Over the next few weeks, we’ll be discussing the steps involved in submitting a short sale package to the lender and managing the flow of information that is necessary throughout the process leading up to an approval letter.
Jackie: After you’ve done your homework, and have determined that a potential short sale meets your investment criteria, you need to start gathering information that will allow you to submit the short sale package.
Bill: You need to work with the homeowner and the Realtor to gather this information.
Jackie: Let’s talk about the Realtor this week, and the homeowner next week.
Bill: The Realtor plays a crucial role in helping to determine the market value of the property. To determine true market value, you need to know what buyers are paying right now for comparable homes in the same neighborhood. It doesn’t make any difference how much they owe on their home now, or what they paid for it.
Jackie: We ask Realtors to supply information on similar homes in the neighborhood so that a comparison can be made between those homes and the one we’re working with. We ask for at least 5 active comps, 5 pending comps, and 5 sold comps – the most recent available. It’s also very helpful to identify foreclosure and short sale comps vs retail comps. If there are not enough comps available in the neighborhood, expand the search to similar neighborhoods.
Bill: Sometimes you will have special circumstances. We are working on a short sale for a log home on 10 acres right now. An individual looking for a log home is not typically looking at traditional homes. Since there are few of them, we wanted to compare to other log homes all over the county, but we also got comps of other conventionally constructed homes on acreage in the area where the log home is located.
Jackie: We ask the Realtor to organize the comps and do a Comparative Market Analysis (CMA). We also consider market conditions, typical number of days on market and ratio of listing to sold price. If there are 3 foreclosures on the same street as the subject property, that is going to have an impact on the sale price.
Bill: It’s important to inspect the overall condition of the home and estimate the cost of any needed repairs to make the home marketable. These include necessary repairs for safety issues and cosmetic repairs. Take pictures of the overall condition of the home and any code or safety violations, damages or problem areas. These pictures are important for use later when justifying your offer to the lender.
Jackie: If the home is out of our local market area, we ask the Realtor to provide this for us. Since Bill is a builder, he can estimate costs. There are also cost estimators available on-line. It’s most effective to have an estimate on a contractor’s letterhead. This is useful when marketing the home, and for the lender to determine “as-is” value.
Bill: The Realtor also needs to look at the surrounding neighborhood to see if there are any special circumstances that will impact the value of the home. Is there on-going drug activity, a boarded up foreclosure with overgrown lawn, or is it on a busy intersection?
Jackie: With all of this information the Realtor should be able to determine the market value, and where it needs to be priced for a quick sale. It also gives us the information we need to establish our “high water price” and initial offer to the lender.
Bill: As you can see, it is important to work with a Realtor that is competent and knowledgeable in their market area. The rapport and working relationship you establish in the beginning of the short sale will help ensure success throughout the process.