Short Sale Home Buying Strategy

Short Sale Strategy…

Undoubtedly, if you have been shopping for a home in the last year, you understand that short sales have a significant presence in today’s market. A short sale is a property sale where the seller requests that their lender accept a payoff amount (offered by a prospective buyer) of less than what the seller owes on the property. Short sales can be an opportunity for buyers to get a great deal on a property. But they can also be a nauseating pain - unless you go in with the right mindset.

Keep in mind…

The Bank, not the Seller, is calling the shots.

First, it is important to understand you are not dealing with the seller even though their name appears on the contract. The lender, who is considering hedging its bets and approving a lesser payoff, is actually calling the shots. Lenders are currently swamped with short sale requests from beleagured sellers, so don’t expect personal service or timely responses to inquiries from the opposite side of the transaction. For short sale buyers, this means a transaction can potentially take months to close. However, a few months’ inconvenience can pay off for a big reward–a large savings for you, the buyer!

The price is right? Wrong!

Listing agent’s pricing of short sales in San Diego can be so arbitrary that they are hardly worth considering, other than knowing that the list prices you see are under market value. In fact, some agents routinely price their short sale listings 10% - 20% below market value (by market value, we are talking about what home buyers will pay for a home in today’s “buyer’s market”). This pricing strategy results in multiple competing offers bidding each other towards market value (market value based on recent comparable sales). My advice to clients is to shop below their target price–anticipating that properties anywhere from 10% - 20% below the target price will end up actually priced in your original price range. It’s not an exact science, but I’ve found that this rule of thumb holds up in approximately 75% of cases.

A question I hear frequently is “why do listing agents do this?”. Simply put, the listing agent, who works for the seller, doesn’t know when the lender’s approval of the short sale is going to come. Thus, they want to drum up as much interest and as many offers as possible in order to get the best price come approval time. In practice, then, think of a short sale property as very much an auction-style listing, where the “highest and best” offer takes all.

Cash is King

When a bank does approve and enter into a short sale contract, the last thing they want to do is commit to an individual buyer, only to see the escrow cancel and have to go back on the market. The most common reason escrows cancel is the buyer not being able to obtain the financing that they were planning on using to purchase the property. Remember, a short sale operates similarly to an auction, with the best bid receiving the lender’s approval and thus, the sale contract. For lenders, the most attractive bids are those that seem most certain to close escrow–i.e., cash offers. Because cash is so attractive to lenders, cash buyers can offer a lower price than non-cash buyers, with an average savings of 5% - 10% of the purchase price! Of course, not all offers can be made in cash, so a large down payment is the next most attractive option to a lender.

How to offset cash competition

The deposit is the best way for a non-cash, low money down buyer to compete with other bids. A buyer that shows commitment with a larger than normal earnest money deposit is, in the same manner as a cash buyer, going to appear stronger and more committed to closing the transaction than a buyer with low money down and less than 1% deposit. Where 1% - 3% is normal for a deposit, 5% will certainly get some favorable attention. It’s important to do homework on the property and financing before escrow and immediately after opening escrow because the deposit can become non-refundable after the contingency period is up. The standard contingency length in CA contracts is 17 days from acceptance.

bank-owned

Pictured: Pacific Beach Foreclosure

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Factor in repair costs up front

Banks seldom approve minor repairs. These repairs should be factored into your bottom line when making your “highest and best” offer on a property. Remember, you are getting a good deal - but with that sometimes comes a little extra work to do (or to hire someone to do). Of course, you are never precluded from requesting repairs - just don’t plan on getting much, if anything, approved. And the bank will only issue credits unless financing cannot be procured without an actual repair being made.

If your like Mick, it will help

Trying to squeeze a short sale purchase into a traditional buying timeline doesn’t fly. Short sales can take more than six months to get approved (from the date of submitting a full short sale package to the lender). More often, they will take 4 - 5 months (and those lenders more affected by short sales requests, such as Countrywide, they might take up to 8 months)! Thus if you can sing the Stones early classic “Time Is On My Side” and mean it, you’re a good candidate for a short sale purchase! It’s good to start looking early, write offers early, and most importantly, to keep looking, and keep writing offers through the process…which leads us to my next point…

There’s other fish in the sea

Don’t fall in love - keep an objective mindset. Inventory is still higher than normal. Use it to your advantage. View a thousand San Diego properties online. Drive by a hundred. Go inside twenty. Write offers on ten. When you are writing offers on short sales, you are not submitting any real funds at the time of the offer. You will not enter into a contractual agreement until the bank has approved the short sale and you open escrow. So until a bank is going to commit to your offer, you don’t have anything on the line. Just like the 60’s, huh? Free love, real estate style!

Final Thoughts

Short sales actually have less competition in the market than bank owned homes. Additionally, if the short sale was an owner occupied property, you will receive full disclosures providing insight into the property that you simply do not get with bank owned or other absentee owned properties. Ultimately, if you are prepared to deal with the short sale process, it can be rewarding! In addition to receiving a “good deal”, for many buyers, considering short sales opens a significant number of options as opposed to just shopping for bank owned homes or conventional sale homes. If you have any further questions regarding short sales, buying or selling a home in today’s market, please don’t hesitate to contact us - 619.684.6229.

Cheers

Cleve

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