Short sale/foreclosure

jane__nyJune 22, 2010

I posted before about looking at short sale houses in Florida. My husband plans to retire in a year and we are thinking of moving to Florida. Our agent suggested short sales because they take a long time to close and it would give us time.

We spent two weeks and looked at so many homes. We now realize how little we understand about short sales. The owners of the houses were living there and did not appear distressed. The homes were well taken care of. We were not sure if the sellers listed the price or the bank.

What are short sales? How do they differ from foreclosures? Are short sale prices negotiable or is the price fixed by what is owed on the property? Some properties were listed as 'bank approved.'

The agent(s) we had were not clear and sometimes appeared not to understand what the process was. One agent told us that houses which foreclosed were better than short sales. When we asked why, he said 'the bank makes sure everything is fixed and taken care of.' Every short sale house we saw was in excellent condition. We did not look at foreclosures.


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Best of luck. You really never know what you are going to walk into in a short sale situation.

A short sale generally occurs when a homeowner owes more on the mortgage than the house is worth and then has to move for some reason. In "normal" times, short sales tended to be the last ditch effort to keep from being foreclosed on. They needed to move because they just weren't going to be able to to pay the note any longer. However, since housing prices have fallen so far in many area, there are a ton of people who are ending up in short sale situations even though they are currently making enough money to pay the note. They just need to move for some reason - job, family, health etc. and their house isn't worth as much as they paid for it.

As for price and closing the deal, that is a another can of worms. The homeowner or the bank can kill a deal at any point. The bank could drag out the process for months and then decide not to approve the sale at the last minute. Working with a big bank is very similar to working with the federal government. Everything goes slowly and some fool is likely to mess it up along the way.

Foreclosures are different from short sales because the bank actually owns the home. They may or may not keep it up (generally not.) Banks definitely want to sell foreclosures, but again, there are so many hoops to jump though and fools to deal with that the deal will take forever and might never happen.

Typically, you can find very good deals in both short sales and foreclosures, but the process is going to be infuriating. Personally, I would not limit myself to looking at short sales or foreclosures. There are plenty of deals to be had in Florida from average homeowners. If I found a short sale that was a total bargain, I might go after it, but I wouldn't restrict my search to them.

    Bookmark   June 22, 2010 at 8:56AM
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"Foreclosures are different from short sales because the bank actually owns the home. "

Not exactly.

The bank does not own the property until they purchase it at the foreclosure auction.

When you borrow money from the bank to purchase a house you sign a mortgage not or deed of trust (called a 'note' generically).
These documents give the lender a security interest in the property (they create a lien).

If the owner fails to pay the bank the house will go to foreclosure. Normally a public auction is held and bidders are invited to bid on the property.
The lender who owns the note can bid at the auction and often does to make sure they get at east the value of the note (and expenses, but possibly adjusted for mortgage insurance).
At this point the bank does own the property and the note is voided.
Banks call this Real Estate Owned (REO).

There are often onerous bidding rules that limit individuals from bidding at the auctions.
Thins like a bidders deposit of many tens of thousands of dollars, very short closings, etc.

Purchasing REO from the bank can be almost as bad.
No one wants to be the person that signed off on a loss.
The bank then does everything by committee (diffusion of responsibility) and things can move slowly. Add to that the lack of maintenance on the REO homes (further eroding their value).

In a short sale the owner sells the property for less than the value of the note, and the bank eats the difference.
The owner sells the property, and then negotiates with the bank to eat the loss and release the note.
The problems that crop up here can depend on who actually owns the note.
Many banks sell the notes into the secondary mortgage market, and while they may provide services like collecting payments and escrow accounts, they no longer own the note.
Fannie, Freddie, and private banks all buy up notes and package them into a Âmortgage backed noteÂ.
Folks (including pensions, banks, and individuals) then purchase the notes since they are normally a decent investment. Not the highest rate of return, but up until recently very secure.

As a buyer you can enter at any one of these stages, a short sale from the owner with the banks permission, at a foreclosure auction (but you are bidding against the bank and others), or directly from the bank as REO.

Short sales and REO tend to be drawn out, especially now with a lot of foreclosures.

Some banks will offer decent lending terms on REO to get the property off their books and back into the 'performing asset' class.

    Bookmark   June 22, 2010 at 9:43AM
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Wow, how confusing. Now I'm not sure what we looked at. I remember seeing REO on listings and didn't know what it meant.

I am getting listings from my agent in Fla. and have seen some of the houses which were short sales go up in price. One house we liked has gone up and down $25,000 each week (3 weeks), since we came back. I'm assuming its a mistake.

I don't understand why it takes so long to buy these homes as I would think the banks would want to unload them. There are so many listed I would think the banks couldn't afford to sit on them if the owners aren't paying the mortgage.

Thank you Brickeyee for your explanation. I will have to reread it a few times and see if I can make better sense of all of it.


    Bookmark   June 23, 2010 at 12:26AM
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"I don't understand why it takes so long to buy these homes as I would think the banks would want to unload them. "

Banks are not set up to handle a significant number of foreclosures, and their desire to dilute the 'responsibility' for the loss across as many employees as possible to avoid any one person being blamed further slows the process.

If you have plenty of time you can get a bargain.

I have an attorney handle ALL negotiations with the bank.
The banks seem far more attentive to returning calls and providing status when an attorney calls.

Some of the banks will also try to include very one sided clauses in the sales contract.

Things like being able to cancel the contract at any time right up to settlement (they might get a better offer on the propery).

    Bookmark   June 23, 2010 at 8:51AM
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Just FYI, in my area, the bank owned (REO) properties are usually priced well, sometimes receive multiple offers and close faily quickly. YMMV
I would definitely stay away from short sales, unless you are a glutton for punishment, though I have seen some (well okay one) close fairly quickly.

    Bookmark   June 23, 2010 at 12:08PM
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Why are short sales more difficult? I'm assuming the listing price of a short sale is what is owed on the house - No? Who accepts the offer? The owner or the bank?

It was my impression that the listing price of a short sale was done by the owner to satisfy his loan to the bank. If we make an offer, who are we offering it to?


    Bookmark   June 23, 2010 at 10:26PM
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Isn't a short sale less than what is owed? Hence the word short?

    Bookmark   June 23, 2010 at 11:03PM
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The list price of a short sale is less than what is owed on the house, hence the payoff to the bank is short. The homeowner can set the price and even accept an offer, but their acceptance is contingent upon the bank agreeing to it. There are various reasons as to why a bank won't accept an offer. Sometimes it is to the bank's advantage to let the home go into foreclosure, especially if there is mortgage insurance in place. Also, banks don't let just anyone who owes more than their home is worth do a short sale. They will look at the owner's assets, income and expenses to determine if they can make up the difference between the sale price and the outstanding mortgage balance. That sort of investigation by the bank takes time. It's best not to fall in love with a short sale house.

    Bookmark   June 23, 2010 at 11:15PM
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"Why are short sales more difficult? I'm assuming the listing price of a short sale is what is owed on the house - No? Who accepts the offer? The owner or the bank?"


A short sale is short of the mortgage balance (after sale expenses).

The bank has to eat the loss and agree to release the lien of the existing mortgage.

The owner negotiates the sale (they still own the property) but then must negotiate with the lender to accept less than is due.

Mortgage insurance does not normally cover a short sale, so the lender may prefer a foreclosure and hit up the mortgage insurance company for the deficiency.

The problem is that mortgage insurance normally only pays on the amount financed over 80% of the purchase price.

$100,000 purchase, 10% down, PMI is on the 100,000-10,000-80,000 = 10,000.
If the decline in value goes past $10,000 the bank is still left short (and banks HATE to lose money).

    Bookmark   June 24, 2010 at 9:28AM
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I'm sorry I'm so 'dense' about this but another question. If the house is listed as a short-sale, I would assume the bank had something to do with it. I can't imagine the owner would just list it at any price without notifying the bank. Isn't the bank involved in these listings?

If the bank agreed on the listing price, why would they change their mind if an offer at full listing price comes in? What is the point of listing the house?

Sorry, I want to make sense of this before we get further involved.


    Bookmark   June 24, 2010 at 10:32PM
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I'm sorry I'm so 'dense' about this but another question. If the house is listed as a short-sale, I would assume the bank had something to do with it. I can't imagine the owner would just list it at any price without notifying the bank. Isn't the bank involved in these listings?

Not always. It depends on the expertise of the listing agent. A listing agent experienced in short sales wouldn't take one until the seller has gone through all the necessary steps to determine if their lender will even consider a short sale. There is nothing to stop an inexperienced agent from listing a house as a short sale without knowing what they are doing.

I have also seen short sales go all the way to closing, then the seller gets cold feet, because often the bank will reserve the right to go after them for a deficiency judgment.

I have also seen short sale situations where the bank has says that they will accept X amount, but when an actual offer comes in for X amount they change their story.
Short sales are not for the faint of heart

    Bookmark   June 25, 2010 at 12:08AM
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The owner can sell their property for whatever price they want.

Getting a lender to release the lien created by the mortgage or deed of trust for less than the balance owed is a separate issue.
Without the lien release they cannot convey clear title, and no title insurance company will insure the new title.

Smart sellers and agents at least feel out the bank on the possibility of a short sale, but the banks may not bother with a full review of the impact on the bank until actually faced with a contract.

They are not going to do all the analysis required with a short sale, mortgage insurance, and even the banks reserves until it is actually needed.
Add to all this that the banks circumstances may change due to regulations or other short sales.

A paying mortgage is an asset to the bank, and can be counted in their reserves.
A non-performing mortgage is in limbo until the bank initiates foreclosure, and then it is removed as an asset.
At that point the bank must determine if they need more capital to replace the value of the removed asset. They can sell stock, or purchase another asset to meet the reserve requirements (usually at least 10% of deposits).

When a bank falls below the reserve requirements it can be considered to have failed and can be seized by the FDIC and is then out of business.

    Bookmark   June 25, 2010 at 9:04AM
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I live in Florida, in Miami specifically. Jane please understand that one HUGE factor, aside from any of the technicalities you are trying to figure out, is that this state is absolutely inundated with problem mortgages, underwater owners, short sale and foreclosure properties. And because this state is one of the ground zero areas for the housing crisis it is also swarming with vulture investors which are individuals or groups or investment firms looking to buy distressed properties at a deep discount (usually condos but sometimes land or SFH complexes), individuals like you and your husband, international speculators looking for cheap vacation/second home properties and any number of shady characters looking to feed off the detritus of all the above activity.

In other words, it is a royal and enormous mess down here in Florida right now. Yes, there are certainly good deals to be had. But as others have warned you it is NOT a situation you can or should expect to manage according to whatever the letter of the law might read. Especially living in another state with no knowledge or insight into Florida real estate. This isn't meant to be disrespectful or rude but you as an individual contemplating a fantastic Florida bargain house are one of literally millions thinking the same thing. Believe me, if it were super easy we residents would know about it. It ain't.

Good luck but please be wary, be careful and keep educating yourself.

    Bookmark   June 26, 2010 at 10:21AM
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Thank you for all the responses. Very confusing and probably something we should forget about. We certainly are not knowledgeable enough to sift through the complexities of buying these houses. Its too bad because there are so many nice houses at very affordable prices.

To respond to 'runninginplace' we are not looking for a bargain, we were looking for something we could afford near our daughter. On retirement income, the only thing we could afford in NY might be a one-bedroom condo. We would like to own a house again but it is just not possible in NY.

We were never crazy about the idea of living in Florida, and I guess this settles it.

Thanks again,

    Bookmark   June 27, 2010 at 4:07PM
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I live in Florida also. If you are not crazy about living in Florida, then that's one thing, but if you do want to, you can get a bargain. I'm in the mortgage biz and I don't see millions of people fighting over these deals.

There are some things to consider such as will the values go down even further? That is why you want something at a good price. In my area you can get a modest home for $130,000 not even with a short sale. Will the value go down further? You never know, but its already very low. Its a buyers market.

If you want a shortsale it is true that you could be waiting a long time. Some of them take a very long time to close as the above posters said. Then again, in my office fairly frequently, my realtor friends come in and say that they lost their buyer and the bank already approved the short sale at such and such number. Now it is very easy if a new buyer wants to make an offer at that number. The bank already stated what they would let it go for. So yes, it all has to go through the system again, but that does not always take very long when it already went through once.

So you can ask your realtor if he knows of any such deals and check them out. You don't need to understand the complexities. You just need a good realtor.
The real question would be if you want to live in Florida. If so, you can get a good deal.

    Bookmark   June 28, 2010 at 6:20PM
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