Canton and Plymouth homeowners consistently call with questions about short sales that lead us to believe there are lots of misconceptions about short sales and the differences between them and foreclosures. As experts in the short sale process our team is well equipped to help homeowners navigate through this process successfully while saving tens of thousands to hundreds of thousands of dollars.
With a majority of homeowners in Michigan owing more than their house is worth, short sales of houses are here to stay for several years at least. More and more homeowners are faced with the necessity to sell under these conditions and most are faced with questions about the short sales process.
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Some even think it is a hoax that cannot be accomplished.I’ve had homeowners disbelief that banks will forgive most or all of a deficiency on a home loan. They quote stories they have heard from so called experts on strategic foreclosures, well meaning but misinformed friends and family members telling them to walk away from a problem because everybody does, etc. The degree of bad information is incredible.
Here are the most common myths we hear and the truths that will shed light on what the short sale process is all about. While this list is not all inclusive, it will give you answers to the most common misconceptions. This and other information on this site will provide more information about the differences between short sales and foreclosures
Myth#1: There are typical or normal procedures and results when it comes to getting a short sale approved.
Fact: There is no such thing as “normal” in any short sale.
The most common questions people ask concern things like:
- What is the standard time for a short sale approval?
- What’s the rule of thumb for how much below asking a bank will approve?
- Will the bank come after me for the deficiency?
- Is it normal for a bank to respond to a short sale with a counteroffer higher than the list price and the appraised price?
Despite the recent government “streamlining” efforts that promised to standardize procedures most banks would follow in processing short sales, it’s still a black box experience for most buyers and sellers.
Sellers submit all their financials to a listing agent who packages them for the bank. Buyers submit their offers to the listing agent and sellers. Sellers sign them and the package and offer is submitted to the bank … and then often no one hears anything back for a few months, if ever. Other times, the whole thing is approved in a matter of weeks (though very rare).
The bank is in the drivers seat. They can respond to your offer however they want. They may counter at a much higher price and demand a cash payment from the seller or they may not. They may take weeks, or they make take six months or longer. They may approve a way-below asking offer, or require a hundred thousand over the asking price. Forget the idea of standard, when it comes to a short sale.
Want to help streamline the process? Hire an agent who has had lots of experience. Listing agents who have done a lot of recent, successful short sales with the same bank do often have insider knowledge that is the closest thing to a rule of thumb over what any individual bank’s practices are. If you’re a buyer, prioritize short sales that are listed by short sale masters – your agent will know who they are. If you’re a seller, ask prospective listing agents for a list of short sales they recently closed, including which bank(s) were involved. Most important make sure your listing or buyer agent has the CDPE designation which sets them apart from all other professionals in the short sale process.
Myth #2: A short sale is the same as a pre-foreclosure.
Fact: A short sale is a home being sold for less than what is owed on it. A pre-foreclosure is a home that is in some stage of the foreclosure process because the owners are behind on the mortgage payments. Many short sales are pre-foreclosures, because the owners stopped making payments when they put the home on the market, either because they can’t afford them, they are simply done with the property and don’t see a need to continue paying on it, or because they feel the bank is more likely to approve their short sale application if they are in default on their loan ( a position some banks often require for short sale approval).
Remember, nothing is standard when it comes to short sales. Short sales are closed every day on which the seller is still in good standing on their loan – these are mostly the short sales of owners who elect this strategy out of a desire to maintain their credit as much as possible, but have to move for work or family reasons.
Buyers should not assume that every short sale will come on the market later as a foreclosure. They should inquire as to any foreclosure notices against the property, and keep track of those time frames. In Michigan there is a redemption period of six months in which the seller has the option of redeeming their property. If the short sale is imminent they might opt to do it. Many buyers have also been surprised when the bank auctions a property they are in contract to buy.
Myth #3: It’s smarter for homeowners to walk away than to short sell their homes.
Fact: Increasingly, I’m hearing those who own upside down homes ask why they would bother with a short sale, when they could just walk away with much less effort. The reality is that walking away and letting your home go to foreclosure is an extremely serious, personal decision.
Michigan is one of those states that allows lenders to sue homeowners who default on their mortgages. The damages are almost always higher than the deficiency between mortgage balance and sale proceeds and include back payments, taxes, interests, etc. The bill can get very high and the bank has 10 years to bring the lawsuit to court. Looking forward to 10 years of wondering is you will hear from the bank in the morning is not a good way to live.
The typical homeowners’ family and financial plans would be impaired much less by a short sale than by a foreclosure. The analogy I use is the Foreclosure is like an accident where you total your car while the short sale is a fender bender that can be repaired much easier. In almost every case it is faster to recover your credit and ability to take out another mortgage on a new home after a short sale than after a foreclosure.
The fact is a short sale costs a seller little or nothing except some time and effort. This makes it smarter in almost all instance to make the effort to short sale than it is to walk away and foreclose.
Myth #4: The the buyer’s broker – or even the buyer’s offer – has much to do with getting a short sale approved.
Fact: Writing a clean, well-qualified offer is important to getting a short sale seller to believe that a buyer will commit to the short sale for the duration required to see it through. However, the buyer’s offer and agent have little, if anything, to do with whether the seller’s bank will approve the sale and the price and terms they will approve it at.
While the bank obviously cares about the price you offer, even that’s not as important as several other factors, including:
- the bank’s perception of the home’s fair market value. This is usually indicated by a third-party broker’s opinion, or an automated computer model.
- the seller’s financials. They must prove financial hardship which has many definitions that are not always entirely driven by finances.
- the completion of the seller’s workout application package and follow-up. This is the listing agent’s responsibility and the entire sale can hinge on his/her ability to get the job done.
Myth #5: That the bank “can’t do this or that” or “they have to do this or that” .
Fact: The seller’s bank in a short sale is being asked to waive debt that they are legally owed. They have the absolute right to simply refuse entirely to accommodate this debt forgiveness request.
However, if they do choose to waive some or all of the deficiency, they also have the right to place whatever conditions they want on that waiver. They can ask for more money from the seller (often in the form of promissory notes). In rare cases they can ask for money from the buyer. They can ask the agents to reduce their commissions and refuse to pay various closing costs. The buyer or seller can counter, accept or refuse any or all of the bank’s demands, too, but know that the banks do have the right to place whatever conditions on the short sale they want.
There are no standard “do’s” or “don’ts” that a bank must or typically adheres to. It’s their cash so they make the rules.
So why should a home buyer buy a short sale property?
Even with all the hassle, there are still some great deals to be had. In Canton, Plymouth, Northville and almost all of the surrounding communities a vast majority of the homes on the market are short sales. If you rule short sale homes out you will be missing a large part of a lucrative market.
What are the pitfalls to look for as a seller facing a short sale?
The main one is choosing a listing agent who has little or no experience in this complicated process. Almost every agent you talk to these days are so called “short sale experts”. Make sure you get their qualifications up front before you sign the listing. The CDPE designation along with the experience of successfully closing a myriad of short sales with lots of different banks is a real advantage. Such an agent can save you time and money. Most importantly the experienced agent will help you and your family navigate this procedure with diminished damage to your financial position.
Any Questions?
The short sale process is changing almost every week. The federal rules are also changing. IT is very hard to keep up with them and even harder to know exactly what to do if you are faced with a short sale. Our website http://shortsalesmichigan.com/Foreclosure-Solutions.aspx has resources and free reports that will keep you informed of up to the minute changes. Also we have resources contained in this site that will keep you informed about the foreclosure and short sale process and we will be adding more in weeks to come.
In the meantime if you have any questions concerning short sales, never hesitate to call Noel Bittinger or myself at 734-459-2600 for confidential answers.