Short sales . How would you experienced flippes handle this?

Question

I recently made an all cash offer (with the help of HML) no contingencies except Short Sale Contingency, and Well and Septic contingency for a house that was listed at $129,000. My offer was $90,000. I got a counter offer for $100,000. I plan to counter that as well with something around $95,000.  The ARV will be around $160,000 with repairs of about $30,000 and holding costs of about $8,000

However, the seller pushed back the dates from next two weeks of closing to first week of May and Bank approval of second week of April. I understand that the bank is trying to get the best possible price for the house and is trying to buy some time. So with this background information, I have a two fold question:

• What is the likelihood that seller is acting on his own and bank is completely in dark about this, or is the bank dictating what the dates should be on the contract, and seller is just obliging?  (This question is so I know how to present myself. I never had to deal with Short Sales from the listing side)
• What would you investors do in this case. Would you be OK waiting a couple of months for deal that seems to be pretty good, if I do end up getting bank approval?

This will be my first flip. So far I have been buy and hold investor and time was never of essence to me. I was willing to wait.  I have my eyes set on the goal of 2 flips for 2017.

Wayne Brooks · Answer

The owner is just being smart, likely with the advice of an experienced agent.  It would be impossible to close in two weeks, with a short sale.  90 days is a typical requirement to get Actual bank approval, thus the time period stated by the seller, and closing a few weeks after that.....SOP.

Also, you/the listing agent needs to know about any other junior liens that may need some contribution, other than what the first mtg. holder will offer, in order to properly structure the offer.....the most over looked step in successfully completing a short sale.

Also, there is no value in a seller taking his property off the market for 90 days for an offer they know the bank is highly likely to reject, hence the reason to negotiate a reasonable price up front.

Christopher Phillips · Answer

@Chinmay J.

Each lender/servicer can be slightly different. However, here is the general process:

most lenders want a signed contract before they will even consider the offer. It's only the first step and isn't exactly binding until the shortsale is approved. Your agreed upon contract offer will eventually be looked at by the bank.

After going back and forth on the price, the listing agent sends in a hardship package along with the signed contract to open a file. The bank won't even respond until the file is complete, would could take multiple attempts by the listing agent to email, fax, and FedEx everything in multiple times. This can take a few weeks.

The hardship takes 1 of 4 forms: loss of income, reduced income, medical, forced move due to job. A seller can't get a shortsale approved just because they decide to stop making payments even those they don't have a hardship.

Once the file is complete, they will assign someone to negotiate or hire a negotiator. This can take a few weeks.

The negotiator will counter the offer and go back and forth with the buyer until a general price is agreed upon. They negotiator will work on the junior liens.

Complications can arise. If a seller has never tried loan modification, the bank might make them apply, which can take a few months. If they already tried loan modification and was rejected this can kill the deal or certainly delay it.

At the end of the day, the final price, the liens, and the hardship have to be dealt with. If the seller doesn't prove hardship, or the liens are too large to deal with, any of these can kill the deal.

It then goes to the mortgage insurance people and the investors.

If this all approved, the bank will issue a shortsale approval letter that lays out the terms of the deal.

Most buyers walk away from shortsales due to the extremely long wait times and frustrations. Many shortsales go 9 to 12 months or more because of the various issues.

Investors have been countering well over list lately.

Cash has no real power in a shortsale. The bank marches at its own beat.

Mike Cumbie · Answer

Hi @Chinmay J.

Wayne is spot on. Short sales often times are not accepted by the bank or the approval is changed months down the road. They have a bottom number where they are going to make money on it (Time owned, payments made, is there PMI/FHA/USDA/VA backing) and if things don't hit that number they say no. They are not the "Fire Sales" they use to be.

If the bank is going to lose money and the loan has backing insurance (FHA/PMI etc) they just say no, why lose one cent when they are insured against loss. Let it foreclose and make their claim against the govt (they get to tack on all their extra fees). it is usually good to research when they bought the house and how much is left to pay, may help you find the right number. The process is generally that the owner and you agree to something, then it is presented to the bank. An "Approved short sale" means that someone else made an offer and the bank said "Yeah that works for us" but the buyer already left and found something else by the time they agreed. Now they are trying to find someone who will match the price the bank already agreed to.

Your guess that the bank is most likely in the dark is usually pretty close until the first offer gets accepted.

Wayne Brooks · Answer

@Chinmay J. A cash purchase doesn't speed up the process at all, the lender just verifies the buyer has cash/pre approval to begin the review process.  Offers don't get submitted to the lender, only fully executed contracts.  I didn't assume you were the listing agent, but you and the listing agent need to know about any junior liens that may need for the buyer to kick in some extra money to satisfy them, up front, in order to structure your offer properly.  Example: here, one of the biggest problems with a short sale can be back hoa dues, $10-20k.  The bank will typically only pay 1% of the loan, or a max one year of dues out of their pocket to settle this, say $3000.  The hoa demands $8000 to settle.  The seller has no money, so the buyer needs to kick in $5000 in addition the purchase price, so the buyer needs to lower their max offer by that amount.  Same thing with 2nd mtg.s, judgments, etc. You need to figure this out up front instead of 60-90 days later, when it's too late to lower your price.

Christopher Phillips · Answer

@Chinmay J.

It's a game of patience...

Outside of that, the biggest problem is that it is hard to get a deep enough discount for a flip.

It might make an okay play for a rental. However, I find that in most cases, the condition and repairs needed don't make sense for the price as an investor. For a owner/occupant it might be an "okay" opportunity, but the slight discount isn't necessarily worth the time involved.

Chinmay J. · Answer

@Christopher Phillips - Thanks for further explanation. This really is a buzz killer isn't it. I mean its a perfect deal from investor's perspective. I have already moved on to researching other deals.

Christopher Phillips · Answer

@Wayne Brooks

Oh. Yes. I mentioned that they review the hardship.

The whole process is a mess. There are some shortsales by me that have been under contract over a year.

Wayne Brooks · Answer

@Chinmay J. Just to be clear, no the bank is not involved in the negotiation process now.  The owner and listing agent know there is no point tying up the property at a price the bank is highly unlikely to accept, 60 days or so from now.

Wayne Brooks · Answer

@Christopher Phillips I was referring to the owner when I said borrower.  The bank makes them submit their full hardship package and determines their eleigibility for the short sale first, then they order the BPO to determine FMV.  That is, if they haven't recently done a BPO for a previous contract that fell through.

Christopher Phillips · Answer

@Wayne Brooks

I left that out. That is correct, the bank is looking to make sure the buyer can make it too the closing. But most of that screening is being done by the listing agent already.

Somewhere in there the bank will order a BPO or an appraisal. But, in all honestly, banks have been ignoring condition issues and have been trying to get as close to general market prices as possible to recoup their loses.

Short sales . How would you experienced flippes handle this?

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