Working in the Distressed Property Market
When it comes to distressed properties, no transaction is the same and most of them take longer than expected. Following are some helpful tips from industry veterans for working with buyers and sellers.
As a REALTOR®, training in short sales transactions is vital these days, "and you must continually update that knowledge," according to Mary Jane Cambria, CIPS, CRS, GRI, PMN, SRES, broker/owner of Cambria Real Estate in Huntington Beach, CA. "The transaction is a moving target, so even if you took the Short Sale and Foreclosure Resource (SFR) class three years ago, come back to class."
After all, with the threat of shadow inventory looming, experts expect the short sale and distressed property market to be around for the next several years. No one knows that better than Tricia Lehane, GRI, PMN, SRES, a sales associate with DPR Realty LLC in Scottsdale, AZ.
"I was working with a Chicago couple who wanted to buy a second home in Arizona. The listing they wanted was a short sale and had only been on the market one day, so we quickly submitted an offer," Lehane said. "I asked if the sellers had a significant hardship and was assured by the listing agent that they did."
Flash forward eight months when the home went to the trustee auction and sold at a higher price than Lehane's buyers' offer. "Going forward, I request to see the paperwork that the listing agent and seller submitted to the lender that shows the justified hardship," she said.
Here are more tips for working with sellers, buyers and investors to ensure a short sale transaction gets closed:
1. Make the save.
For Cambria, it's all about saving the property if at all possible. "In the beginning, it's not about selling. I help homeowners explore all of their options to save the home before we talk short sale," she said.
Lori Cox, ABR, SFR, SRES, a speaker, educator and business coach in Chicago, agrees. "Prior to taking the listing, the agent needs to discuss potential solutions to the owner's current financial situation. The agent should not just offer one solution but speak to all options when short selling," she said. "Ultimately, the property owner needs to decide which option is best for him or her. Of course, the agent can't provide legal or tax advisement, so it's critical to recommend that sellers seek it from experts."
According to Cambria, "I only do short sales when I've done everything else I can to help them save the property. Sometimes that can take a long time."
Unfortunately, not everyone who's underwater on his or her mortgage qualifies for a short sale, and that's a popular misconception.
The property owner must have a valid financial hardship that caused or will cause the mortgage payments to become unaffordable. If that happens, Cox said, "the seller may be granted forgiveness from the lien holder(s) based on the hardship circumstances and be able to sell the property without further financial liability after the closing."
Cox advises agents complete a net sheet to gain understanding of the outstanding liens on the property. "Then, you must ascertain what caused or will cause the mortgage payments to become unaffordable for the property owner. That means asking tough and personal questions. A willing property owner is a must," Cox said. A willing property owner means that the owner must be ready, willing and able to complete all required paperwork and provide all additional information that may be required by the servicers to validate the hardship and ultimately approve the short sale transaction.
Lehane suggests agents find out the whole debt picture. "If the total debt between all lenders is more than double the asking price, it's pretty unlikely for the short sale to come together," she said. "Also, beware of seconds with credit unions," Lehane said. "They rarely accept Home Affordable Foreclosure Alternatives (HAFA) release terms as they're required to pursue any defaults."
3. Show you care.
"What bothers me about short sales is that we lose track of the fact that we have to be sensitive with these sellers. After all, they're losing their homes," Cambria said. "I counsel them and encourage them to speak with an attorney or CPA. Then, once they're knowledgeable with their financial situation, I describe the short sale process to them, but I take their feelings into consideration. For the seller, this is a very difficult situation."
4. Know the liability.
"The liability on the part of the listing brokerage firm and agent is certainly a reality," Cox said. Therefore, many brokerage firms have created their own unique company policy that states that licensees must complete NAR’s SFR certification prior to working with a short sale seller or buyer of a short sale property.
As for the liability the seller incurs, Cambria says, "It's always best they consult with an attorney and accountant to ensure they're doing everything correctly."
5. Price it right.
While it is frustrating when an agent doesn't do his or her due diligence to diagnose the desire to sell the property and the hardship, "it's also very frustrating for all parties when agents don't price properties accurately," Cox said. "The agent may price it based on trying to eliminate the liens so the seller gets more for the property than it is worth, and that's a mistake."
Cambria agrees. "Price it to the market value. You get these listings that are underpriced and get 20 offers and end up selling at market value. Do your homework and price it at what the market will bear," she said. "There's a misconception that short sales buyers will get a really good deal; the fact is everything is a good deal right now. If something is listed $100,000 under market value, you're doing a disservice to everyone."
6. Communicate and be patient.
"I base how often I communicate with lenders and buyers on everyone's needs," Cambria said. "However, no matter what, I will contact everyone at least two times a week." That includes:
- The buyer's agent to ensure the buyer is still on board,
- The lender to get an update on the transaction,
- And the seller to keep them updated.
"You don't want the buyer to walk away because they gave up," she said.
But, more than that says Cambria, "Be patient with the stressed-out sellers. They aren't making payments, and they want the sale to be over quickly so they can get on with their lives."
Overall, Cox says, "The buyers and sellers need to be educated on the transaction and how it's processed." And remember that you wear three hats:
- First, you diagnose that the seller has a true hardship.
- Second, you need to be a good technician and complete all the details involved in preparing and submitting a package.
- Third, you must be a good clinician. Your bedside manner must be positive, communicative and informative.
Now You Know
One last tip: "Get the appraisal done right away," according to real estate educator Cox. "Oftentimes, lenders for the buyers will have the buyers wait until after the seller's lender has approved the short sale. But, that's a bad idea. It's best for the buyer to get the appraisal done quickly because that appraisal can assist in getting the contract to close. After all, the seller's lender can look at that expert document and be more willing to use it as a value."
Tracey C. Velt is an Orlando-based freelance writer.
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