The 5 Most Common Complaints of Short Sale and REO Buyers (and How to Avoid Them)
Roughly forty percent of the homes for sale on today’s market are short sales and foreclosures! Distressed properties are well known for their value (a reputation which is sometimes accurate, and sometimes not), but they also have a reputation for causing buyers to become distressed, too!
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Transactional snafus, last-minute surprises and long, drawn-out escrows that never close seem to be par for the course. Instead of avoiding these properties altogether, get educated about the most common dramas that go down in these deals, and how you can avoid falling victim.
1. Run-on (and on, and on) escrows. When you’re buying a home (or selling one, for that matter), time is absolutely of the essence. And buyers reasonably expect that the big time suck in real estate is in the house hunting process itself; seems like once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly, right?
Not so much, when it comes to some distressed property sales. I’ve heard tell of the occasional, swiftly-moving escrow on an REO (real estate owned – by the bank). But for the most part, these transactions take anywhere from a few days to a few weeks longer than “regular” sales, because of the extra signatures, supervisor-level approvals and even investor involvement required to seal the deal. Banks don’t have the same sense of urgency individual home sellers do, and it’s not uncommon for the people who need to sign on the dotted line to be on vacation or scattered across the country, adding days’ or weeks’ worth of time to the escrow.
And short sales are also an entirely different animal when it comes to escrow timelines. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.
Avoid the drama by: expecting your escrow to run long, and being pleasantly surprised if it doesn’t. Expectation management is everything. Make sure you take these extended timelines into account when you’re working with your mortgage broker on the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an allowance for the cost of extending your low interest rate, if rates are rising rapidly during the time you’re waiting for the deal to be done.
2. Bank won’t take lowball offer. If I had a dollar for every time I’ve received a question from an outraged reader to the effect that a buyer has had their short sale or REO offer rejected on grounds that it was too low, even though the bank has no other offers, I could buy a foreclosure myself (admittedly, it’d be one of those $150 foreclosures in some blighted town with tax liens and no plumbing, but still).
Banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because you see it’s on the market and listed as a short sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s condition. Fact is, many banks would rather see the listing agent reduce the price by a moderate amount, and wait to see what offers come in, than to accept an offer 30 percent below the asking price just because there are no other offers on the table.
Avoid the drama by: working with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with. You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after lowball offer on distressed homes. Sit down with your broker or agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not bizarrely out of the realm of the fair market value of the property.
3. Last minute postponements/cancellations. These transactions have an uncanny way of being delayed at the last minute – or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and just hopped in the moving truck, only to get a text from your broker that the deal didn’t close because the escrow company which was selected by the bank flubbed the checkboxes on a single sheet of paper (it happens). Or, you’ve been in contract (with the seller) on a short sale for four months, and the bank refuses the sale entirely because the seller refuses to kick even $1 of their own cash into the deal, despite having a flush savings account.
Avoid the drama by: staying as flexible as possible with your moving plans as long as possible. Best practice is to plan on some overlap between the time you can be in your last place and your scheduled move-in date. Also, if you’re in contract on a short sale, you should take the point of view that you don’t have a firm deal until you get the bank’s approval of the transaction. So don’t even think about starting to make moving plans or paying for home inspections and appraisals until you know the bank has greenlit the deal and that the purchase price and terms they’ve approved work for both you and the seller.
4. The bank’s black box. Make an offer on a normal home and you’re likely to know what the outcome will be within a few hours or a few days, at the outside. If things take longer because the seller is out of town or some such, the listing agent tells you that, and you at least know what’s going on.
Make an offer on a bank-owned property or a short sale? It’s a crap shoot – could be days, but could also, easily, be weeks or months before you know what’s going on. And no amount of calling, pleading, prodding or nudging is likely to get you much information on how your offer or the seller’s short sale application is being handled or what (if any) progress is being made. And that “black box” into which your offer disappears at the benk level is very frustrating.
Avoid the drama by: continuing your house hunt until you have an answer back. Maniacally pestering the listing agent for answers or harrassing your buyer’s broker into spending hours on hold with the bank is highly unlikely to get you any insight. (With that said, it does make sense for your agent to check in regularly – sometimes even daily – with a short sale or REO listing agent to stay updated on any developments with the property and to make sure your offer/transaction stays in the front of their mind.)
Most of the angst in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home. You can only control your efforts and activities, not the bank’s. So, consult with your own broker or agent about staying proactive in viewing and even pursuing other properties until you have a firm “yes” from the bank on your short sale or REO offer. Until that time, and usually for a short time after you get the bank’s approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when your right to rescind your offer or exercise contingencies – i.e., bail – will expire).
5. Double standards. In a “regular” equity sale with no bank involvement, both buyer and seller are obligated to meet various timelines. Seller has to provide disclosures by X date, open the property to inspections – with utilities on – by Y, and close and move out by Z. REO and short sale buyers, on the other hand, are often dismayed to find that even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick-like.
Avoid the drama by: chalking it up to the (admittedly irritating) way things are – the price you pay to buy from the bank. Realize that working with the bank on the bank’s terms is unavoidable when you buy a distressed property. Then, go into the deal with realistic expectations – including the expectation that the bank will drag its feet, despite expecting you to keep every deadline – and you’ll be less frustrated, and less likely to make poor decisions out of frustration.
Also, make sure you do respond in a timely manner to the bank’s requests and your obligations under the contract. I’ve seen banks capitalize on buyer delays in returning signatures and removing contingencies to accept higher offers they received in the interim. Don’t lose your home on a technicality because you assume that the bank’s lackadaisacal timelines apply to you as well.
Author: Tara Nicholle Nelson
Tara-Nicholle Nelson
Trulia's In-House Demystifyer of All Things Real Estate
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Legacy Comments
It doesn’t have to be this way! Our company sells many REOs for banks at online auction, and we endeavor to have a buy-sell signed by both parties within 10 days, and closing within 30 days. You need not encounter run-on escrows, last minute postponements or cancellations, the “black box,” or double standards. Our sellers sometimes reserve the right to accept or reject a final bid (within 10 days) but many of our sellers are selling with no minimums and no reserves. It can be a great opportunity for a buyer!
Short Sales do not have to be as much an adventure as this article indicates. While there is no argument that in the past there has been long delays, things are improving. Often these delays were as a result of the lenders, Mortgage Insurance Companies, government, investors holding the mortgage and agents learning how to best approach the sale. Everyone can share the blame for the delays. What I have found is that as Realtors it is about preparation and setting proper expectations. If you represent a buyer there are questions that you must ask before proceeding with showing a property. If you represent the seller there are questions that must be answered (with the right answers) from the seller before agreeing to help the seller halt their foreclosure.
My last Massachusetts short sale was approved in 17 days and closed in 32 days. Having a good working knowledge of short sales, properly communicating with all parties and setting expectations will get your short sales approved quickly and without undo stress. Do yourself and your buyers a favor and avoid short sales that are being marketed by an agent that is unsure of the process.
I have been doing short sales for the last 4 years. I just lost one to foreclosure because the seller couldn’t pay the back taxes and didn’t want to pay $5000.00 in cash and sign a $10,000.00 note!
Your market area is very different than, for instance, the Detroit, MI area. It truly is an adventure and agents here are definitely experienced in dealing with both REOs and Short Sales. Michigan has been in this arena longer than most. Most Short Sales are typically 4-5 months. REOs are typically 30 days, however, many loans are not going thru, due to the condition. We are now finding that the Short Sales are beginning to take longer, due to the loan holders upping the ante of the sale price at the final moments, beyond our comps and bank loan appraisals.
Where you may see a shorter time frame is when a house already went through the Short Sale process, and the original Buyer either could not get a reasonable deal or they just gave up. Therefore, a shorter experience for the next Buyer.
Short Sales depend on so many variables, some listing agents control and others are issues they have no control over. The best example is one bank was upset at two people selling a short sale home, mind you it was merely a purchase money loan, but the lender ran their credit the last week before close and found both purchased a new car. Feeling the lender was being gipped, they demanded each divorcing party give them a $15,000 note or they would foreclose. The sellers said foreclose then – and the asset manager had the bank cancel the short sale and did foreclose. How is your skill going to over-ride that lunacy?! Then PMI said one of our listings was “damaged and their value reduced” and that was totally untrue. Our seller lived there, his wife, due to medical issues lost her job and half of their income and had to sell. We had a CASH offer willing to close on the amount the bank agreed, yet PMI TO THIS DAY – SINCE MAY 2ND – HAS NOT AGREED TO SELL!!!
Yes you can prepare, you can be certified and have great expertise, but banks are run by people – who can have illogical decision making which ruins the sale. We have seen cash offers refused and the foreclosure sale was FOR LESS!!! We keep thinking, ok – it is getting better – yet escrow after escrow we see the continual problems of no cooperation or even communication, resulting in pathetic results. The answer will not come unless the American people put the pressure on the politicians to reform and standardize such a process as the Short Sale. The alternative is to continue to have REO Homes a blight on our neighborhoods, run down landscaping due to “Winterizing” the home and in California there is no such need to ruin homes by that ploy. I have great success with some Short Sales and others we have little or no control. We keep working to help the process by educating Asset Managers and Negotiators with the banks, but much more has to be accomplished.
There is a big difference between a short sale and an REO. In a Short Sale, the homeowner (obviously) still owns the property, and is the seller of the property. An REO is owned by the bank directly, making the bank the seller. My experience with the short sale process: if you make sure from the begining that everyone knows it will take a while, you have a lot less complaining to deal with. Also, check, re-check, and triple check evreything you send to the bank. Make sure all documents (every page in fact) are complete, acurate, and have the sellers name and account number on them. This will really help avoid unnecessary delays.
Just looked at your website and those listings are bank owned, not short sales. The article is referring to the long processs that some times occurs when dealing with a negotiator regarding a short sale. Two different situations. Bank owned are much easier !
Its really too bad that these auction homes dont offer competitive real estate commissions. Realtor work hard on behalf of their clients; many times showing them 20 houses before finding one. The homes on the auctions are usually easy to show, but offer no incentive to the agents bringing you clients.
Respectively,
Marianne Malerba
Very Good — Informative — too the piont — accurate — helpful
So true. Our short sale took 9 months to close, the owners stole a ton of stuff from the house in the process, the shore sale “expert” was a complete idiot, our closing day would be canceled last minute because of the short sale negotiator not answering his phone. It was a terrible experience but in the end we got out dream home!
Wow, look what happens before my coffee break, I can’t spell!
My suggestion is to do everything you can to not get involved with a “Short Sale”. All the rules are on the buyer and none on the bank and seller. Very few buyers can plan a move at short notice or plan a closing five times. The name itself is deceiving because there is nothing “Short” about the process! Warning buyers does not work because they just do not understand how rediculous it will get like signing the same document over and over, or having to have no closing date on the paper work, or only getting an answer to questions every two weeks, or renegotiating after everything is signed, or deterioration of the property because no one is taking care of the home after the contract is presented and signed by the seller, or the property value changing by the time the bank wants to approve the transaction. No expectations is the correct thought process though and include in that no expection, NO Closing.
These are great talking points. Thank You
People really underestimate how frustrating short sales can be. Buyers tell me all the time “I’m in no rush” but when the bank doesn’t even respond to their offer for 3 months it ticks them off. Short sales can really frustrate both the buyer and the agent.
Great information to pass on to my buyers!
All of these points are so very true. Thank you. I really think it boils down to setting reasonable expectations from the beginning with your buyers. Letting them know what is up ahead makes the transaction less painful. I have close 3 short sales so far and every single one has been different. The last short sale escrow I had fell through because the seller filed Chapter 13. What a big disappointment for my buyers. Now I keep a list of EXPECTATIONS that I read to any new buyers I meet with so that I can really prepare them for what’s up ahead.
Excellent-telling it like it is-just about covers it all. They are a challenge to do however, they can get done, thanks.
Its so good to see the things in print that I already know to be true. This article will be emailed to all of my investor clients. A good read and always good to remember that a cool head usually prevails in the end.
I have been working with short sales, what you stated about escrow being drawn out is not always the case. If you have a good rapport with the bank or lending institution the offer may more much quicker.
Number “2. Bank won’t take lowball offer.” is something I encounter quiet often and the buyers just don’t understand why the bank doesn’t even respond to substantially low offers. They just get bent out of shape that the seller is under no obligation to respond or give a counter to what can be viewed as an unreasonable offer. Being realistic saves a lot of pain as well as the buyers, sellers, selling agents, and buyer’s agent time. If buyers want a response, don’t present an offer than is unrealistic because it is a bank or the property is a distressed situation.
I can’t believe how many realtors don’t know how to work with the banks on short sales. A short sale should not be listed until it has been approved by a lender thus becoming a “LENDER APPROVED SHORT SALE”. Keller Williams has provided us with the CDPE course to do just that. Try learning about distressed properties and then go out and get those short sale listings that expire.
Bob
I agree 100%. I list REO’s and Short Sales and this is exactly what happens. Love this article…and I will be sending it to the buyers I work with so they can hear what I always say and explain from another professional. REO’s are most definitely smoother than short sales, but my REO sellers have sometimes delayed my own buyers offer on my own listing due to many different reasons. Not 3 months like a short sale, but up to 10 days in many occassions, yet we still have to meet closing date, contingencies etc..
again…WONDERFUL article!
One should NEVER lump REO and Short Sales into the same category. We are doing a disservice to our buyers – and our sellers – by conflating the two. They are as different as apples and alligators.
This article has good points that apply to Short Sales only.
Also good points that apply to REOs only.
I could write a book the size of “War and Peace” on Short Sales – and by the time I finished writing the first page the content would be dated. Simple thing to understand is that there are so many variables that nobody, literally nobody, can provide a process diagram that accurately represents how your transaction will proceed from the initial listing until close of escrw. I challenge anyone to do so.
REOs have a process that is relatively predictable, although the asset managers, and often the listing agents, are so physically removed from the market and property condition that they really don’t have a clue about the true value. For example, it’s hard to explain to an asset manager what happens to plumbing and waste lines that have sat unused for a year or two, but it isn’t a cheap repair.
One small correction, I’ve been involved in a lot of REO offers and I’ve never know it to take weeks or months to get a response. About the longest was 10 days and that was unusual.
Great Article. Managing expectations is key!
Great article. It takes alot of patience and fortitude. Many of my past clients
said it is worth it. There is no perfect house so why not get one
at the best price possible. “Location Location Location”
All 5 points are spot on, and I can easily say that these 5 complaints are the same 5 complaints that agents have as well! Everyone knows that the average short sale can take up to many months, so what is the benefit to the buyer for waiting that long. Yes they can submit on a standard sale and hear back within 2-3 days however if you are a buyer looking for a great deal, waiting patiently for a short sale may be the right answer. Most buyers want instant gratification and want to know right away whether their offer was accepted or not, however if you have some time and can be patient, you just may reap the rewards by purchasing a short sale. In the Irvine Orange County marketplace, the standard sales and bank owned properites are selling at or sometimes even above market price, however the short sales are the ones driving prices down.
Using short sale and foreclosure in the same sentence is not a good idea. They are two different breeds–as an agent, we like foreclosures, they go relatively fast–short sales can take 6 months and then not even happen!
Exactly!!
I agree with Erin! If the realtors know what they are doing and willing to work for the sale it doesn’t need to be this long drawn out process!
Instead of writing about the distressed buyer, more focus should be on the distressed homeowners, who never thought they would be losing their homes. No one imagined we would be in this state of affairs. I work with many short sale sellers and buyers in South Florida.
Buyers would rather purchase a short sale home due to it being a maintained household in better condition than an REO.
Yes, there is a wait for the buyers and there is also a very well priced home as their reward.
Susan, I couldn’t agree with you more..
Great summary of the facts!! Thanks for putting it in writing so succinctly.
Thanks for the summary for Buyers and Sellers. These suggestions have been pretty spot-on in my experience. The most frustrating thing for me as a Seller’s agent (REO or SS) is when Buyer agents get all bent out of shape and defensive for their buyers and create an even more negative situation. Patience and a good attitude will go a long way and hopefully get the buyer an amazing deal. It is best for all parties involved to determine ahead of time if you or your client are not cut out for the “wait”.
We are doing a great disservice to the public by grouping short sales and REOs together. Most REO’s proceed pretty much lik a regular sale–a very few hicups and if the listing agent is any good; they make them go away. Short Sales on the other hand are generally difficult because you are dealing with people at the bank who do not ordinarily deal with real estate transactions other then to issue forclosure notices. I have found most REO listing agent able to make things happen. No one has any control in short sales and really no motivation as many times it is to the bank’s benefit to foreclose (more money from the government). However experienced SS agents have been able to get things done in a realatively normal amount of time.
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Nice article… should be required reading in a market like ours where Distressed properties make up well over 60% of the market.
If I had a dollar for every person that I’ve come across that blames much of what you bring up on the real estate agents, I’d be buying one of those REO’s also..
Why did you NOT explain the Housing Aforadability Forclosure Alternative (HAFA) to people who work with Short Sales. This process works with the server awards the seller with $3000 and time constraints that speed the transaction. This is a very good Win Win for people in financial trouble andavoids forclosure that hurts all property in the neighborhood.
Good article. One worth sharing. One additional tip: make sure the seller hires a good, short sale attorney. They have to have a lawyer, and having the right one makes all the difference. Verify their experience working with short sales and use someone your comfortable with. Just ‘any attorney’ won’t do when working with short sale transactions!
You should point out the reason for an attorney _and_ CPA is that those professionals have expertise for which Realtors are not licensed experts.
Fox example, an attorney may point out the potential liability of a future deficiency judgment against the Seller of a Short Sale years after the transaction is completed and the deal is done, even if the Seller has done nothing illegal. It is possible for the holder of a note to retain the right to pursue collection, or more likely, to sell the debt to a third party at a discount, and that party can pursue the Seller. An attorney could help revise the payoff agreement or recommend not signing any agreement with such a clause. This is just one of many reasons Short Sales are fraught with uncertainty.
It’s not the Realtors lack of knowledge that makes it a “long drawn process”….we are not the ones who dictated “short sale policy and procedures” for the banks…..I have closed many short sale transactions with none of these events stated in this article happening. The buyer’s expectations and lack of knowledge regarding real estate procedures have a lot to do with it. The realtor involved should educate his/her buyer and seller as much as possible….this will reduce the frustrations of dealing with short sales and REOs
Thank you for this great piece of content. Best Regards
Why no reference to MARS. We agents must be most careful NOT to discuss a sellers mortgage situation when dealing with short sales. Our hands are being tied tighter with every new guideline/law set before this housing crisis. How will we ever be able to help people through it?!
Banks do not take weeks or months to address an offer on an REO. I agree this is two articles. REO’s and Short Sales aren’t even close to being the same animal.
Wait to have an appraisal and do an inspection until AFTER the bank approves the sale? Good luck closing within the bank’s time frames if you don’t bother doing anything until the last minute. Sure, it’s irritating to wait and then wait some more…and then be expected to jump and get everything done instantly once the bank finally approves, but it doesn’t have to be that way…if you’ve already been working on your obligations. Having your inspection done during traditional time frames allows you to use the report as leverage against the bank. If you wait until after approval to do your inspection, there is very little chance the bank will start negotiating all over. Most likely, the buyer will walk and everyone will have wasted their time. If a buyer isn’t willing to fork over a few hundred bucks to get this process started so they’re ready to jump when the bank says jump, they shouldn’t be looking at short sales. Same goes for waiting to start the loan process.
Great post, understanding the different types of sellers is critical to writing the appropriate offer. Match the motivations and preferences of the seller and your offer will have a far higher chance of success.
Check out my post http://culvercity.losangelesrealestatevoice.com/2011/05/20/buyers-sellers-market/ on this very subject.
Bottom line is that there’s nothing short about a short sale. Prices tend to still remain at our low market level. So when the buyer asks to lowball the offer, the wise agent will do their homework and if the list price is low, they’ll come up a few dollars to be in the running to be the accepted offer. It’s been my experience that conventional with 30% down or higher (all cash) is king in the REO department. I’ve made too many offers on behalf of hopeful buyers only to have another accepted based on the ability for a quick close. That being said, I’ve run into the typical scenario of the bank being the one who accepts that offer based on the ability of a quick close only to delay the escrow by 30 days while they obtain the necessary investor signatures. Friends, it’s still a nightmare out there until more people are hired to streamline this cumbersome process.
there is a fantastic book on the subject of handling REO offers, buyers, and brokers called “REO BOOM” by Aram Shah & Tim Shah. They talk about “multiple offer monster” and how to deal with it along with the 5 most commonly made mistakes in the REO business. Check it out its a great read.