How to Buy Short Sale and Foreclosure Homes in California

The old adage that “if it sounds too good to be true, it probably is” is quite relevant in many of these cases.  It’s not that it’s too good to be true, in many cases it’s simply a matter of trying to attract attention to the property.  The Agent listing these homes rarely has any guidance or advice from the bank on what they would accept in lieu of what is owed on the property.

The definition of a Short Sale is a home that is selling for less than what is owed to the lien holder(s).  The banks are dealing with many distressed homeowners right now and have a huge workload when it comes to “settling” for less that what is owed on the money they have already lent to the current owner.

Many banks will postpone the foreclosure process while the current owner tries to sell this home.  On average, it will cost a bank upwards of $60,000 to foreclose on a home – and that doesn’t even take into account the price that they may have to sell it for to get it off their books – more on that later.

When a Real Estate Agent takes a listing to list a short sale, they rarely have any idea of whether or not the bank will cooperate and sell the home for less than what is owed on it.  In addition to that, if there is a second mortgage on the property – many times they have to agree to completely forgive what’s owed to them.  If the first lien holder is settling for less than what is owed to them, there is obviously nothing left to pay for the second mortgage.

The Real Estate Agent’s Biggest Challenge is to list this home at a price that will attract buyers.  When there are buyers, the Agent has the ability to start negotiations with the lien holder(s) and get an idea of what they may settle for.  In addition to the purchase offer, the Agent is required to put together a hardship package showing that the current owners can no longer afford the home.

Once you submit a purchase offer on a short sale – the waiting game starts.  On average, it is taking 45 to 60 days to even get an answer from the bank on whether or not they will entertain the offer.  I have waited over 60 days just to have the bank say “No” with no guidance or direction on what it would take for them to consider an offer to settle.

The most important thing you need to know is that a bank will not settle for less than, or at least much less than, what the home is worth today.  Typically, before a bank considers an offer they will perform a Broker’s Price Opinion, or BPO.  This is advice from a third party real estate broker on what the current value of the property is worth.

Knowing what to expect is the most important message I am trying to get across here.  If you see a low asking price, it doesn’t mean that you will be able to buy that house for that price.  There is a fundamental communication gap right now between the lien holding banks, servicing companies and Real Estate Agents.

I hear the frustration from both Agents and home buyers alike in dealing with Short Sales.  I believe this is primarily because Buyer’s Agents are not communicating with home buyers to set up thier expectations for this process of making an offer on a short pay home.

Perception is Reality.  If you’re a home buyer making an offer on a short sale property keep this in mind.  Ask your Agent to do some homework.  I can’t tell you how many times i’ve spoken to a listing agent and had them basically just break down on the phone because the bank will not respond to any offers they submitted as long as 60 to 90 days ago.

Your Agent should be doing a lot of homework before you make an offer.  Here is what your Agent should do FIRST if you are thinking about making an offer on a short sale:

1.  Call the listing agent.  A. Find out if the hardship package has been submitted from the seller and if the bank has reviewed it.  B. Find out if the listing Agent has had any communications at all with the bank or servicer.  C. Find out if the Agent has dealt with this bank before and if they have any expectations of the time line for processing the short pay request.

2. Check recent sales in the area.  If properties with similar amenities have sold in the past 1 to 3 months in close proximity to the home you’re interested in – how much did they sell for?  What was the average price per square foot?  Where they also short sales or foreclosures?  This is important because the bank will check this data before considering your offer.

3. Lastly, and maybe most importantly – search the area for foreclosures that are for sale that are at or below comparable sales prices in the same area.  You can save yourself a lot of time and trouble if an equally valuable property is already priced to sell close by.

I am not trying to discourage you from making offers on short sales.  I am trying to educate and inform so that you are not surprised by the process.  This is not a “close your eyes and throw a dart” type of sale.

Move forward on your Short Sale offers with this infromation and you will not be disappointed!  There are two ways to approach making a short sale offer.

Short Sale Approach 1: Make an offer that YOU CAN’T REFUSE.  Chances are, the bank will refuse it, but If the bank accepts your offer, Congratulations!

Short Sale Approach 2: Disregard the “asking price”.  Many times this number is pulled out of the air and has absolutely no relevance to the actual “value” of the property.  Many times the Agent does the best they can to price the home such that it is consistent with recent sales in the area…..but that’s still no guarantee that the bank will agree.

If you really want a Short Sale property, you may want to seek the advise of your Realtor as to what a realistic value might be and make your offer at that amount.  Remember, the bank is going to do thier homework – I just doesn’t make sense that you wouldn’t do yours.

Finally, buying a short sale does not exclude you from using any Down Payment Assistance Programs, FHA or CalHFA loan programs and you can still always use Down Payment Assistance Grants like Nehemiah and Ameridream.