Monday, June 16, 2008

Short Sale Trouble: How to Avoid It!

A recent post by Alan Butler on the BloodhoundBlog highlights potential issues when working with a listing agent who really doesn't understand the pitfalls of handling offers in a short sale.

Alan's response to agents who take all offers presented on a short sale and submits them to the bank to choose the best one as, "...A coward’s way to handle contracts."

In my opinion, the best way to handle a multiple offer situation on a short sale is to have the owner accept an offer and have another in back-up. Both offers should be submitted to the lender(s). Also, when an offer is accepted, the listing should be displayed as a 'Pending' listing so agents don't show a home which is already under contract. This also prevent numerous other offers to pour in which can complicate the situation with the bank.

When an offer has been accepted on a short sale and another agent wants to write an offer, Alan suggest saying, "I have an offer on the property at this time. You are more than welcome to submit your offer for consideration in a back-up position."

Alan also states that, "If you send multiple offers to the lender, you’ll simply confuse them. They’re confused enough already. Don’t help them.

Second, by sending multiple offers, you might unwittingly be creating the impression that you have got a hot little property on your hands that might be worth more money. This is going to make the lender cocky. Their demands for money are going to go up, and worse yet, they may get the impression that it’s a better idea to take the property away from your client and sell it themselves for more money!"

I agree with Alan completely.

On a recent showing with my clients, we came across an open house in a desirable neighborhood. The first 'Red Flag' I noticed was that the property was a short sale and the owner had already abandoned the property.

The listing agent turned maid was doing some clean-up work because it seemed the owner had just left leaving a trail of dust and trash behind for the agent to clean. Another big 'Red Flag'.

I use the term 'Red Flag' to indicate a serious problem with the property or a problem which can put a buyer at risk.

Nonetheless, I approached the agent and started to ask some questions. Listed below are the questions I asked:

Q. Why has the owner left?
A. Why are you asking? He left because he wanted to put his problems behind him.

Q. Do you have any offers on the house?
A. Yes, I'm going to collect them all and send them to the bank for approval.

Q. Has a notice of default filed on title?
A. Don't know but it's not important.

Q. Do you know how many months the owner is behind on payment?
A. Does that really matter?

Just by asking a few basic question, I already knew that this agent didn't know what she was doing and she was also putting her client at risk of foreclosure. Nonetheless, I advised my clients to skip over this home because the risk far outweighed the benefit.

The correct way to handle a short sale is the same way you would handle a seller who has equity. Welcome all offers, counter, then accept one and place the next best offers a back-up offer. Then sending the accepted including the back-up offer and have the lender choose which one they will accept if any.

Imagine what would happen if the listing agent sends 10 different offers to the lender(s) for approval. Now lets also imagine if the lender accepts an offer and the seller refuses to sign. If that doesn't draw up some lawsuits, I would be surprised.

If your thinking of buying a short sale home, their are some limited financial risks involved and expect to be patient as it can take several months for a response. MAKE SURE YOU ARE WORKING WITH A PROFESSIONAL. The best alternative to a short sale is a bank owned home or buying direct from a seller who has equity.

Written By:
Richard Johnston, RE/MAX
Short Sale Homes in the San Fernando Valley
818-730-4128

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