  If there is any documentation missing or unclear, they will request additional information. Unfortunately, even this initial review can sometimes take 4 weeks or longer and often paperwork disappears and duplicates must be supplied.

Once this initial review is completed and the package confirmed as complete, a negotiator representing the lender will be assigned.  It is the job of this negotiator to carefully review the file and make a recommendation as to whether it should be approved, or not.  If there are 2 lenders (as in a 1^st  and 2^nd  mortgage), this entire process must be completed for both lenders. 

Step #5 – Negotiation

During the review and negotiation process, the lender’s negotiator may counter specific items in the offer including the purchase price and the requested commission.  In the case of the second mortgage holder (who stands to lose the most), they may push for a bigger contribution from the 1^st  lien holder as in California they can no longer request that the sellers make a financial contribution.  Again, this is where experience counts.  The seller’s Realtor or negotiator should be in communication with the lender’s negotiator several times a week, working to move the deal along and arrive at terms that are favorable to the seller and buyer.  This part of the process can drag on for weeks, or even months, although some lenders have streamlined the process.  Also, keep in mind that many of the 2^nd  mortgage holders won’t even begin the review process until the 1^st  lien holder has approved the sale.

Step #6 – Approval

If the lender’s negotiator recommends approval, the file goes to upper management or the investor for final approval.  Generally speaking, if the file makes it this far, it is usually approved.  But again, this final leg of the process may take an additional two or more weeks.

And finally, the letter everyone has been waiting for – the approval letter.  Assuming all terms are acceptable to sellers and buyers the sale will now proceed as a “normal” sale.  The approval letter will stipulate a date by which the sale must close or the approval is no longer valid, usually 30 days.  Hopefully the buyer has hung-in during the approval process, and at this point the clock starts ticking for buyer inspections and contingency removals.

Navigating a short sale as either a buyer or seller can be overwhelming, and some of the items noted above may vary depending on the state you live in.  In any case, making sure you’re working with an experienced short sale Realtor is the best way to protect your interests. 

Overall, August was a good month and sales of detached and attached homes were up compared to August of 2010.  However, it’s the year-to-date numbers that tell the real story.

Compared to 2010, our year-to-date volume is down by 8.9%  for condos and 1.9%  for detached homes, and values have also slipped.  The median price for an attached home in August was $208,000 which is down significantly from a year ago when it was $220,500.  Detached homes have done slightly better, but the median price of $370,000 is nearly 4% down from $385,000 last year.

Some areas of course have fared better than others:

The year-to-date median price for a detached home in Cardiff  by The Sea is $892,500, up from $825,000 a year ago. Carmel Valley is also doing well with a median price of $915,500 up from $905,000.  And there has been little change in either Del Mar or La Jolla over the last year…both are holding steady at a bit over $1.3 million.

For most of the rest of the county however, home values have dropped.  We especially see this in areas that were new in 2005-2006.  Many of the homes purchased at the top of the market have now become foreclosures or short sales which tend to pull down the overall values in any neighborhood.

If you have questions about a specific area, just give me a call. 

As we all know, foreclosures are a big part of the current real estate market, and they can offer buyers a great deal….or a disaster.  Here are a few important things to know before sinking your money into a foreclosure.

#1.  The biggest difference between buying a foreclosure and a traditional sale is that the current owner has no knowledge of the property and most likely has never even seen it!  With a traditional sale, the owner is legally bound to disclose anything and everything they know about the property that could impact the functionality or value of the property.  Not so with a foreclosure.

#2.  The second thing to understand is that the property is sold “As Is”.  This could mean anything from the home simply missing a refrigerator or stove to missing all the toilets, floor coverings and windows.   This also includes everything you don’t want, such as any old belongings or outbuildings that were not cleared.

#3.  Now this may sound like, what you see is what you get….but that would be too simple.  You also get what you often can’t see such as termites, bad electrical wiring or a failing roof or rotting pipes.  This is why it is imperative that you spend the money for a general home inspection by a qualified home inspector, and then spend the extra money for additional inspections of any areas that seem to be waving a red flag, such as a roof or plumbing.  Unless otherwise stipulated in the contract, in California you have 17 days after acceptance of your offer to complete your inspections and pull out of the deal with all of your money if you don’t like what you discover.

#4.  I’ve seen this one trip-up would-be buyers too often….make sure that the condition of the property is consistent with what your lender will approve.  For instance, if you are doing an FHA or VA loan, the house has to be habitable; no mold, floor coverings must be in place and appliances and heater must all be in working order.  Talk with your Realtor about the type of loan you are getting and make sure the houses you’re seeing will qualify.

#5.  You will be asked to sign a bank Addendum which basically relieves them of any liability.  A part of the Addendum will cover late closing.  Make sure your loan is in place and ready to close on time.  If there is a late close of escrow and it is the fault of the buyer, it will cost you about $100 a day for each day that you’re late to close escrow.

And finally, make sure you work with a Realtor who is experienced in foreclosures!  There are way too many pitfalls and potential hazards to risk your deal in the hands of an inexperienced agent.

If you have any specific questions, or would like to see foreclosure opportunities in San Diego, please don’t hesitate to give me a call!