An explanation of the process will probably help. Many home owners today are “upside down in their home. That is, they owe more on the mortgage than the house is worth, generally because they took advantage of loose lending guidelines and bought with 100% (or close) financing or refinanced an existing property and took all the equity out of it.
At some point, for whatever reason, they find they can no longer pay the mortgage, and often will try to sell the home. After they miss about 3 mortgage payments the bank(s) will launch foreclosure proceedings, and generally it will take about another 9 – 12 months (in South Florida) before the actual foreclosure sale.
During that period the price on the home is steadily reduced to the point where offers start coming in, but of course the sale cannot be completed because the seller owes far more than the offer and has no cash to bring to the closing table. At that point a third party, generally the realtor, opens a conversation with the bank(s) about forgiving part of the mortgage so the deal can go through.
Now, the bank is not about to roll over and write off tens of thousands (maybe hundreds of thousands) of dollars so a big negotiation begins. In some cases the mortgage was covered by Mortgage Insurance so the bank is going to get paid anyway, and so has little incentive to negotiate. Good luck trying to find a contact in the MI company to talk to.
Firstly there may be several lien holders involved. Maybe 2 or more mortgages, HOA, probably property taxes, and maybe some other liens. A specialist known as a loss mitigator is called in, and they have to get agreement on who is going to take what percentage of the loss.
Then the creditors are going to want to know why the seller can’t pay and will require a detailed review of the sellers finances. The seller will have to submit tax returns, income statements, credit card statements, and so on and will have to justify every penny they spend. They have to prove beyond a shadow of a doubt that they cannot afford to pay the mortgage
Then an independent review of the value of the property has to be made, and unless the sale price is higher than the market value, the deal may be rejected. A full appraisal needs to be done and they will also look at the other properties on the market, recent sales and properties under contract, and complete a careful analysis of the property to establish a “Fair Market Value“. That is the price at which the sale will go through.
If the offer is below the market value they will reject the offer, probably without renegotiating the price. At that point the deal is dead. It is very difficult to “steal a deal” on a short sale.
Also it’s likely that Real Estate agents will be asked to cut their commission. Often the agent will agree, but then their broker will nix that idea and the transaction might fall through for that reason.
Finally the seller has to agree to the deal. You’d be amazed how many sellers still think they are going to walk away with cash or refuse to agree “because my house is worth more than that“. Often they will just get tired and frustrated with whole process and walk away.
The net result is that after the contract is written, there will be a delay of generally at least 90 days and up to 120 days before you know if your offer is accepted. In addition only about 20% of short sale contracts make it to closing.
By the way the bank will probably require at least a 5% deposit which they will hold during the negotiations.
Once the contract is agreed, you get a short period, often only 14 days, to close and if you don’t the your deposit is at risk.
ON THE OTHER HAND.
If you wait a little longer the bank will be forced to complete the foreclosure and remove the seller from the house Now they have a problem, because the house is standing empty and deteriorating. Not only that, because they are now the owners they have to pay the taxes, HOA fees, insurance etc. It’s costing them money.
They will usually put the home on the market immediately. Sometimes they’ll clean it paint it and fix it up a bit, more often they don’t, so the property looks like c**p and no one wants to buy it.
They generally price the property just below competing homes on the market. However they don’t wait long before they start knocking big chunks off the price. They’ll keep price cutting till someone makes an offer. It doesn’t matter what market value is, or what an appraiser says, they take whatever they can get.
Generally it’s not worth trying a low ball offer. I find they won’t accept anything below 90% of the current asking price. They might put your offer in a hold file and come back later but that’s not likely. However you will get an almost instant response, sometimes just yes or no, but usually a counter.
This where I come in. I’m tracking around 200 bank Owned properties at any time. I know many of the listing Realtors. They are generally not very ‘user friendly’ because they are working for the bank. They don’t like showing homes, and just want to process offers.
I can generally get a response without giving them a deposit check. Sometimes they will share the current status with me and hint at what it will take to get an offer agreed. Usually I can at least find out if they have other offers.
The offer always has to be in writing and the bank generally have their own set of contract forms. The package has to be complete before they’ll submit it to the bank, and the less hassle they get the more helpful they are. In most cases we get an answer within 24 hours and we can then either continue to negotiate or move on to the next one.
Once a property hits it’s sweet spot, there may be several offers come in close together. Price is not the main consideration, although obviously it’s a factor. The most important thing is to convince the bank you can and will close if the offer is accepted. Proper presentation at this time is vital.
So in summary, you should prefer Bank Owned over Short Sales because,
Much higher probability of success.
Better Price
Fast response
Much less stress
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