The Federal Housing Finance Agency (FHFA) today invited investors interested in purchasing pools of Fannie Mae, Freddie Mac and FHA foreclosures in the nations hardest-hit metropolitan areas with the requirement they rent them for a period of year to pre-qualify.

The new bulk sales program, under discussion since August, will begin with a pilot program where Fannie Mae will offer for sale pools of various types of assets including rental properties, vacant properties and non-performing loans with a focus on the hardest-hit areas. The first transaction will be announced in the near-term.

The purpose of the pilot phase will be to examine investor interest in various types of assets, including the location, size, and composition of pools of assets; the ways in which investors maximize the participation of experienced local firms and organizations that can provide the types of services and support needed to ensure community stabilization; the types of structures and/or financing that improve returns to the sellers as well as home values in impacted markets; and the process by which investors are qualified to and ultimately participate in the sales transactions.

FHFA said today it is also looking at ways to improve REO sales to homeowners and small investors, enhancing the existing retail sales strategy at Fannie Mae and Freddie Mac. Both companies sell the majority of their REO properties to owner-occupants at close to market value.

“This is an important step toward increasing private investment in foreclosed properties to maximize value and stabilize communities,” said FHFA Acting Director Edward J. DeMarco. “I am grateful for the collaborative effort by the many stakeholders including investors, nonprofit organizations, and state and local government officials, who have worked together on this Initiative.”

FHFA reportedly may include as many as 500 to 1000 in the first pool of the pilot phase.  The GSEs have more than one million properties in their foreclosure pipelines.  Although the FHFA has not set a timetable for beginning bulk REO sales, government officials speaking on background with Inman News columnist Ken Harney said they may launch the program with a sale of 500 to 1,000 homes as early as this month.

The announcement by FHFA came just hours before President Obama was scheduled to make a major speech on housing policy.

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Bulk Sales of GSE Foreclosures Begin

America has become a nation of two foreclosure realities: judicial states, where judicial review is required for every foreclosure, and non-judicial states.  Both have their processing problems, but delays in judicial states are setting new records and impacting local real estate economies.

December data from Lender Processing Services (LPS) paints a picture of increasingly clogged foreclosure pipelines struggling with aging properties and unmanageably large inventories. Half of all loans in foreclosure in judicial states have not made a payment in more than two years. Foreclosure inventories in judicial states are two and a half times the size of those in non-judicial states, and the gap continues to widen.  The backlogs are causing overall foreclosure activities to drop significantly; starts and down and foreclosure sales rates in non-judicial states stood at approximately four times those of judicial foreclosure states in December.

In some judicial states, delays are extraordinary.  The average foreclosure process in New York has increased 37 percent since 2010, and New York properties take an average of 1,019 days to complete the foreclosure process — the longest of any state.  New Jersey documented the nation’s second longest average foreclosure process, at 964 days, and Florida documented the nation’s third longest average foreclosure process, at 806 days. Foreclosure activity in both these states dropped more than 60 percent from 2010 to 2011.

The reason for the dramatic differences between judicial and non-judicial states is not just delays caused by judicial review, per se, though clogged courtroom calendars and an overwhelmed legal bureaucracy are to be expected in a system that was never meant to process hundreds of thousands of foreclosures a year.  Rather, the real problem is robo-signing paranoia.  Knowing that they are operating in the crosshairs of federal regulators and litigators, lenders are bending over backwards to see that the paperwork is perfect for every foreclosure.  Judicial states’ foreclosures have more paperwork and procedures that do non-judicial states. For all states, the length of the average foreclosure process has increased 24 percent from 281 days in the third quarter of 2010, when lenders began to re-evaluate foreclosure procedures in earnest as the result of the so-called robo-signing controversy.

A lot is at stake for investors in the 21 judicial states: Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Nebraska, New York, New Jersey, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, South Carolina or Wisconsin.  Foreclosures in their markets are taking longer to process than they would in a non-judicial state.  The result is smaller REO inventories, which translates into less opportunity.  Certainly robo-signing paranoia was a contributing factor to the 24 percent decline in foreclosure activity last year.

“While foreclosures continue to represent an excellent bargain-buying opportunity for many buyers and investors, foreclosure sales accounted for a smaller share of the total market in the third quarter.  That trend is not too surprising given the continued ambiguity surrounding proper foreclosure procedures — and the ripple effect that has on sales of  foreclosed properties that might have been improperly foreclosed,” said Brandon  Moore, chief executive officer of RealtyTrac last week. “The sooner the market gets more clarity about accepted foreclosure procedures, primarily through the  long-promised settlement between multiple states attorneys general and major lenders, the sooner the market can more efficiently dispose of these distressed  properties.”

That settlement is due to take effect this Friday, February 3.  By then states must decide whether or not to accept a proposed $25 billion nationwide settlement with banks of a foreclosure probe that was an outgrowth of the robo-signing scandal.  The settlement would set standards for how banks conduct home foreclosures while providing mortgage relief to borrowers.

Banks have been waiting for the new standards before re-designing their processing standards and moving ahead with backlogs in judicial and non-judicial states. However, LPS found that some were moving ahead anyway to clean out their foreclosure pipelines.  Pipeline ratios (the time it would take to clear through the inventory of loans either seriously delinquent or in foreclosure at the current rate of foreclosure sales) declined significantly in judicial states in the last quarter of 2011.

JPMorgan Chase and Wells Fargo cut their foreclosure timelines by as much as 100 days for some of the worst mortgages handled in the third quarter, according to a report from Moody’s Investors Service. Moody’s tracked completed foreclosure sales in some of the most backlogged states in the country such as New York, Florida, Nevada, California, Illinois and Pennsylvania.  All but two of the six were judicial states.

“Although pending foreclosure volumes remain high for all product types, (third quarter) foreclosure sale timelines improved from the second quarter, as judicial states continued to work through their significant backlogs of foreclosed loans,” Moody’s said.

However, Moody’s found that streamlining the process doesn’t speed up the timeline for selling REOs.  After foreclosure sale, Wells took an average 197 days to unload Alt-A foreclosures in the third quarter, up from 191 in the previous quarter.  REOs once linked to subprime loans continue to take the longest to sell. For those liquidated in the third quarter, Ocwen Financial Corp. took an average 288 days to sell an REO after the foreclosure sale, up from 237 days on REO sold in the second quarter.

“Our outlook is that REO timelines will lengthen dramatically over the next year, hampering servicer efforts to expedite their foreclosure procedures as they try to maximize return to investors,” the Moody’s report said, as reported in HousingDaily. “Given the significant number of loans in foreclosure, an increase in REO volume is inevitable.”

More REOs in inventory and longer time on market?  Sounds like a recipe for good deals.  At last, happy days are on the way for investors in states that have been getting the short end of the stick for a long time.

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Foreclosure Update: Happier Days on the Way for Judicial States

Most folks who buy and sell distressed property for a profit secretly expect that eventually the day will come when foreclosures will no longer account for one out of every three homes sold in America.

Someday the Foreclosure Time will indeed end, though most likely not within the next two years.  It’s end, however, is inevitable and the forces that will bring about its twilight are already hard are work.

Why?  The tighter lending standards put in place following the subprime debacle in 2006 changed forever the mortgage approval process.  They have returned mortgage lending to the pre-boom environment requiring documentation, significant down payments and demonstrated ability to repay.  The standards, which are widely blamed today for making life difficult for buyers, are already having such a positive effect on mortgage backed securities marketed after housing bust that MBS research firm UFA reports that residential mortgage default and prepayment risks are on the road to recovery.

Tighter standards and stabilization of the economy have also driven mortgage delinquencies down to levels not seen since 2008 or 2009.  Of the total number of mortgages that are either 90 or more days delinquent or in foreclosure, the number that are delinquent 90 days or more days has shrunk to levels not seen since 2008.  Moreover, a growing number of the shrinking number of defaults are not new.  Some 45 percent of October foreclosure starts were redefaults, or mortgages that had previously defaulted and were modified unsuccessfully either by the lender or the federal government. For delinquencies over 30 days, “first time” delinquencies account for only a quarter of total new delinquencies—further signs of an improving trend.

Pending another recession, the slow decline in delinquent loans, a precursor for foreclosures, is expected to continue.  After rising slightly to a rate of 6.02 percent in the first quarter next year, 60-day mortgage delinquencies will resume their decline, falling to about 5 percent of all performing mortgages by the end of next year, according to Transunion.

The near term picture for foreclosures, however, is dramatically different.  The national foreclosure inventory hit an all-time high at the end of October of 4.29 percent of all active mortgages. Some 3.9 million loans are delinquent 90 days or more or in foreclosure, according to Lender Processing Services’ November Mortgage Monitor.  Only about 4.5 to 5 million total existing homes are sold each year; the 4 million strong national foreclosure inventory will certainly take several years to be absorbed.

Like a patient on life support, the lifespan of the foreclosure era is being extended by servicers who have slowed processing to a snail’s pace in the wake of last year’s robo-signing scandal.  Today the median processing time is 336 days, unless you live in New York State where it’s 3.2 years.  REOs come onto local markets in first and starts, sending prices and inventories into temporary disarray.

Finally, add to the equation the fact that negative equity is still a huge factor in foreclosures.  Ironically, negative equity is caused by low property values which in turn are the direct result of the foreclosures that negative equity causes when vulnerable homeowners can’t mee their mortgage payments.  About 23 percent of the nation’s mortgaged homes is still underwater despite several less than successfully federal programs to reduce negative equity.  These homeowners are highly vulnerable to public and personal economic misfortune and it won’t take much of a re-recession to send large numbers of them into default.

These factors could delay the end of the Foreclosure Time; they certainly make it difficult to forecast.  Still, the question is not whether the foreclosure era will end but when.  We’ll know we’ve entered the twilight when foreclosure inventories slowly decline and cease being refreshed with new move-in ready properties.

Foreclosures will remain a significant segment of most real estate markets for years to come, but their market share will shrink and their depressive effect on values will lessen.  As the twilight deepens into night, median prices will rise, market by market, and a new sense of normalcy will return.  For investors who bought during the Foreclosure Golden Era, it will be a better time to sell and to realize the profits they so richly deserve for the risks they took when no one else was buying.

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Twilight of the Foreclosure Time

So many people have walked away from homes that are hopelessly underwater. With little prospect of recouping their losses, or faced with a difficult personal financial situation, they have made a decision to let the bank foreclose. Prior to 2007 this would have resulted in an income tax liability on the amount of any forgiven debt. Currently the law allows people to walk away from their primary residence without fear of IRS consequences through the end of 2012. Rental properties are another matter. Investors walking away from investment properties are still liable for income tax on the amount of any debt discharged by the lenders.

The real estate bubble lured many neophyte investors into the water with easy money and unsustainable rates of appreciation. When the music stopped many of them were holding multiple properties while drowning in debt. Even experienced investors were feeling the pain. Watching homeowners walk away from their primary residence, seemingly without consequences, led many investors to believe they could do the same. They should have read the fine print.

Debt Relief Act

The Mortgage Debt Relief Act of 2007 allowed homeowners to avoid paying taxes on forgiven debt but investors were specifically excluded from this law. Right or wrong, investors are presumed to be more sophisticated and aware of the risks. At real estate club meetings I have encountered investors talking about “strategic default” and letting the banks have their headaches. When asked about the taxes they would respond that they had lost money so there would be no tax due. When asked about the tax consequences of forgiven debt I would be told that the law forgives it (it doesn’t) or, more often, I would receive a blank stare in response. It was clear that they were so concerned with immediate relief of their debt pain that they hadn’t considered the tax ramifications nor had the consulted a legal or tax professional.

Some investors view bankruptcy as an option. Debts accrued personally and in their business can often be discharged this way. IRS debt? Not so easy. While not impossible, eliminating taxes owed to the IRS is an onerous process. Trying to do so without the aid of a professional is certainly not advised.

Proper Planning

If an investor needs to walk away in a strategic default, or engage in a short-sale of an investment property, proper planning is essential. Investors need a strategy when they begin investing but they also need one for any significant changes that occur in their business. Defaulting on a debt is certainly a significant event. If you are considering strategic default as an option be sure you do so with your eyes open. It is no surprise that investors, especially formerly successful ones, may find the thought of walking away from debt obligations to be humiliating and embarrassing. However, it’s not a time to bury your head in the sand or avoid facing the issue. Swallow your pride and seek the advice of professionals before you act. No one plans to fail, but they often fail to plan ˗ the two are often related.     

 Remember that failure is an event, not a person. – Zig Ziglar

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Look Both Ways Before You Walk

When I was in college, I took a sociology class that was taught by a professor who specialized in studying the impact of the media and its presentation of the news on the public. For example, he would study the number of copycat killers there might be after a murder was featured on the news. Not to be all gloom and doom, but I have noticed this same effect in real estate.

When the media talks about loan modifications, we get all sorts of calls and emails about loan modifications. When the media talks about short sales, we get all sorts of calls about short sales.

This past week, I have had several short sale sellers call for more information on liability and deficiency judgments with regard to short sales. In California, we’ve had some changes to our anti-deficiency laws. So, there has been an increase in discussion of this topic on television, on the Internet, or in print and that has resulted in a lot more buzz about the topic.

One question that I was asked about is how I can prove that when I negotiate a short sale, I always request that the bank specifically state that they will release the seller from any future obligation for the forgiven debt. As agents negotiating short sales, it is always our goal to obtain a full release of any future liability (again, this may not apply in California). Ultimately, the bank (if they approve the short sale) generates an approval letter which dictates the terms and conditions of the short sale approval.

Usually this approval letter will include the purchase price, the buyer and seller names, and the fees that the bank is willing to pay at closing (i.e., title insurance, real estate commission, etc.)

The short sale approval letter should carefully be reviewed by the borrower and an attorney selected by the borrower. Borrowers (short sale sellers) need to be sure that the language in the short sale approval letter represents a negotiation that is in their best interest. Most Realtors® are not attorneys, so it is vital to consult with an attorney on this matter prior to the closing of the transaction.

On a final note (and this one is for buyers of short sales): it ain’t over ‘til it’s over. Specifically, if the short sale seller is not satisfied by the terms and conditions in the approval letter, the seller does not need to close the transaction. Of course, a better plan would be to return to the bank and ask for a few changes to the letter. Then, the poor buyer who has been waiting for short sale approval can actually see a successful closing.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Short Sale Approval Letters and the Issue of Deficiency

When I am representing a buyer in a short sale transaction, I am certainly hoping that the short sale listing agent falls into the category of those who can get the job done and those who are fast. Those who can have successfully closed a fair number of short sales, have significant experience in real estate, and know real estate contract law better than the back of their hand. Those who are as fast as the fastest racecar driver can get that short sale approval lickety-split. If I’m on the buyer’s side, I’m hoping for a tenacious soul who is detail-oriented and will do anything necessary to get the deal closed.

Why are all of these character traits so important to me? Well, I’ve got my buyer sitting patiently (or impatiently) waiting on this particular property. If s/he waits three to six months and the deal goes south, my buyer is going to be very angry, and nobody wants an angry buyer.

Unfortunately, I do come across a fair amount of listing agents in the those who can’t category. Usually (and I do not mean to generalize) those agents reveal themselves by their answers to a few questions:

1. Have you submitted the short sale package to the bank? (If the answer is yes, this means that they already have an offer in play. If offers are still being accepted, then my buyer will probably not be in first position. Time to move on.)
2. Who are the lien holders? (If the listing agent does not know and cannot find out the answer quickly, then the short sale package-the nuts and bolts of the transaction-has probably not even been collected yet from the seller. This is not good because you want to work with someone who is ready to send a complete package to the bank.)
3. How many short sales have you successfully negotiated? (If this question is met with some hemming and hawing, this may indicate that the listing agent has not closed too many short sales and is a little bit uncomfortable with that line of questioning.)
4. What is the status of my buyer’s offer? Why haven’t you sent it back to me with the seller’s signature? (If this response to this question is something like ‘I’ve sent all the offers to the bank and they will choose’, run like the wind. It is NOT common practice for the bank to select the offer or to review contracts that are not fully executed.)

There are many experienced agents who can get the job done and successfully close those short sales. The key is for a short sale buyer and his/her agent to ask questions of the listing agent prior to submitting an offer on the property. The answers to those questions will alert you as to whether or not the short sale is going to close fast.

Photo: flickr creative commons by Martin Pettitt

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Short Sales – Working with Those Who Can

In many parts of the United States buying a foreclosure is en vogue. Buyers flock to these properties because they are allegedly a great deal. But, are they?

While each and every foreclosed property listing is different, there are quite a few considerations with respect to purchasing a bank-owned foreclosure (REO). And, sadly, not every bank-owned property is a great deal!

Here are some things you may want to consider when purchasing an REO:

• In parts of the United States, there is great competition for REOs. Do you really want to compete against so many other people to buy the foreclosed property? (Competition drives up the purchase price.)
• Are you qualified to go high enough in your offer to compete with the others or is your first offer your highest and best? (Again, competition drives up the purchase price.)
• Will your offer be strong enough? (If you are obtaining an FHA or VA loan and putting little to no money down, your offer may not–unfortunately-be competitive.)
• If you are financing the property, will the property pass inspection? Fixers, for example, may not pass inspection. (FHA and VA loans require a property inspection and the property must meet specific guidelines.)
• If you are financing the property and it is in a Homeowner’s Association, will the lender approve the purchase? (Lenders now look at association delinquency rates and pending litigation when agreeing to loan on a property.)
• Once your offer is accepted, will the property actually appraise for the purchase price? What will happen if it does not? (If the competing offers drive the price very high, the new purchase price may be actually higher than an appraised value. If you are getting a loan for the purchase, this factor may impact your ability to obtain financing.)
• Will the bank be able to transfer title? (In this day and age, some lenders are finding that they are unable to transfer clear title on some properties.)
  

There are so many factors to consider when purchasing a foreclosure. While the purchase may be a great deal, make sure that all the cards are on the table and that you have considered all of the factors that could impact your property purchase.

Photo: BasicGov

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Purchasing Bank-Owned Properties – The Good, the Bad, and the Ugly

I spend a small part of each and every day answering questions that come through my email inbox about short sales. Over and over, I see many common questions. Seems that inquiring minds want to know the answers to all of the same things. Here’s my top five:

1. How will a short sale affect credit?

Depending upon how the short sale is negotiated, the agreement made at the bank and the way the bank reports the short sale to the credit-reporting agencies, it is possible that the short sale could have only a small impact on credit score. However, the missed mortgage payments (if there are any) will have a negative impact on credit.

2. What are the tax consequences of a short sale?

Short sale sellers should always consult with an accountant regarding the possible tax consequences of a short sale. President Bush did sign into law the Mortgage Debt Relief Act of 2007, which does have positive tax consequences for those who participate in the short sale of an owner-occupied property.

3. Why is a short sale better than a foreclosure?

 
When a seller participates in a short sale, s/he will avoid the foreclosure ‘ding’ on the credit report. That being said, it may not be better to participate in a short sale. Consult an attorney and/or an accountant to help decide what is best for you.

4. Can a person participate in a short sale if they have no late mortgage payments

The simple answer is ‘yes.’ If an individual has a verifiable hardship, then they can participate in a short sale.

5. My seller’s foreclosure date is 2 weeks away. Can he still participate in a short sale?

Many lenders will postpone a foreclosure date if they have a complete short sale package from the seller and the seller’s agent. This package must include a purchase contract as well as important financial information. Without these items, lenders will not postpone a foreclosure date.

So, there you have it. Top five short sale questions so far this summer are answered for you here. Now, go out and enjoy your summer!

Photo: flickr creative commons by Ishmael Orendain

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Top 5 Questions About Short Sales

The short sale has always been a tricky transaction. It’s a challenge to obtain the required paperwork from the seller. It’s a challenge to find a qualified buyer who is willing to stick around until the short sale gets approved. It’s a challenge to prepare the paperwork and to get the deal accepted by the mortgage lender(s). The challenge becomes even greater when there is more than one lien holder (more than one mortgage lender) for the property being sold in the short sale transaction.

Traditionally, the first lien holder (the lender who holds the first mortgage) offers the junior lien holder(s) a small amount of money in order to release their lien. The first lien holder makes this offer because all of the liens on the property must be reconveyed at closing in order for the sale to occur. Junior lien holders may accept what is offered by the first lien holder.

You might wonder why a junior lien holder would accept, say $3000, when the loan balance is $100,000. The reason is quite simple: if the property is foreclosed upon by the first lien holder, the second lien may not get any money at all.

When I started working short sales, junior lien holders would take anything offered to them by the first lien holder: $500, $1000 . . . anything at all.

Increasingly junior lien holders have some strategies up their sleeves. If they want more money than is allotted by the first lien holder, they may ask for a cash contribution. Be careful to check with the first lien holder as to whether a cash contribution would be allowed. If it’s not permitted, you might find even more strategies up that lien holder’s sleeve.

Photo: flickr creative commons by minhimalism

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Junior Lien Holders and Short Sales

Agents, homebuyers and individuals facing foreclosure frequently ask me about this thing called ‘cash for keys.’ Somebody’s uncle’s cousin’s sister told someone that they can get ‘cash for keys’ if the property goes to foreclosure, and homeowners generally want to know whether this is true.

And, yes, in a nutshell, it’s true.

What is Cash for Keys?

Here’s the deal: It is the general practice of many entities that have foreclosed on properties to offer those individuals currently residing on the property ‘cash for keys.’ Usually, this comes in the form of a cash incentive provided in the form of a cashier’s check when the resident provides the keys to a broom clean property.

The first order to business after the property is foreclosed is for the new owner (or a representative of the new owner) to contact the resident and offer cash for keys. If the resident agrees, then a Cash for Keys Agreement is usually signed. This agreement may even include a W-9 (which would indicate that a 1099 may be in the future).

Note that this agreement does not preclude the new owner from beginning eviction proceedings on the property under certain circumstances. However, generally, things move more quickly and efficiently in a Cash for Keys Agreement versus eviction proceedings.

The other day I received a phone call from a woman whose property had been foreclosed and purchased at auction. The new owner was calling her and dropping by the property and stating that he would be changing the locks in 48 hours, so she had better get out. While laws do vary from state to state, there are specific rules as to how a new owner can reclaim his property and court proceedings are usually required.

So, if you have purchased a foreclosure and you have some tenants that you need to move, make sure to get familiar with the laws surrounding eviction proceedings and the policies surrounding cash for keys in your state.

Photo: flickr creative commons by Bohman

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Musings on Cash for Keys & Foreclosures

I try to keep track of as many possible statistics about the housing market, knowing that a gem of intelligence is always lurking behind some chart or graph if I look hard enough. One graph that historically has been un-revealing is suddenly speaking to me in volumes.

The graph below shows the continuing trend of banks pushing through to a final foreclosure sale in Tallahassee. In the past, roughly 10 to 15% of lis pendens that were filed on a property resulted in a foreclosure sale, and there was rarely any movement or trend in that area. The data made for a boring graph. Until now.

Tallahassee has been a fairly stable market for many years. Prior to the housing boom 7 years ago, distressed properties were a tiny niche in the market, with only a handful selling every month. When homeowners got into trouble, they usually  were able to find an alternate solution to foreclosure, such as getting current on the loan, selling the home through normal market conditions, selling short, or surrendering the property to the bank in what is referred to as “deed in lieu of foreclosure.”

But times have changed. The blue line on the graph below shows that the ratio of foreclosure sales to lis pendens filings is about to reach 60%, though part of the high percentage is “a math thing,” because the denominator is dropping fast while the numerator is rising.

Regardless, more lis pendens filings are ending up as foreclosure sales today than ever before.

The trend of new filings continues to drop (green bars) and the trend of foreclosure sales has actually started to drop as well, though foreclosure sales (red bars) were halted by the courts (and some poor decision making by the banks) and I suspect we will see the foreclosure sales begin to rise again before the end of the summer.

2011 is the Year of the Foreclosure, and if we see a spike in sales activity, we might be able to consider this the worst year as we head into a full market recovery. The biggest variable will be the speed in which lenders are able to ramp-up the processing of stalled files.

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Foreclosure Sales Provide Insight Into Housing Recovery

Short sale negotiations are tough–even in the easiest of circumstances. It takes around two months to get a short sale approved. And, many times, it takes much longer when buyers back out, paperwork gets lost, dates are not met, etc.

Perhaps the toughest thing for a short sale negotiator to deal with is a buyer who is on the fence. You know the kind– having trouble with qualification, having trouble meeting deadlines, changing terms and conditions once the bank has agreed to the short sale.

Negotiating a short sale where the buyer is “on the fence” can be extremely tough on the sellers, because the sellers have little security that the deal will close. It is also tough on the agent or individual doing the negotiating; this individual is working extremely hard to put this deal together–spending perhaps up to 50 hours of time over the course of the transaction negotiating with the banks, just to learn later that the deal might go south.

Believe it or not, this situation is also hard on the banks. Just like everyone else, the bank is expecting things to happen according to plan, and hoping that all parties will meet deadlines so that losses will not continue to grow (not to mention how annoyed they become when two or three extensions are requested on the short sale approval letter).

But, what can be done when a short sale buyer is on the fence?

First and foremost, I would say that it is only best to work with this buyer when you have no better option. Second, I would say that it would always be good to secure as many back-up offers as possible. Third, I would advise that you need to get not only the buyer and the buyer’s agent in the game, but you also need the buyer’s lender on board. Ask the buyer’s lender to provide you with concrete dates for approval, documents and settlement on company letterhead and submit that to the bank. This way if those dates are not met, it is not you (the listing agent or negotiator) who has put your professional name on the line.

For investor buyers who have their own plans and designs with regard to the purchase of the property, banks are frequently not empathetic. Banks really do not seem interested in the fact that you want another price reduction, or need to sort out some issue before closing. Now that most of the major lending institutions have policies and procedures, lenders are actively proceeding to foreclosure when buyers are on the fence and all parties to the short sale are not performing as agreed. It’s a bummer, but it’s also a fact.

So, what’s the best way to avoid this situation? I’d say that all parties need to perform their due diligence up front. Listing agents should pre-qualify the buyers. Buyers’ agents should be sure that the buyer is serious and ready to perform. Last, buyers should pre-qualify the property, and make sure that it is something that they really want. Short sales are tough, and everyone wants them to close. A little due diligence by all parties can go a long way towards seeing an effective short sale closing.

Photo: flickr creative commons by Anthony Stanley

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Short Sales: Dealing with Buyers Hanging Out on the Fence