Thursday, March 04, 2010
Short Sale Questions
Early morning south Cocoa Beach. Not many condos this far south.
A reader asked the following questions in response to the last post about short sales. He thought the discussion might be interesting to others. Thanks, Bob.
Larry, Thanks for the very enlightening short sale story. Some additional information on this mysterious subject would be appreciated by many readers..
In your stories I saw 3 points which appeared to me to be either not logical, not ethical or not legal.
I find it surprising condo fees are limited to 6 months. That is certainly punishing the other residents to the benefit of the banks. In other states I believe the fees can be recorded as a lien, which stays with the property until satisfied. At what point does the local real estate tax authority begin to act on unpaid taxes?
If a bank rep blesses the price of a listing, how can a full price offer be subject to negotiation? I've always believed that the most basic foundation of the system was the offering of a property at a price the seller is prepared to accept. I can see there is an initial need for the seller to demonstrate to the lender what the market value of the property is.
Since it appears the listing prices may not include other fees and taxes, how can a buyer approach a short sale with some handle on what the final cost will be? In addition to what exists now, it is impossible to factor in what could accrue over the 8 to 22 months it can take the bank to make up it's mind.
In answer to the first question about the limitation of 6 months of condo fees. The law allows for up to 1% of the original mortgage amount or 6 months worth of assessments to an association if a lender acquires title to the unit via foreclosure or deed in lieu of foreclosure. One exception is if a third party buys the foreclosure at auction. In that case, all past due assessments are due. In a short sale, all past due assessments are due but can sometimes be negotiated. A very detailed discussion can be found here. No it's not fair to the other homeowners but it is something that associations who attempt to play hardball during a short sale should consider.
I recently assumed negotiations with an association in a short sale at the request of the listing agent. They were holding out for around $4500 of past due fees and were refusing to accept less. After pointing out that they would only be getting $2040 in the event of foreclosure should the short sale fail, they quickly accepted my offer of $2850, the buyer and lender saved $1650, the association got $810 more than they would have and we closed the sale. Win, win win. Note: because of the still-accruing fees before the eventual foreclosure, the association's savings probably exceeded $3000.
The tax collector has a much simpler process for getting taxes paid than forecloure. They sell the tax certificate at auction to investors who pay the taxes in exchange for a high interest rate on the amount from the entity who eventually clears the lien on the property. That entity will either be the lender at foreclosure or the owner who catches up on the taxes plus interest. In some cases the investor forecloses on the property if the lien is not satisfied.
Question number two is a doozy. In my example, which was highly unusual, a faceless bank rep "approved" the reduction in asking price for the short sale but the actual approval still had to come from the loss mitigation department who came back with a much higher price. The only time that a bank issues an approved price in a short sale is after a contract has been submitted and gone through the process and the bank comes back with their number. This is the point at which many buyers walk away. Many become married to their original offer price during the long frustrating approval process and often withdraw their offer rather than come up to the bank's approved number. This is when the listing agent will put the property back on the market with "bank-approved price" in the listing commentary. The approval letters are typically good for only 30 days so another buyer who can perform quickly can step in and buy the short sale in a quick deal.
Short sale listings in the MLS have the notation "third party approval required". The listing agent typically does a comparative market analysis to determine fair market value and then lists the property somewhere below that number in order to generate an offer. The banks will not accept that CMA as evidence of value. They will, after receiving the short sale package with an offer, order a broker price opinion or appraisal. That is what they use to establish value. In a recent deal a Fannie Mae desk jockey used Zillow of all things to override an appraisal to the upside.
Question number 3; A buyer shouldn't try to factor in accrued or expected expenses. Just as what a seller paid for a property is irrelevant to a buyer, so is the amount of loss to the lender in a short sale. A buyer should only be concerned with how far below current value she can purchase the property.
Don't expect the lenders to act logically in short sales. Their methods and processes are often illogical and counterproductive. And for buyers considering short sales, don't make the mistake of assuming that all short sales are good deals. Some are overpriced. It is also worth considering that the psychic damage of the often long and draining process may add a bitter taste to an eventual success. Good luck if you decide to engage.
Comments and questions are encouraged.
Of all the times that I've been burned,
By now, you'd think I'd have learned.