Short Sales / Bank Repos Coldwell Banker Northern California
Folsom Office

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Having a clear understanding between "Conventional Sales", a "Short Sale" and a "Bank Repossession" ("Bank REO") is critical for buyers and sellers. 
 
Within MLS (MetroList Services tracks homes listed and sold through real estate Brokers), there are three primary "status classifications" for homes offered for sale:
 
Active - properties being offered for sale which are not "Short Sales".  These are known as "Conventional Sales" and include Bank REO (repo) properties.
 
Active Short Sale - properties being offered that require the home seller's lenders to approve the property sale because these lender's will receive less than the amount owed them at the close of escrow.
 
Active Short Sale Cont. - properties which have received one or more offers that have been submitted to the lender(s) for approval.  The sale is "contingent" upon lender approval, a prerequisite for selling the home.  Because of the volitile nature of short sales, additional offers may be submitted.  If lenders receive an offer which is more favorable, they may choose to move forward with the newer offer. 
 
Pending - any property which is currently in escrow.  This may apply to any of the above categories.
 
 
CHARACTERISTICS OF A "SHORT SALE" (may or may not involve a property in foreclosure)
 
There are two categories of Short Sales:  a) "Short Sale - Active" are properties where offers are being solicited; and, b) "Short Sale - Contingent" where offer(s) have been submitted to the lenders for acceptance.  Short Sale properties are only shown as "Pending" following lender's approval and acceptance by the borrower.  Regardless of status, the senior lien holder may choose to move to preforeclosure or foreclosure at any time, even during escrow.  In the event the borrower chooses to seek bankruptcy protection during escrow, the transaction will be halted.
 

1. Seller/borrower cannot continue to meet obligations ... lender debt exceeds market value;

2. To qualify for a Short Sale, seller must secure approval by the lender for 'debt forgiveness' due to a 'hardship' (such as a loss of job, death of spouse);

3. The sellers may have been served a "Notice of Default" (following a Notice of Delinquency) which must be mailed to the borrower 10 days after the NOD is recorded;

4. Short sale pricing is often lower than comparable homes to encourage multiple offers and may, or may not, reflect market value;

5. While offers are delivered to the seller for acceptance, the lender has final approval to reject, counter or accept any offer;

6. In the current market, the lender may not respond to offers in normal time frames, or may even not respond for several weeks;

7. Due to the financial situation of the sellers, homes are offered in "as-is" condition and requests for repairs may be declined;

8. After recording of the "Notice of Default", a "Notice of Trustee Sale" is usually recorded in 3 months to designate the date for "Trustee Sale" (public auction) if the seller is unable to make reinstatement payments. (The deadline to cure default is five business days before the trustee sale; deadline to pay off debt is any time before the trustee's sale begins.);

9. Short sales are an emotional roller coaster for sellers and buyers, resulting in high frustration, and in many cases, failure to close escrow;

10. Buyers considering purchase of a short sale may be well advised to wait for the property to go through bank foreclosure and then attempt negotiation directly with the lender who may choose to take title (see Bank Repossession).

11. MLS statistics show the ratio of short sale residential properties in Sacramento county sold vs. the number of short sale residential properties withdrawn/expired was 1:10 was 1:10. This statistic helps clarify why short sales can be difficult and trying.  That percentage has improved only slightly to 3:10 in 2009 as lenders choose to go forward with foreclosure (often despite the fact there are standing offers for a property).
 
12.  At the lender's descretion, action may be taken to move forward with foreclosure which may prevent a buyer from closing escrow.  Or, if the home seller makes a decision to seek protection under bankruptcy laws, the transaction will be cancelled.  In either case, the buyer who has perhaps been patiently waiting for several months for escrow closing has no recourse.
 
 
For additional information, please scroll down the article "Buying In A Short Sale Can Be Risky".
 
The chart below tracks the level of Adjustable Rate Mortgages due to reset through 2012.  Note while the initial wave of these resets from 2006 peaked in October 2007 and May 2008 was followed by a steep decline from September 2008 through May 2009, the level of Option ARM, Agency and Unsecuretized ARMs will begin to increase in April 2009 and carry through October 2011.  This sustained period give cause for concern as the governement considers assistance to troubled homeowners.
 
   
CHARACTERISTICS OF A BANK REPOSSESSION

1. The lender has foreclosed and taken legal title to the property;

2. The property is offered for sale based on a bonafide appraisal, sometimes at pricing designed to encourage multiple offers which may result in a higher final selling price;

3. Properties are offered in "as-is" condition; repairs requested by the buyer are usually declined;

4. Buyer retains the right to inspections and may choose to 'back away' subject to the terms negotiated in the purchase agreement;

5. Stipulations are imposed that require the proposed buyer to be pre-approved for a loan or that other documents showing credit worthiness are included with the offer;

6. While lender response can be from a few days to a couple of weeks, the time frame for purchase is generally less than that of a "short sale".

Buying In A Short Sale Can Be Risky
By Dian Hymer as appeared in The Sacramento Bee, on April 21, 2007

In the recent past, the inventory of homes for sale was pitifully low. Now the number of homes for sale has increased in many areas, but some listings have less-than-advantageous terms. An example is the so-called “short sale.”

In a conventional home sale, the buyers usually need only the sellers’ acceptance to go forward with a transaction. In a short sale, lender approval also is needed for the sale to close. (This can significantly add to the time needed for escrow, from a typical period of 30 days to 3 months.)

A short sale occurs when a property sells for a price that is insufficient to pay back the loans secured against it and the sellers’ closing costs. In such a case, the seller either have to come up with enough cash to cover the shortfall or their lenders must agree to forgive the amount that the sellers are short for the sale to go through.
 

Short sales have not been a big part of the home sale market since the recession of the early 1990’s. At that time, home prices dropped as much as 20 percent in some markets. Some sellers who purchased just before the recession with little cash down were unable to sell for a high enough price to pay back the amount they owed.

A low cash down payment at that time was typically 10 percent of the purchase price. During the past couple of years, many high-income, low-cash-down home buyers used no-cash-down, interest-only mortgages to complete their purchase. If such a buyer is transferred a year later, loses a job, becomes ill, or gets divorced and has to sell, a short-sale situation could occur, even if home prices haven’t declined.
 
Here’s why: Buyers who make no down payment have no equity in the property. With an interest-only loan, the amount borrowed isn’t reduced during the first years of the loan unless the borrowers make additional principal or pay-downs.
 
If the mortgage is a pay-option variety that permits the borrowers to pay less than an interest-only payment, the principal or amount borrowed could actually increase rather than decrease with each monthly payment. (This is referred to as an “option-ARM” loan.)
 

Couple that with scant home-price appreciation and sellers could come up short even if they sold for the amount they paid, once closing costs such as escrow fees, taxes and brokerage commissions are taken into account.

House hunting tip: Buyers should beware of sellers in a short-sale situation who list their properties at below-market prices to entice offers.
 
Before getting serious, buyers should find out the amount of loans that must be paid off to close the sale. If the loan amounts total more than the seller’s asking price, they will either need to pay more or the sellers’ lenders will need to agree to accept less than they’ve owed – that is, unless the sellers have savings to contribute to the sale. (In extreme cases, the sellers’ could jeopardize funds in a retirement savings plan in order to preserve a good credit rating.)
 

Buyers who want to go ahead with a purchase that is subject to lenders approval should be prepared for longer-than-typical closing or escrow period. Usually, lenders won’t even take a short sale under consideration until the sellers have accepted an offer. It then can take up to 3-4 months before the buyers know whether the lenders will approve the sale. In that time period, the buyer could perhaps have found another property or even be subject to even higher loan mortgage rates.

Advice for making the offer: Buyers should include a provision in the contract that allows them to withdraw at any time until the lender approves the sale. This way, the buyers can get out of the contract without penalty if it looks like the transaction has little change of closing.

HELP FOR TROUBLED BORROWERS FACING INTEREST RATE INCREASES OR BANK FORECLOSURE

The most important advice for borrowers: Call the HOPE hotline now at  888-995-4673 . 

There are a number of new efforts to help borrowers who may be subject to changes in their loan program. The recently established National Counseling Hotline will put callers in contact for HUD-approved counselors affiliated with the non-profit Homeownership Preservation Foundation. Call the "HOPE NOW" hotline at  888-995-4673  to receive qualified guidance without charge.  There are different programs for different borrower situations:

  1. Owners who are able to stay current even with an interest rate reset.
Solution: Counseling and refinancing. Lenders may be able to take these borrowers through a fast track process into a more affordable loan.

Potential Pitfall: Prepayment penalties may apply. Borrowers are encouraged to time their refinancing to after the rate reset, since penalties often apply only during the initial rate period of the loan.

  1. Owners who face default after an interest rate reset.

Solution: Counseling and rate freeze of up to five years. To qualify, they must be ineligible for refinancing (e.g., have a loan-to-value ration of greater than 97%), occupy the property as a primary residence, and have a credit score of less than 660 that hasn't improved more than 10% since the loan was originated.

Potential Pitfall: The rate freeze is temporary; borrowers still need to work out a long-term solution.

3.  Owners already in default.

Solution: Counseling and a loss-mitigation strategy, such as a "short sale" or "deed in lieu of foreclosure". Under the mortgage debt forgiveness law signed by President Bush December 20, 2007, borrowers who receive debt forgiveness as part of a loan workout over the next three years won't have to pay federal tax on the forgiven amount.

Potential Pitfall: Those who don't call in time may not be able to avoid foreclosure.