James R. Samsing's Real Estate Blog

My local service area which includes the Phoenix West Valley cities of Avondale, Goodyear, Litchfield Park, Surprise and Glendale has been one of the hardest hit real estate markets in the country. As a result, most new clients in these cities always want to start with foreclosures. Thanks to dozens of late night infomercials and a host of real estate companies touting foreclosure auctions, the average consumer assumes that bank owned properties always sell below the market. They have been trained into thinking that they can find houses for 50 cents on the dollar and that banks are desperate sellers looking to rid themselves of any house on their books.

Unfortunately this misguided information often leads consumers to overpay for property or to miss the best deals in their search area.

I just spent the past 2 weekends at the REDC auctions in Phoenix and Mesa. I personally inspected every home in my local market and watched as hundreds of these homes were sold. While it is true that a small percentage did sell well below market prices (about 15-20%), the overwhelming majority of properties at these auctions sold at or near the current market price. This is particularly true when you factor in the "Buyer's Premium" of 5% that the auctioneer adds to the winning bid. Many of these homebuyers were obviously unaware of the condition of the home they were buying, underestimated the cost to cure the property, or simply did not know about current active listings that were comparable to their subject. In one case a buyer purchased a home for $85,000 (+ a 5% buyer's premium) when there was an IDENTICAL (model match) home in BETTER condition NEXT DOOR that is currently listed for $75K! Ugh.

And of course there is the "Previously Valued To" figures thrown out by the auctioneer. I love those. The auctioneer puts that figure in big bold print above the property address every time. As though somehow knowing that the home was once worth $350K is going to change the fact that it's worth $95K today. But I imagine there are some consumers who get fooled by these numbers.

The point I am obviously making is that not all banked owned properties are "deals." Yes, it is true you can find REO property offered well below the current market. And yes, now really is a great time to buy. But every transaction is unique and must be evaluated on its own merits in light of current market conditions.

So where should home buyers turn if they really want the best deals? I would argue that short sales, on average, are better deals than foreclosures. In fact, as my local markets have started to pick up over the last 45-60 days, I would say that short sales have become an even better deal relative to foreclosures.

How is this possible? Consider the following:

1. A Short Sale typically sells for the same or lower price than a foreclosure. This is because:
   1. The seller is disinterested in price - they just want to clear the debt and save their credit rating.
   2. Banks will agree to take less because they are avoiding the cost and delay of foreclosure proceedings.
2. Short sales are generally in far better condition than bank owned homes. Unlike foreclosed properties which are often missing appliances and have significant deferred maintenance, short sale properties are often kept up by the seller to ensure they sell. In many cases the seller is still occupying the property. As a result, there is far less cost to cure a short sale property than there is an REO. 
3. Short sales attract fewer buyers because of the time delays and hassles. Consequently, there is less price competition from other buyers.

The key difference with short sales is that you need to be a patient buyer. Short Sales generally take 4-8 weeks to get an approval from the bank. This is substantially longer than bank owned properties where you usually receive an answer within a few days.

As I mentioned earlier, every transaction is unique and should be evaluated in light of current market conditions. Naturally I would recommend that consumers employ a qualified Realtor to assist with the analysis. But if you are a buyer who does not need to close right away, then I would implore you to ask your Realtor to make short sales a part of your search.

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Over the course of the last week I've had the chance to read a large number of blogs and Realtor posts regarding short sales. I can't imagine there is another subject with a wider degree of opinion! There is so much information, both good and bad, it is easy to see how consumers and Realtors alike are easily confused. 

I have been a licensed Broker since 1995, but for nearly 20 years I have been principally engaged in the lending side of the business. During that time I have helped hundreds of consumers negotiate short payoffs of private and institutional loans, obtain prepayment penalty waivers, perform rate modifications on existing loans and assist with lien payoff resolutions including IRS tax liens.

Short sales and loan modifications are nothing new.

What has changed is the sheer volume of consumers who are upside down on their homes and the complexity of the mortgages they hold. This has created a tremendous market for short sale "experts" and loan modification "specialists" who offer services to desperate homeowners. And it's created a log jam at loan servicing departments with overwhelmed loss mitigation units processing inordinate numbers of applications. Of course, compounding the problem is this crazy financial services environment where the major servicers (retail banks) are incapable of adequately staffing temporary loss mitigation departments due to their financial condition. Oh, and don't forget the hideous maze of ownership rights to modern mortgages; many of whom have been sliced and diced from mortgage pools into CDOs with no clear owner, and a servicer with no vested interest in the loan itself. Fun Stuff!

Yet in spite of this there are plenty of local Realtors and Loan Modification Companies touting themselves as short sale experts with the ability to make the process "easy," "simple" or "fast."

Uh huh.

Short sale situations are as varied as the stars in the sky. Every consumer's situation is different and there is no single cookie cutter/template that will work for everyone. With that in mind here is my best attempt to provide some general guidance to homeowners or Realtors seeking to sell a home for less than is owed on the mortgage(s).

Bit of Advice #1. Get to the right people the first time around.

Mortgage ownership and servicing rights change hands at an ever more rapid pace. It is important to know WHO owns your mortgage and WHAT department handles short payoff approvals.

If you aren't sure of who owns the mortgage, perform a free search through the MERS (Mortgage Electronic Registration System) website: https://www.mers-servicerid.org/sis/  MERS is a national registration system for mortgage loans and nearly all institutional loans are registered with them.

Once you have determined who the correct servicer/owner of your mortgage is, then you need to identify which department handles short sale approvals. Do not contact the general toll free number listed on a mortgage statement or website unless you want to spend lots of time listening to "sold on hold" messages while being bounced from person to person. I generally "Google" the specific company department I am looking for if I cannot find it in my own rolodex. There are a few free public lists of Loss Mitigation Departments that you might also try. Here is one I recently found: http://iamfacingforeclosure.com/blog/loss-mitigation-phone-numbers/

Once you contact the appropriate Loss Mitigation department make sure to get a detailed list of their requirements, including any company specific forms they require. Do not use a cookie cutter template provided by some 3^rd party.  

Note: If you are dealing with multiple institutional mortgages on a single property then - in my opinion - you are trying to do the impossible. However, you can get short sale approvals done when the 1^st & 2^nd mortgages are owned by the same company. Many lenders now have "Co-Loss Mitigation" Units that workout settlements on multiple loans simultaneously. I recently completed a short sale in Southern California with Wells Fargo by working with a group specifically setup to negotiate on behalf of Wells Fargo Mortgage (1sts) and Wells Fargo Home Equity (2nds).

Bit of Advice #2: Hardship, smardship. You have a sad story, boo hoo hoo. Now what's in it for us?

If you scan the internet you will find hundreds of samples for short sale hardship letters. Too often they focus on the borrower's reasons for needing a short sale and not the bank's reasons for accepting the short payoff. It is ok to spell out hardship but FOCUS ON THE REASONS WHY THE BANK SHOULD ACCEPT YOUR PETITION. The bank only cares about getting the maximum amount of money, in the shortest amount of time. Anything you can point out to that effect should be at the heart of your letter and application.

And be as detailed and accurate as possible. You will need an estimated HUD-1 that is spot on. And if you are looking for a pre-approval, or if you can't get the numbers to be deadly accurate, then make sure to add a minor level of padding to allow yourself some wiggle room with negotiations. Remember that the Loss Mitigator is also looking for some sort of "win" and, as it is with your clients, it's much better to under-promise and over-deliver. Besides, if the deal ends up short to close guess where the extra money is likely going to come from??? It isn't going to be from the lender whose agreed to take tens (or hundreds) of thousands less on their loan!

The key here is that you want to give the Loss Mitigation Officer as many reasons as possible to approve the short sale. Which leads me to my next piece of advice...

Bit of Advice #3. Know who you are dealing with.

Imagine yourself working in a temporary/contract $40,000 year job, sitting in a cubicle farm surrounded by hundreds (if not thousands) of other collection professionals. Your daily work life resembles a Dilbert cartoon with stacks of files on your desk that stretch to the ceiling. Pinned to the punchboards on your cubicle walls are "Matrices" of loss mitigation guidelines which spell out what you must review and what you are permitted to approve. Your phone rings incessantly and you have 14 new voicemail messages, each from some histerical Realtor or homeowner wondering when their application will be approved. You can barely go to the bathroom without someone's permission let alone approve an exception from the "greater of 80% payoff or 100% of bank AVM" rule in your region. Those exceptions require the written approval of a Loss Mitigation Officer II-A and you have only been with the bank 6 months... 

Do you really want to harass this guy? You think he really wants to take your call? Bother him too much and my guess is your short sale application will be placed in the "cylinder filing cabinet."

Instead, be nice. Don't call and harass anyone. Get an e-mail address. Nearly all of the banks have a generic e-mail string like john.doe@bankofamerica.com. Send him polite update requests every few days that he can respond to at his leisure. Keep him apprised of any market conditions regarding the subject property that might hasten his decision. Remind him of important milestones in the purchase contract. Offer to bake him cookies. Whatever it takes (within legal limits) to keep him engaged with you and your file.

Last Bit of Advice (For Realtors Only):  Own the process.  

I live and work in the West Valley of Phoenix and there is hardly a home seller here who is not upside down. I know a lot of Realtors who choose to avoid short sale listings altogether because of the time and energy they take. Others choose to use 3^rd party vendors and leave it up to someone else to do most of the work. While I would never advocate that Realtors spin their wheels and work for free, I do believe that we all have some degree of responsibility to the markets and communities we serve. And remember, the more short sales we close, the fewer foreclosures there will be, the greater the number of qualified buyers that will exist in the future, and the faster we will return to a period of home value appreciation. 

There's my 2 cents. My sympathies to the millions of homeowners in this country who are upside down on their home through no fault of your own. I wish you the best of luck.