Are Short Sales Harder to Complete These Days?
I’ve read some stories recently about short sale offers that were accepted by sellers but rejected by banks. Some examples are here, and here. So what is the deal here? Are banks hoping to get more money through a foreclosure? Are they hoping that these troubled homesellers can refinance into new FHA loans worth 85% of their debt? Does anyone from a bank want to comment on the situation? Are there any other homebuyers going through a short sale now? I would love to hear your stories.
August 7, 2008 | Filed Under All Cities, News
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The bank wants to get back as much of their money as possible which is why they often turn down lowball offers on short sales. What the buyer may not know is if the seller is current on a first but late on, or not paying at all, on a second or third. Yes, that can be the case. You as a buyer don’t know who is the final decider – which bank. A short sale is a complicated process.
Bank owned properties are getting multiple offers because they are usually below market properties and many people are trying to snag a deal. Investors are out looking for deals and are willing to bid up the property as long as their numbers work out. It’s hard for a first time buyer to compete with an investor who has money, experience and time to get the deal.
San Mateo County isn’t seeing a lot of short sales in the higher priced areas. That may change when the Alt-A loans begin to roll in later this year and next year. But, then again, it may not because many of these people are in a position to refi since prices haven’t dropped dramatically in Burlingame, Hillsborough, Millbrae, Foster City or western parts of San Mateo.
The 80/20 is coming back to bite the sellers, basically, if the sales price is below 80% of the previous sale price it is likely that the amount of the sale will not be enough to cover the first mortgage. Since it has 1st lien that means that that bank would get all the money. The 2nd mortgage still has a say, as 2nd lien, and for some reason has veto power, since it it getting nothing they will naturally veto a sale. Now you may be thinking, but if it goes into foreclosure they will likely not get anything either, but the key point is likely, even if there is only a .5% chance of getting back 10k for example it makes sense to veto. Expected gains from accepting nothing = $0. Expected gains from foreclosure = .005 * 10,000 = $50. $50 > $0, $50 wins!.
It is basic math with these banks, clearly the 1st lien could share in proceeds, and pay off a little on the 2nd so it isn’t an automatic veto, but clearly that would require thinking outside the box. Banks will not do that so short sale becoming foreclosure seems pretty standard practice for now.
I have a question about short sale offers. When the lender is looking at offers on the table, how do they determine the “acceptable range” of the offer? Is it based on the original loan amount, the current market value, a combination? I guess my question is, is there a formula for this… or does the lender/asset manager just lick their finger and hold it in the air to see which way the breeze is blowing?