Short Sales and Strong Stomachs

by brandt

Over the last week, I’ve gotten a few emails from a college friend asking about the home buying process and picking my brain on all the situations and circumstances that we have gone through in finding and purchasing our house.  She had asked me about short sales, and I told her “it’s been my experience that if you’re going after a short sale, you had better have a strong stomach.”  I thought I had a strong stomach.  Now that thinking is being put to action.

 

Having previously worked in the mortgage industry before I switched jobs and started house hunting, I knew that short sales were met with trepidation and anxiety.  Through my own research, I found that short sales were a dicey proposition.  Yet after asking every possible question I could to my agent, she told me that short sales weren’t necessarily BAD, just frustrating.

What exactly is a short sale?  Stripped to its essence, the lender is agreeing to accept less than the total amount due on the house in order to avoid foreclosure auction or bankruptcy.  The amount you offer is directly to the bank, with the seller as an accommodating party.

Why would a bank agree to a short sale?  First of all, if a house goes into foreclosure or bankruptcy situation, the bank isn’t getting money coming in.  It’s a dead asset that’s not accruing any money and is considered a high risk asset.  Second, if a home goes into foreclosure or bankruptcy, it could go for much less than even the short sale on the home, plus the fees involved can be higher.  It’s purely a matter of economics.

Why do I say you need a strong stomach?  Here’s been our experience with the short sale proceedings on House #2 in Rochester.  Naturally, every house is different, every experience is different, and every bank/lender is different, and we just seem to be in a sticky situation.

We find the house, and like I mentioned on my review of the house, it was in a bad state.  We offered them 85% of their asking price, as well as asking them to pay 6% in closing costs.  We didn’t offer them asking price because of the condition of the home.

The seller wasn’t happy with the offer, and countered.  We went back and forth until we came at a verbal agreement at 90% of asking price, to which they verbally agreed.

This whole exchange happened over the course of 24 hours.  My agent was very confused.  Remember what I said about short sales?  She was concerned that he (the seller) didn’t understand what a short sale was, and that he (the seller) was trying to pay off the liens on the house (which isn’t the purpose of a short sale).  Nevertheless, a price was finally verbally agreed, and we thought “OK, time to wait on the bank.”

Last Thursday Ashley and I signed the paperwork for the purchase agreement (PA) and sent it over to our agent to get it to the seller.  I got a phone call late Friday as I was leaving work that the seller now doesn’t want to sign the PA because he doesn’t think the price is enough.  Great…

Of course, all weekend my mind has been mulling this situation over.  We haven’t even gotten to the hard part (working with the bank), but if he isn’t willing to sign the PA for our offer, then why are we waiting on him?  And if he wants to play hard ball with me, I can play hard ball with him.  Especially with Ashley and I now being officially on-the-clock as far as our apartment goes (we’re moving out at the end of the month), what do we do?  Come to find out that the seller is from a different country, and the seller has a long 20+ year relationship with the agent, who also seems to be from a different country, which throws all kinds of fun things into the process.

This is where the strong stomach comes in.  A short sale can be a great deal.  I’ve seen some houses that needed a bit of touching up go into short sale situations, a buyer gets it at a great deal, and within 1 year (just through basic upkeep) the value of the home has increased $10,000.  But then again, if we can’t get the offer to the bank, how can we even realize the potential of the deal?

So how do you handle a situation like ours?  Do we stay invested in the house in Rochester, or do we drop it, say “You’re a ridiculous seller, and we don’t want to work with you.”?

I struggled with it this weekend.  When I came into work on Monday, I wrote a long email to my agent laying out all the facts, and saying “If we don’t have an offer in by Tuesday at noon, we’re walking away,” thinking that laying out our terms bluntly would sway the seller to sign at the risk of losing the house.

However, this is the reason why you have an agent.

She talked me off the ledge, and said “You don’t want to insult, or come off like you’re insulting or being hard-nosed, especially if the other party is already acting that way.  You don’t want to strain a relationship with them because we still need to work with them when it comes to the bank.”  I gave her a call after work, and she had many good nuggets for me – mostly, the seller’s agent feels very frustrated because of the personal relationship he has with his friend (the seller) and not listening to him (the agent) and taking the agent’s advice.  So it sounds like the agent knows that we’re offering a good and reasonable price.  The other interesting thing is that they had a lot of house showings over the weekend, but as of Monday at 5:15, nobody had made an offer.  Perhaps that changes today, but if nobody is making an offer based on the asking price, that should be a sign.  Our agent recommended that we wait, and be patient.  “We’ll check in with them every couple of days, and let them know that our offer still stands.  In the meantime, look at other houses, keep your eyes out.  If something comes up, we make an offer on that.  Negotiating isn’t so much about playing hard ball, but relationships.  Sometimes the best thing we can do is to be silent, and force them to think.  If they haven’t gotten back with us in a week or 2, then we think about taking the offer off of the table.”

I don’t do well with the unknown.  The possibility of being another 2 weeks before the seller takes the offer really bothers me specifically because this isn’t his deal to negotiate, and he should have known the details of his role in the short sale before he put it on the market.   Couple that with the amount of time waiting for the bank (1-3 months), plus the possibility the bank might reject the short sale and the fact that even though we started our search early enough to not have this problem, it’s causing me to stress just a tad.  However, higher reward (a nicer house for a killer price) = higher risk (uncertainty and possible rejection). Short sales aren’t for everyone, and I’m not saying I’m a tough guy to go through with it.  I would recommend to everyone before going in on a short sale to get with a buyer’s agent and go over every question and nuance you have, because your best tool is knowledge when it comes to these properties.

Images can be found here and here.

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