Posts filed under ‘Tips’

Short Pay transactions: a view from each side

Ordinarily, I give Buyers information and then suggest that they avoid “Short Sale” listings.   First, a definition:  a “short sale” is where the Seller owes more on a property than the current market value of the property.   In selling it, he is “short” of what he owes his Lender(s).    Most lenders will at least look a facilitating a Short Sale transaction because it is faster and less expensive to the Lender than the alternative of Foreclosure if the Seller is having problems.

So when you make an offer and get it accepted by the Seller of a property that is a Short Sale, that is only the first step.   You also need the approval of the Lender.  Sometimes there is a second loan or a credit line as well as first loan, in which case you need approval of both Lenders.   As part of that process, the Seller is required to submit a whole array of financial statements and documentation of the circumstances of their hardship, such as a lost job, a divorce, etc.   Just wanting “out” from the property isn’t going to cut it, the Lender will most likely go ahead and foreclose in that circumstance.

At present, I’m in two Short Sale transactions, one representing a Buyer, the other representing a Seller.   The Buyers made their initial offer more than six weeks ago and got it accepted by the Seller in a matter of days.   Time passed, waiting for the Lender to respond,  and then a little over two weeks ago, the Lender had the Seller issue a Counter-Offer.  Remember, the Seller had already accepted the offer but the Lender re-opened negotiations and said, “We’ll take this transaction but the price needs to be $23,000 more than the Buyers had offered.”  There were some other terms and conditions as well.  Within 48 hours, after reviewing alternative properties, the Buyers accepted the Lender’s counter-offer.  We were told that the final approval of transaction would be “within days” and that we could open escrow as soon as that approval came in.
Two weeks later, today, the bank’s system informed the listing agent, “The Buyer’s documentation of their down payment isn’t in a satisfactory form.”  The Buyers had provided computer printouts of their statements and do not receive printed monthly statements.  Nonetheless, the Lender wants them to go to their bank branch and get statements printed for the last two months.   We’re told that once the Lender receives these, they will proceed within 24-48 hours.

This is the kind of frustrating petty and arbitrary demands that Lenders can and do make in Short Sale situations.   The only reason I suggested that my clients go ahead with pursuing this Short Sake transaction  was that the listing agent had told us that the process with getting the Short Sale approved by the Lender was pretty far along (it was) and that there were very few substitute properties in their price range in the area they were interested in.   I hope we find out in a few days whether the bank is going to go forward because their last Counter-Offer specified a November 30 closing date.

My situation with the Short Sale where I’m representing the Sellers isn’t going much better.   The property was listed for sale in mid-August, we got an offer the first week of September and reached acceptance within a week or so of negotiations.    The Sellers submitted to the offer to their Lender and we  proceeded to wait.   And wait.   And wait.

After four weeks, the Lender had another real estate agent look at the property to render a  price opinion to determine whether the offer was acceptable or not.   More waiting.   A burst of paperwork from the Lender to the Sellers.  More waiting.  Two weeks ago, the Sellers were told that the package was on the asset manager’s desk awaiting final approval.  We’re still waiting.

Short Sales can be good deals.  But participants must have an incredible amount of patience.   The worst cases I’ve heard of involve Short Sales that took nearly a year to complete.   Next to that, 3-4 months is looking good.


November 9, 2010 at 6:34 pm Leave a comment

Foreclosures: Santa Monica vs. Southern California

According to an article in the Los Angeles Times, some 34 percent of the sales in Southern California for the month of August were of foreclosed properties.
In contrast, my weekly statistical analysis of Santa Monica on Monday showed that only 2 of 112 single-family homes and 9 of 196 condos & townhomes on the market were foreclosure properties.    Santa Monica in particular and the Westside in general are very different from Southern California as a whole.  Buyers need to calibrate their expectations on the basis of local market conditions, not the newspaper headlines.

September 15, 2010 at 6:49 pm Leave a comment

Counteroffers, asking price, short sales

Representing a Buyer, I just had negotiations fall through on a Santa Monica Condo.

The asking price was $439,000, my Buyer offered $05,000.    Our estimation of a fair price was $415,000 and thus we were disappointed to get a counteroffer of $434,000.  After a second round of counter-offers, negotiations broke down almost $20K apart.  It happens.   My Buyer was determined not to overpay and the comps supported his position as far as I’m concerned.

But here’s the important thing:   the listing agent revealed that the Seller owed nearly $400K on the property.  The break-even point at which the Seller would not have to put money into the transaction or attempt to work out a Short Pay with their lender would be around $425K.

Finding out what Seller owes and whether they can afford to sell at a reasonable market price is becoming an important step to take in this market.     If a Seller simply can’t sell at what seems to be a good market price to the Buyer, the Buyer needs to move on and find another property.

August 31, 2010 at 10:41 am Leave a comment

It’s a tricky market

Wednesday, I wrote an offer on a low-end 2-bedroom condo in Santa Monica.  It received eight offers and my client didn’t receive a counter-offer.  What does this tell you about the market?   It’s strange:  on one hand, the amount of property on the market has risen by roughly 50 percent in the last six months.  Every day brings another batch of price reductions.  And yet…some properties get multiple offers and are on the market less than two weeks.   The moral is that every property is different, and that every property has to be evaluated carefully by Buyers and Sellers to determine what the market value is.   A Buyer can’t assume that offering 5 percent below asking price will be successful; a Seller can’t assume that their property has all the features that induced multiple Buyers to make offers on the property two blocks over.

July 24, 2010 at 2:07 pm Leave a comment

Foreclosures (REO’s) and Short Sales: A Cautionary Tale

I frequently get an initial contact where someone is very emphatic about finding a foreclosure or maybe a short sale.  The assumption seems to be, a foreclosure or a short sales is by definition going to be the best deal out there.   This may be so, but it isn’t guaranteed to be so and in fact often a foreclosure or a short sale is worse for the Buyer than a well-priced sale by a regular Seller.

I just had a client cancel the escrow for the purchase of an REO property.   It’s only the third cancellation I’ve had in 19 years.    What went wrong?   You should understand that banks and other sellers of foreclosed properties are relieved of the burden that ordinary sellers have in making disclosures about the property.   Was there fire damage that was superficially repaired but left the building structurally weakened?   An indivdiual would have to disclose this.   A bank probably wouldn’t even know the repair history of a property but even if they did, they aren’t compelled to disclose what they know.

The entire burden of due diligence is upon the Buyer.    Has a leaking shower caused rot and let water seep into the walls?   Better have the best possible inspection because if the property is bank-owned, they won’t know anything.  Fire damage?  Ditto.   Termite damage?  Ditto.   Problems with electrical wiring or plumbing?  Ditto.    Furthermore, most banks are selling properties completely “As-Is” with no credits or repairs given once escrow is opened.  The result is that you can discover tens of thousands of dollars in repairs that need to be made to rectify conditions that weren’t obvious when you viewed the property prior to writing an offer.

As an alternative, you can have all your inspections up front before you negotiate a purchase price but you run the risk of paying hundreds of dollars, maybe more, in inspections without knowing if you and the bank can even agree upon a purchase price.    How many inspections are you willing to pay for before knowing whether or not you have a deal?

Short sales—where the Seller is selling the property for less than he owes his lenders—are another matter.   When you reach agreement on terms and conditions with the Seller, your journey has just begun.    The Seller’s lenders—banks in most cases—then have to agree to accept less than what they are owed in lieu of foreclosure.    Simply acknowledging that they have received your offer can take two weeks.   The total process can run months; one client told me that his recently completed short sale purchase was “nine months of horror.”    One might be encouraged to hang in for the duration if one was sure that one would get a good deal but statistics show that only about half of all attempts at short sales are completed.

Furthermore, the banks approving short sales can unilaterally impose changes to the terms and conditions prior to making a final acceptance.   Seller paying for termite work?  10 days before the close of escrow you might be told, “No, take it or leave it.”    You thought you had a sales price agreed to?  Six months after making your offer you might be told, “We’ll take your deal but you’ll have to come up with $25,000 more.”   The range of changes to a contract that a bank can impose as a condition is virtually without limit.   They can’t force you to accept but often the end result is a purchase that’s not nearly as attractive as what you contemplated when you wrote your offer.

The essence of making a good buy is still the same:  find a good property in a good location at a good price.  If it happens to be a foreclosure or a short sale, then go ahead and go into the transaction with your eyes wide open.   You may in fact make that golden purchase that many dream about.   But if the property is being sold by just an ordinary Seller, relax…you might have the better deal by the time escrow closes.

October 14, 2009 at 8:01 pm Leave a comment

How much under asking price should I offer?

“How much under asking price should I offer?” is a question that I’m asked in any market and much more frequently in the current market.

I’ve been told by a student of economics these days that most questions about economics can be answered with one of two answers:  either  a)  China  or  b) it depends.   In this case, the answer is “it depends.”

There is no set rule because Sellers (and their agents) vary widely in how aggressively they price a property.  Some properties are worth–and are receiving offers–of full asking price, or even over in multiple offers, in this market.    Other properties are priced clearly too high…and you see them languishing on the market for months.

One thing I do when preparing to write an offer for Buyers is to print out all the recent sales of comparable properties and compare various factors such as location, square footage, amenities, etc., of the sold properties to the property they’re going to write an offer on.   In so doing, I print out a report that shows both the asking price and the selling price of these “comp” properties.

No matter what the market, you will find that the majority of sales occur within 3-5 percent of the asking price.   I’ve concluded there are two reasons for this happening.

First, if the “true” market value of a property is 10 percent or more below its asking price, the Seller usually isn’t ready to hear the truth and will reject the offer.   Otherwise, he would have lowered his price to a more defensible level to attract a quicker sale.

Secondly, and as a Santa Monica real estate agent this sometimes drives me nuts, many Buyers won’t write an offer much more than 5 percent below the asking price.   “It’s too embarrassing” and other variations on that theme I’ve heard over and over again.

So, while the answer to how much under asking price you should offer is “It depends” and may vary from property to property, the overall pattern is such that most sales will occur within 3-5 percent of listing price, even in the current market.

May 7, 2008 at 10:06 pm Leave a comment

When is a Loan Approval not a Loan Approval?

In most real estate transactions, the purchase of the property is contingent upon the Buyer getting a loan at terms specified within the contract and within a specified time, often 17 days per the boilerplate language of the standard contract, though many realtors in the current market with its lending challenges are extending that period to 25 or 28 days. Exceptions are when the Buyer is making an all-cash offer or in a hot market where a Buyer may remove contingencies in their offer up front in order to make their offer more attractive.

In the course of the transaction, the Buyer is expected to remove the loan contingency upon getting loan approval. If the Buyer doesn’t remove the loan contingency, the Seller may require the Buyer to cancel the transaction or Buyer and Seller may negotiate an extension of the loan contingency, sometimes accompanied by the release of a portion of the Buyer’s deposit from escrow as a gesture of good faith.

But what constitutes “Approval”? Loan representatives who take an application enter the data from the application into an automated system and receive an automated Approval (or not). So when that approval comes back, the Buyer can remove their loan contingency, right?

Not so fast. After that automated loan approval, the lender’s rep submits the loan package—application, credit report, pay stubs, copies of bank account statements, and all the myriad other bits of paper comprising an application—to the lender’s underwriting department for review. The underwriter orders the appraisal and reviews all the documents. And here’s where some of the fun can begin. The Buyers’ income may be fine but the underwriter may be concerned about the solidity of an applicant’s job history. Or there may be an item on any of all those pieces of paperwork that cause the underwriter concern. The appraisal, especially in the current market, may come in at a value below the purchase price or the lender may even arbitrarily slash an appraisal by 5-10 percent as a hedge against a declining market. An loan application isn’t approved until the underwriter—and, often, the underwriter’s supervisor—signs off on the application. But at that point, we have approval and the Buyer can remove the loan contingency, right?

Not so fast. When an underwriting department approves a loan, it does so with a number of conditions. Many of them are trivial and many are completely transparent to the Buyer or their agent, information to be furnished by the lender’s rep. Other items are things like the lender being provided with copies of the Buyer’s driver’s license. But then there may be more problematic conditions, such as an appraiser being asked to come up with two or three additional properties, either sold or currently on the market, to validate the appraisal. In some cases, an entirely independent second appraisal is called for. Only when all these conditions, called “pre-document conditions,” are met can the Buyer more or less safely remove the loan contingency.

And, actually, the pre-document conditions are not the end of the line. After loan documents have been issued and signed by the Buyer(s), there are additional pre-funding conditions that have to be met prior to the loan funding. These usually are really trivial, and include such things as the lender calling the Buyer’s place of employment to re-confirm employment status before the loan is funded. For what it’s worth, a Buyer client of mine once changed jobs during escrow just before the loan was due to fund; that provided way too much excitement in the process.

The consequences of removing a loan contingency without prudent diligence can put the Buyer’s entire deposit at risk should the loan fail to be funded. The problems, especially with possibilities such as second appraisals, are even more acute into today’s lending environment. The bottom line is, Buyers and their agents need to be very careful about removing loan contingencies.

April 9, 2008 at 7:20 pm Leave a comment

Finding Value—the tip of the iceberg

The current soft market is illustrating one of my long held principles as a realtor:   value, as indicated by a property that goes up the most in an “up” market and down the least in a “down” market, is not purely a matter of location.

While prices on the Westside in general and Santa Monica in particular are holding up better than other parts of Los Angeles County and the rest of California, it’s instructive to pay attention to details.   The very best properties, the tip of the real estate iceberg, assuming they have credible listing prices, are still selling quickly, some even with multiple offers.

But if that three-bedroom house is on a busy street it will take longer to sell, and at a disproportionately lower price, than its uncompromised neighbor two blocks over.   That two-bedroom condo with less than 900 square feet of living space will be a much more difficult sell than the one in the same neighborhood with more than 1,200 square feet, even though the latter has a higher asking price.

There’s a line of conventional wisdom about real estate that says one should buy the worst property in the best location one can afford.   I disagree.    If you put all the properties in an area on a 1-100 scale, I recommend not buying any home at 25 or below.   Don’t buy on the busy street, don’t buy the excessively small, don’t buy the house across the street from a fire station.   Instead, if building and sustaining value is among your top priorities, find a home that doesn’t have any of these incurable defects.

Contrariwise, if you really need “bang for the buck,” getting some combination of larger/newer/nicer, then these homes with the incurable defects are exactly the properties you should look at.  But remember, the “deal” you get on the front end when you buy is the same deal you will have to give on the back end when you eventually sell.   You’ll be able to meet your daily needs at the cost of reduced appreciation.

As your realtor, I can help you understand and weigh these trade-offs.

March 30, 2008 at 3:44 pm Leave a comment

Sellers: looking at contingent offers

Virtually every real estate contract has contingencies that the Buyer must meet or otherwise have an option to withdraw from escrow. The three traditional major contingencies are the ability to get a loan for specified amounts at specified terms, the acceptance of the result of a physical inspection and other due diligence, and a review of documents pertaining to the property, such as a preliminary title report.

But the current market is seeing a new contingency that we haven’t seen much of at all in the past 12 or so years: Buyer’s offer is contingent upon the sale of the Buyer’s property. In the past few years, Sellers would have laughed at such a contingency…why wait for the Buyers to sell their property when you can get another three or four or eight offers without that contingency?

But times have changed. Now, with many properties being on the market for 60, 90, 120 days or more, Sellers may be more willing to consider an offer contingent upon the sale of the Buyer’s property.

There are many factors that a Seller should consider, including length of time the Buyer has to remove this contingency, how attractive the property is and how well priced it is (to gauge the likelihood of reasonably prompt sale), the apparent willingness of the Buyer to do what it takes to get their property sold and assessment of the Buyer’s real estate agent’s ability to successfully market the Buyer’s property.

There isn’t a simple, clean set of answers to these questions. If Sellers have their property listed with me, I will walk them through the questions and answers as I evaluate them, giving them the benefit of my 17 years of experience, including experience gained in the last down market of 1990-1996.

When the market changes as it has over the past few months, Sellers have to change and adapt with it. Carefully considering a contingency of the Buyer’s selling their home may be a prudent thing to do if the offer is otherwise solid and if the prospects of the Buyer doing so look good within a specified period of time.

February 18, 2008 at 10:28 am 1 comment

Some Common Mistakes

For most people, a real estate transaction will be among the most financially significant actions they undertake in their entire lives. Given that, it pays to be prudent. Here are two errors I’ve observed in the past year.

Using an Out-of-Area agent to list your home for sale. In one case, a couple used one of their best friends who was an agent in Hollywood to list their Santa Monica condo for sale. The agent did not understand the nuances of location in the Santa Monica market. As a result, the condo sat on the market for months while the market declined and the Sellers finally accepted a much lower sales price than they would have had to accept had their property been priced accurately to begin with.

There is no substitute for on-the-ground experience in pricing and marketing a property. When you hire an agent, make sure that he or she has that on-the-ground experience where your property is located.

Using a Part-Time Agent. In the instance above, the agent was a part-time agent in addition to being from out of the area. As a result, the agent could not respond to buyers and other agents as quickly as he/she could have. Real estate contracts contain a clause that says “time is of the essence” and while this is always true, it’s even more so in a volatile and challenging such as we are experiencing right now.

Using the Agent Representing the Seller of the Home You Want to Buy. I’ve seen parties who are buying a property use that property’s listing agent to list their current home for sale in the hopes that will get them a better deal on the purchase of their home.

The duty of the listing agent is to obtain the best price and terms for the Seller of that property. For the listing agent to induce that Seller to accept terms from a favored client of the agent would be a breach of ethics. Beyond that, from a practical standpoint, the listing agent has a longer pre-existing relationship with the Seller. Either way you figure, counting on the listing agent to get you a better deal because you let him or her sell your own property in exchange is a bad proposition.

August 28, 2007 at 4:47 pm Leave a comment

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