Real estate short sales are becoming all the rage in the Mammoth MLS inventory. And anybody who consistently reads here knows I’m skeptical about them in the Mammoth market for many reasons. But with an ever changing economic landscape, manipulations from Washington DC, and fluctuating bank policies, I’ve tried to keep an open mind and continue to do my own research on what to expect in the future. Furthermore, I don’t think many of my readers appreciate how relevant the Q&A’s and columns found here are to what is really happening in the market.
So while this column was largely researched and half written, I walked into a conversation yesterday at an open house between two very experienced Mammoth real estate agents. Both were disgusted. One was complaining about how her buyers want to see all these short sale listings because they appear to be such good buys, and how they were wasting her time. The other was complaining because his investor client was listing all of his investment properties as short sales but wouldn’t take the time to even look at some of the paperwork the bank will request in a short sale transaction. These agents were clearly verbalizing the many quandaries I have anticipated.
So back to the column. In some of my recent research I came across a very simple and concise (and almost brilliant) explanation of the problem. This comes from Patrick Schutte a RE/MAX Realtor who is very active in foreclosures and short sales in Prescott, AZ. He says, “While I used to shy away from short sales, now there are 10 questions that I ask the listing agent before my clients and I craft their offer.” This methodology is very astute, and displays his experience (and probably frustration) in dealing with short sales. These 10 questions give any potential buyer and/or their agent a real clue as to whether this is viable, or a complete waste of time. So let’s look at Mr. Schutte’s 10 questions (they’re in bold) and my comments (what makes them so important) follow. And then I have some questions to add that are more Mammoth specific. Hopefully, the sum total of this exercise gives buyers and sellers some enlightenment about short sales, especially here in Mammoth.
1. Who initiated the short sale? May seem like a harmless question but it is rather important. Mammoth’s inventory is filling with short sale offerings by agents that have no clue other than to follow the crowd or trend. They have no idea (yet experience) at what it takes to complete. So is it a knee-jerk reaction by the listing agent or the seller? OR has the seller/agent been talking to a specialist (not the receptionist) at the lender who requested that the property be listed as a short sale? Big difference.
2. Has the homeowner stopped making payments on the property? Historically, a lender won’t even consider a short sale unless the property is in default (i.e. late on payments). Many short sale offerings are not in default, the sellers are just trying to get out from under the property while preserving their credit. In most cases there is no true “hardship” other than the owner no longer wants this “investment.”
3. Has the bank received the seller’s short sale package including the hardship letter and have they approved the homeowner for a short sale in writing? Well, here’s where the rubber meets the road. The “short sale package” is an application to the bank to be approved for the short sale. For many Mammoth wannabe short sellers, this is going to be more detailed than the application they made to purchase or re-finance the property. This will include copies of tax returns, bank statements, credit reports (including the Mercedes lease), personal balance sheet (and extensive financial worksheet), etc. The hardship letter explains why they deserve to qualify for the short sale. The more assets the seller has the more likely the bank will dig and look for ability to pay.
4. How was the listing price arrived at (BPO, CMA), and has the bank approved it? Sorry, the bank isn’t going to let any buyer steal the property. There will be appraisal(s), Broker Price Opinions and other assorted evaluations. And in this market, while the short sale is in a protracted escrow period the value declines so the deal that was isn’t as good as the deal it is. That’s why buyers usually back out of the transaction at some point.
5. Are there any subordinate lien holders? Have all lien holders agreed to short sale? Here’s the critical modern day problem in Mammoth––there’s more than one loan. And while the holder of the first loan might be agreeable, the holder of the second loan isn’t (or even worse, it can’t be determined who even has the loan––remember, this was the era of slice-and-dice). And speaking of lien holders, the homeowners associations are holding liens on some of these properties and they want to get paid.
6. Is their Primary Mortgage Insurance (PMI) on the 1st mortgage? This isn’t so relevant to Mammoth, but if the property IS owner occupied (and thus having a much better chance of completing the short sale) then this could be a real issue. The lender may not care for the short sale because it may be in their best interest to foreclose and let the accountants jockey the numbers.
7. Have you received any other offers, and has a loss mitigator been assigned to the case? Now you’re getting down to brass tacks. If everything is in order so far and these questions have been answered properly (the listing agent has done their job!), now you’re getting down to an understanding of what the bank may accept as a price in a short sale. And whether the buyer is willing to be in the range. And you have a live-body decision-making human being looking at the file. I could write a whole column on this question. All of these people are so swamped (and probably disinterested) that this is serious consideration.
8. How long do you estimate the loss mitigator will take to respond to our offer? Now Mr. Schutte has to be respected for not messing around, and his website indicates he was a Marine, and in a short sale a buyer needs a good Marine on their side (storm the beach!). I don’t know how accurate the answer will be but it is worth asking. If you’ve got this far it shouldn’t be too long, “ah, next week, or next month, or next year.”
9. Has the loss mitigator ordered another BPO yet? When will they? More brass tacks. In this market it is normally an updated appraisal. (And I have news for you, real buyers aren’t paying “appraised” values in Mammoth, appraisals are typically 10-15% higher than what the today’s buyer is willing to pay––they’re typically educated and qualified!)
10. When is the scheduled trustee’s sale? Has the bank postponed it in writing?
We were just assigned a foreclosure/REO and the prior owners were “shocked” they had been foreclosed on. They said they had talked to the bank the day before and the bank was “working with them.” The property had been listed and everyone was clueless that the bank was going to pull the plug. Right now the pipeline shows there are a dozen or so short sale listings with looming Trustee’s Sales. Some have been in escrow already and have fallen out. Some Trustee’s Sales have been delayed pending potential short sales. But the odds are some (or most) of the “work” hasn’t been accomplished. (Sooner or later we’ll be leaving the jettisoned world of short sales/foreclosures/REOs and government intervention.)
Here’s a question that is more Mammoth specific:
Is the seller prepared to put cash or promissory notes into the short sale transaction to make it happen? Well, that’s what any seller that can’t prove hardship is typically being asked to do. You see, most of Mammoth’s short sellers aren’t hardship cases (as their financial worksheet/credit report will prove), so the bank scrutinizes their financial position and wants them to pony up something of value to make up for the forgiveness. This is when the seller gets to decide if it is worth it or not. This is why the exercise of asking the 10 questions is so valuable for any potential buyer. The lender will create pain for the non-hardship seller and many of these sellers don’t want the financial (or emotional) pain or compromise. Most are just looking for an easy way out of the mess (and their agents gladly enable them).
There are other concerns about short sales in Mammoth, but I’ve run on too long. Buyers will have to pay cash outside of the escrow for any furnishings. But that may not be a big deal. One local agent that has numerous short sale listings told me (to my face) that he doesn’t do anything except put the listings into the MLS. He said, “I tell my sellers they have to do all the short sale related work.” That should give you a high level of confidence on top of everything else we’ve discussed here.
Mr. Schutte’s 10 questions are extremely valuable to any buyer pursuing a short sale purchase. I highly suggest any buyer doing so to ask their agent to pursue them before writing any offer. For listing agents, the sellers should be prepared to answer them (and do the work first). Having the answers will save lots of time. And after all, time is the most precious commodity we all have.