Today's blog idea came from a question I received last week from one of the users on my site. In an email this user asked,
"Is it reasonable to believe that with the current inventory out there that once we get pre-approved and find a home that we like that we can close in less than 30 days?"
The answer is more difficult than a simple yes, but there are some steps ALL BUYERS should take to avoid delays in escrow, as well as finding a home.
Once you get an offer accepted, closing in 30-45 days or less should be no problem, depending on the type of financing you are using. However, there is a lot of competition amongst buyers in the market right now when it comes to the best properties. Most buyers are not getting their offer accepted on the first house. The negotiation process is what we can’t really predict. If you are eager to find a home and make a purchase soon, here are the steps you should take to achieve success:
1. Get pre-approved before you do anything else. No matter how solid of an ability to qualify you think you have, guidelines and requirements have been very volatile in the mortgage market. This is why it is essential for EVERY buyer to get pre-approved first. I've seen more buyers who "KNEW THEY WOULD QUALIFY" end up not qualifying or taking a long time to get their approval set and missing out on a property they really wanted, than not.
I recommend speaking with 2-3 direct lenders (not brokers) for the best rate and terms. Here is my lender’s contact info if you would like to see what he can offer you:
David Medina
Mission Hills Mortgage Bankers
dmedina@mhmb.com
2. To ensure the ability to close on time once you get an offer accepted, you need to avoid short sale listings completely. My recommendation is to focus on Bank repos and Traditional sales where the sellers must sell and have enough equity to do so without attempting a short sale. For more info on this subject, please read my blog, ” Short Sales vs. Bank Repos.”
3. Pick one agent and work with them exclusively. The agent should be local to and familiar with the area(s) you are interested in. Any agent who tries to work with you for a purchase in an area they don’t regularly service, is most likely going to take longer to find you the right home and probably won’t get you the best deal when they do. I say to work exclusively with the agent you choose because if you are not working faithfully with them only, they will not put in the highest level of effort on your behalf.
For more information on the areas I regularly service and working together exclusively with me as your agent, please call or email me.
Thanks!
Scott Johns
California Foreclosure Network
Oak Tree Realty Group
(951) 471-3238 Direct
(951) 848-9330 eFax
Scott@CaliforniaForeclosureNetwork.com
http://www.blogger.com/www.CaliforniaForeclosureNetwork.com
Wednesday, June 18, 2008
Sunday, June 8, 2008
Short Sales vs. Bank Repos
In my zip code, 92562, I ran a search this morning, for houses built in the year 2000 or newer, under $500,000, with at least 4 bedrooms, and 2000 square feet. 131 listings came up in the MLS (Multiple Listing Service: How we agents all list and sell homes). This was an experiment to see how these listings break down in #'s of short sales, repos, traditional sales, etc. Here are the results:
Bank Repos*: 59 (45%)
*Also called REO's, Bank Owned, Lender Owned, Corporate Owned, etc.
Short Sales*: 57 (44%)
*Also called Short Pay, Subject to lender Approval, etc.
Traditional Sales*: 15 (11%)
* Seller's have, or claim to have, an enough equity in the home or money out of pocket to make up the difference between what is owed and what it sells for.
What do the #'s mean? I'm glad you asked!
Ever since the peak of the Real Estate Market Boom (the date will vary depending upon the neighborhood), there has been a surplus of inventory on the market. If there is a much larger # of homes on the market than what is actually selling, then which homes are selling, and why?
Using the same criteria as above, I searched for closed sales from last month, May 2008. There were 43 matching my criteria. Of these 43, this is how the #'s broke down:
Repos: 37 (86%)
Traditional: 4 (10%)
Short Sales: 1 (2%)
New Home: 1 (2%)
Interesting... Why do repos and short sales have almost the same market share of inventory, but repos have an overwhelming 86% market share of the sales vs. short sales' miniscule 2%?
There are a number of reasons for this, but first, it is important to understand the differences between these types of sales.
New Home Sales: This refers to new construction being sold by a small to large size developer.
Traditional Sales: As described above, refer to an owner who either occupies the property or owns it as an investment (ex. 2nd home, rental, etc.), and has enough equity or cash out of pocket to break even or sell for a profit..
Repo: A property that previously became an asset of a financial institution through the process of foreclosure.
Short Sale: Similar to a traditional sale in the type of owner, but the owner is upside down in the property. Meaning, the total of the mortgage balance and costs of selling exceeds the value of the property. For Example: John Smith owes $450,000 but he would only be able to find a buyer for his home at a price of $300,000.
This hypothetical example shows how the $150,000 difference between what is owed and what the property is worth presents a big problem for the seller. Their only option is to convince the bank(s) holding their mortgage(s) to take a loss on what is owed to them to avoid taking an even bigger loss through foreclosure. The concept makes sense, but several problems tend to be encountered along the way. Here is a list of some of those problems:
1. Multiple Mortgages
Many short sales are so because they were purchased through 100% financing or other high loan to value percentage financing. Financing is generally split up into a 1st (usually up to 80% of the purchase price), and a 2nd making up the remaining amount financed of the purchase price. Also, many people who didn't use multiple mortgages to buy their homes took 2nds out on their homes later for improvements or to pay off other debts. The problem with these multiple mortgages is that each loan is often with a different financial institution. In a foreclosure the bank in second position often gets nothing, and the first takes a loss as well. Because of this, bank's holding the seconds are generally, AT FIRST, willing to participate in a short sale because their chance of recovering a portion of their money is much higher. However, the banks in first position know that the 2nds will get nothing in a foreclosure and are reluctant to take a loss if the second gets anything through a short sale. The 1sts will often agree to a short sale if the seconds get nothing, but the 2nds won't agree to it because that's no better for them than a foreclosure.
2. Delayed Response
Because of the multiple parties involved and the limited staffing in the loss mitigation departments of various financial institutions, it is generally a lengthy process to get an acceptance on a short sale in the VERY FEW cases that are accepted. On average, short sales take several months to get an acceptance before the escrow period can even begin.
3. Changes in Financing Terms and Interest Rates
First, Processing & Underwriting Guidelines for Mortgage Lending have been extremely volatile ever since the Rea Estate Market Bubble "Burst". This means your loan program could disappear while you are waiting months for a response.
Second, the interest rate on your loan cannot be locked until you have a property in escrow, and then it costs extra to extend a rate lock more than 30 days. So, either your rate could go up before you get the property in escrow, or if the seller opens escrow and only submits your offer to the bank for approval, you could have to pay to extend your rate lock while you wait for a response, just to get turned down.
4. Foreclosure
Most short sale properties are already in some stage of the foreclosure process. Many a foreclosure has been completed while a short sale deal is still trying to be worked out with a buyer. Once foreclosure is complete, a short sale offer can no longer be negotiated.
5. Unstable Occupants
Most Owners or Tenants Occupying short sale properties know they are most likely about to lose their home to the bank. And they don't consider a short sale to be much different. Because of this, people have a tendency to damage the home through either vandalism or gutting (Ripping out and selling fixtures), much of which often gets repaired/replaced once the property has become bank owned. In short, if your purchase of a short sale does go through, the condition of the property could be much worse, upon closing, than it was when you originally viewed it, or even had your home inspection or final walk through.
6. Loosing Equity While You Wait
This is a problem of both New Home and Short Sales in the current market. Whether you are waiting for a new home to be built or a response to your offer on a short sale property, the value of the property is CURRENTLY declining. This isn't to say that you shouldn't buy any property until prices stop declining (I will address this issue in a future blog), but if you are going to buy now, shouldn't you pay TODAY's market value, not the value from 3 months ago when you first submitted your offer?
7. Unrealistic Prices
Agents and homeowners know that most buyers know that short sales are a waste of time. It is very difficult for them to compete with Bank Repo's, so they have to go after the unknowing buyers. How better to do this than with the price they list their home for? If you don't know any better, of course you are going to think that short sale priced $20,000 below anything else on the market is a great deal, along with several other new buyers. The problem is that banks will not approve a short sale where the purchase price is discounted below the current market value. Why? Because if they did, it would increase the rate of decline in property values causing the same financial institution to lose even more money on future short sales and repos. The Sellers are counting on buyers getting emotionally attached to the property, first because of the price, then bidding the price up through competing offers, until it reaches a price the lender taking the loss may approve.
8. Multiple Offers
MOST short sales will take all the offers they get and send them on to the bank for approval, keeping the property available for additional offers while they wait for an answer. Perhaps your offer is the best one at the time you make it, and maybe even high enough for approval, but while you wait, somebody else can come in and bid $500 more than you and they will get the property if it actually does go through, without you having an opportunity to negotiate. It seems silly right?
Do I need to continue?
I have a personal policy that I will not waste my time or my clients’ time looking at short sales. After reading this, if you are still considering short sales for potential homes to purchase, you may be asking yourself, WHY???
I hope my web site users and clients find this first blog helpful. Please send me an email if you have any additional questions.
Thanks,
Scott Johns
California Foreclosure Network
Oak Tree Realty Group, Inc.
(951) 471-3238 Direct
(951) 848-9330 eFax
Scott@CaliforniaForeclosureNetwork.com
www.CaliforniaForeclosureNetwork.com
Bank Repos*: 59 (45%)
*Also called REO's, Bank Owned, Lender Owned, Corporate Owned, etc.
Short Sales*: 57 (44%)
*Also called Short Pay, Subject to lender Approval, etc.
Traditional Sales*: 15 (11%)
* Seller's have, or claim to have, an enough equity in the home or money out of pocket to make up the difference between what is owed and what it sells for.
What do the #'s mean? I'm glad you asked!
Ever since the peak of the Real Estate Market Boom (the date will vary depending upon the neighborhood), there has been a surplus of inventory on the market. If there is a much larger # of homes on the market than what is actually selling, then which homes are selling, and why?
Using the same criteria as above, I searched for closed sales from last month, May 2008. There were 43 matching my criteria. Of these 43, this is how the #'s broke down:
Repos: 37 (86%)
Traditional: 4 (10%)
Short Sales: 1 (2%)
New Home: 1 (2%)
Interesting... Why do repos and short sales have almost the same market share of inventory, but repos have an overwhelming 86% market share of the sales vs. short sales' miniscule 2%?
There are a number of reasons for this, but first, it is important to understand the differences between these types of sales.
New Home Sales: This refers to new construction being sold by a small to large size developer.
Traditional Sales: As described above, refer to an owner who either occupies the property or owns it as an investment (ex. 2nd home, rental, etc.), and has enough equity or cash out of pocket to break even or sell for a profit..
Repo: A property that previously became an asset of a financial institution through the process of foreclosure.
Short Sale: Similar to a traditional sale in the type of owner, but the owner is upside down in the property. Meaning, the total of the mortgage balance and costs of selling exceeds the value of the property. For Example: John Smith owes $450,000 but he would only be able to find a buyer for his home at a price of $300,000.
This hypothetical example shows how the $150,000 difference between what is owed and what the property is worth presents a big problem for the seller. Their only option is to convince the bank(s) holding their mortgage(s) to take a loss on what is owed to them to avoid taking an even bigger loss through foreclosure. The concept makes sense, but several problems tend to be encountered along the way. Here is a list of some of those problems:
1. Multiple Mortgages
Many short sales are so because they were purchased through 100% financing or other high loan to value percentage financing. Financing is generally split up into a 1st (usually up to 80% of the purchase price), and a 2nd making up the remaining amount financed of the purchase price. Also, many people who didn't use multiple mortgages to buy their homes took 2nds out on their homes later for improvements or to pay off other debts. The problem with these multiple mortgages is that each loan is often with a different financial institution. In a foreclosure the bank in second position often gets nothing, and the first takes a loss as well. Because of this, bank's holding the seconds are generally, AT FIRST, willing to participate in a short sale because their chance of recovering a portion of their money is much higher. However, the banks in first position know that the 2nds will get nothing in a foreclosure and are reluctant to take a loss if the second gets anything through a short sale. The 1sts will often agree to a short sale if the seconds get nothing, but the 2nds won't agree to it because that's no better for them than a foreclosure.
2. Delayed Response
Because of the multiple parties involved and the limited staffing in the loss mitigation departments of various financial institutions, it is generally a lengthy process to get an acceptance on a short sale in the VERY FEW cases that are accepted. On average, short sales take several months to get an acceptance before the escrow period can even begin.
3. Changes in Financing Terms and Interest Rates
First, Processing & Underwriting Guidelines for Mortgage Lending have been extremely volatile ever since the Rea Estate Market Bubble "Burst". This means your loan program could disappear while you are waiting months for a response.
Second, the interest rate on your loan cannot be locked until you have a property in escrow, and then it costs extra to extend a rate lock more than 30 days. So, either your rate could go up before you get the property in escrow, or if the seller opens escrow and only submits your offer to the bank for approval, you could have to pay to extend your rate lock while you wait for a response, just to get turned down.
4. Foreclosure
Most short sale properties are already in some stage of the foreclosure process. Many a foreclosure has been completed while a short sale deal is still trying to be worked out with a buyer. Once foreclosure is complete, a short sale offer can no longer be negotiated.
5. Unstable Occupants
Most Owners or Tenants Occupying short sale properties know they are most likely about to lose their home to the bank. And they don't consider a short sale to be much different. Because of this, people have a tendency to damage the home through either vandalism or gutting (Ripping out and selling fixtures), much of which often gets repaired/replaced once the property has become bank owned. In short, if your purchase of a short sale does go through, the condition of the property could be much worse, upon closing, than it was when you originally viewed it, or even had your home inspection or final walk through.
6. Loosing Equity While You Wait
This is a problem of both New Home and Short Sales in the current market. Whether you are waiting for a new home to be built or a response to your offer on a short sale property, the value of the property is CURRENTLY declining. This isn't to say that you shouldn't buy any property until prices stop declining (I will address this issue in a future blog), but if you are going to buy now, shouldn't you pay TODAY's market value, not the value from 3 months ago when you first submitted your offer?
7. Unrealistic Prices
Agents and homeowners know that most buyers know that short sales are a waste of time. It is very difficult for them to compete with Bank Repo's, so they have to go after the unknowing buyers. How better to do this than with the price they list their home for? If you don't know any better, of course you are going to think that short sale priced $20,000 below anything else on the market is a great deal, along with several other new buyers. The problem is that banks will not approve a short sale where the purchase price is discounted below the current market value. Why? Because if they did, it would increase the rate of decline in property values causing the same financial institution to lose even more money on future short sales and repos. The Sellers are counting on buyers getting emotionally attached to the property, first because of the price, then bidding the price up through competing offers, until it reaches a price the lender taking the loss may approve.
8. Multiple Offers
MOST short sales will take all the offers they get and send them on to the bank for approval, keeping the property available for additional offers while they wait for an answer. Perhaps your offer is the best one at the time you make it, and maybe even high enough for approval, but while you wait, somebody else can come in and bid $500 more than you and they will get the property if it actually does go through, without you having an opportunity to negotiate. It seems silly right?
Do I need to continue?
I have a personal policy that I will not waste my time or my clients’ time looking at short sales. After reading this, if you are still considering short sales for potential homes to purchase, you may be asking yourself, WHY???
I hope my web site users and clients find this first blog helpful. Please send me an email if you have any additional questions.
Thanks,
Scott Johns
California Foreclosure Network
Oak Tree Realty Group, Inc.
(951) 471-3238 Direct
(951) 848-9330 eFax
Scott@CaliforniaForeclosureNetwork.com
www.CaliforniaForeclosureNetwork.com
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