Home Buying Power

by Marti Kilby

The Short Sale

  A short sale occurs when the proceeds from the sale of the home are insufficient to pay off the mortgage(s) and closing costs, and the bank agrees to accept a reduced payoff. Often, the seller of the home has fallen behind on payments, and their only option to avoid foreclosure is to try to sell the home as a short sale, which is less detrimental to their credit.

  From a buyer’s perspective, the biggest difference between a traditional sale and a short sale is that the seller is not the decision-maker. The seller and their agent will determine which offer seems most favorable, and that offer will be submitted to the bank (or banks, if there is a second mortgage as well). It is then up to the bank(s) to decide if the purchase will be allowed.

  This decision-making process can take anywhere from 30 to 120 days or more, and in the end, the sale still might not be approved. If there are two mortgages, it becomes even more difficult, as the second lien holder, being in the junior position, is not entitled to anything if there are insufficient proceeds to pay off the first lien. They must rely on the good graces of the first lien holder to offer them a token payoff, usually between $3,000-$15,000. If they want to play hardball, the second lien holder can block the approval and/or demand a higher payoff. Thus, time and uncertainty are the largest obstacles in a short sale.

  The biggest drawback to a short sale is that you really have no idea about whether or not your offer will be approved, or how long it might take. The other negative is that a financially stressed seller is not in a position to make any repairs, and the bank, which is already losing money, will not agree to any repairs, so you really are purchasing the property “as-is.”

  REO Foreclosures

  A real estate owned (or REO) property is one that has been foreclosed by the bank but did not sell at auction, so title reverted back to the bank. Banks are not in the business of selling homes, so they turn over the task of unloading the inventory to asset management companies, who in turn assign the listings to local agents who specialize in selling REOs. Unlike short sales, the decision-making process is usually quicker. The asset manager knows the parameters of what the bank is willing to accept, so even though the final decision must come from the bank, the asset manager can negotiate and respond in a timely manner.

  The biggest drawback to purchasing a bank-owned property is that the owner (the bank) has never lived in the property, or even set foot in the home, and thus has no knowledge of anything about the property. They are exempt from supplying most disclosures; whereas in a short sale, the sellers have lived in the property, and even if they can’t pay for repairs, they are legally required to disclose all known facts about the home. Buyer beware! Often, foreclosed homes have been neglected or even abused by their former owners, who were angry about the foreclosure. Make sure you conduct all necessary investigations and are satisfied with the condition of the property. What you don’t know could prove to be a very costly discovery!

  So if you’re looking for a deal, a short sale or REO might be a good choice if you’re not in a hurry to complete the purchase, are prepared for the offer to be rejected, are willing to accept responsibility for all investigations, and don’t mind purchasing the home “as-is.”

  Savvy Shopper Tips: If you’re interested in short sales or REO properties, your real estate agent can perform a search specific to those parameters. If this is their area of expertise, they might also be able to access data for homeowners who are behind on their mortgage, but for whom a Notice of Default has not yet been filed. These homeowners might be interested in an off-market short sale. Always do complete inspections. $500-$1000 spent on investigating the property could save you thousands. Be prepared to walk away if the necessary repairs are too great for the price.

  Chapter 9

  How to Make an Offer They Can’t Refuse

  There is an art to writing a compelling offer, which is another reason to work with an experienced real estate agent. Personally, when acting as a listing agent, I love to receive a well put together offer, as it makes my job much easier when I present the offer to my client, the seller. For instance, we like to see that all of the appropriate documents for the particular sales situation are included and completed properly; the language in any addendum clearly states the buyer position or request; and, hopefully, there is a cover letter that explains a bit about why the buyer wants to buy this particular property. What a listing agent never wants is to have to call the buyer’s agent and ask for missing documents, such as proof of funds or a loan pre-approval.

  That being said, I need to share a little story here.

  On January 1st, I listed a lovely condo in a very popular area. The response was immediate, and we had several showings scheduled the first day, despite it being New Year’s Day. By the second day, we had an offer, which we countered the following day, almost at the top of our price range. We really thought the buyer would counter back with a lower number, but the following afternoon, January 4th, they accepted our counter and all parties executed the contract. I then moved the listing to pending status in the MLS late that night.

  Fast-forward to the morning of January 5th, and I receive another equally strong offer. The agent had not checked the MLS to see that it was no longer an active listing. When I spoke to him, he mentioned they would have had their offer in on the 3rd, but they were waiting for an updated pre-approval letter.

  Timing is everything! Had they submitted the offer earlier, they might have had a chance, as we would have countered both parties. And even if they didn’t submit it on the 3rd, if the agent had contacted me and said they would have an offer over to me in the next 24 hours, I probably would have advised my clients to wait and see how the second offer looked before sealing the deal with the original buyer.

  After all the planning, searching, and viewing of homes which didn’t quite make the grade, you’ve found the house you want to buy. It’s time to write an offer, but where do you begin?

  Writing Your Offer

  There are five things you’ll want to consider when writing your offer.

  Determine value. The starting point is determining the value of your selected property. Your real estate agent will review comparable sales from the past six or 12 months, depending on the level of activity in your market. Generally speaking, in most cities, appraisers will only accept values for sales going back six months. Your appraiser will try to find properties as similar to the one you have selected as possible, matching number of bedrooms and baths, square footage, lot size, and age. They will also look at other attributes, such as views, age of the roof and windows, and whether or not any of the rooms have been remodeled.

  Set your price. Once you’ve determined the fair market value of your chosen home, you need to determine an offer price. This will depend on several factors, including the level of competition, how long the home has been on the market, the seller’s motivation, and how you plan to purchase the home. For instance, if the seller has had the property listed for 60 days and has already made an offer on their next home, they need to sell quickly, and you might be able to offer less than if the property had only been listed for five days and the seller was in no hurry to move. Likewise, if you are asking the seller to pay for closing costs, be prepared to offer more than if you were asking for no concessions. (See Chapter 11 for more information on closing costs.)

  One thing to keep in mind is that it is fine to start with an offer that is under market value, but if you come in too low, you risk insulting the seller to the point that they don’t even want to counter. In California, a seller who has listed their home with what is called “value range pricing,” such as $450,000-$500,000, does not have to respond to an offer that is below the low end of the range. Also, in a competitive market where the seller is receiving multiple offers, it may be best to come in above asking price, if you really want the house and your agent feels that it would appraise at your offered price. However, when offering above market value, you run the risk of the appraisal coming in too low. Th
is means you’ll either need to renegotiate the sales price, pay the difference out of pocket, or move on to another property after having paid for an appraisal, which is generally $350-$500 or more. Learn more about how to handle appraisal issues in Chapter 16.

  Determine your deposit. You will also have to determine the size of your earnest money deposit. This is around 1–3% of the offered price and will be deposited to the escrow holder generally within three days of acceptance of your offer. (More about escrow in Chapter 12.) For some loan types—such as VA, which offers 100% financing—the initial deposit might be less, or in some cases, when you want the seller to see the level of your commitment, the deposit might be more. Historically, the earnest money deposit was made payable to the broker who deposited it in a trust account. The broker would then write a check to the escrow holder when an offer was accepted. However, today’s brokers are less inclined to manage client funds and are more likely to just include a copy of the check from the buyer, payable to escrow with the offer, or include no check copy at all.

  Sign the documents. Your agent will prepare all of the documents for you to sign, which may include a special addendum if the property is held in a trust, is in probate, or is a short sale or REO. In California, the standardized form used to submit an offer is the Residential Purchase Agreement. Once signed by all parties, this offer becomes the actual purchase contract and is submitted to escrow for fulfillment of the transaction. If this is your first time writing an offer, please ask your agent to sit down with you and walk you through each section of the contract to make sure you understand and agree to all of the terms and conditions. If you have written several offers and are familiar with the content, your agent may use an electronic signing service, such as DocuSign, which allows you to sign in just minutes from your computer, phone, or tablet.

  Submit your offer. The next step is the actual submission of your offer. In today’s age of electronic communication, most listing agents request that offers be submitted via email. This also cuts down on wasted paper. Along with the offer, your agent will include a copy of your loan pre-approval and a bank or other financial statement which shows that you have sufficient funds to cover your down payment and closing costs. In some areas of the country, the buyer still submits an actual check payable to the listing brokerage for the earnest money deposit. As nearly all submissions in California are electronic, there are fewer and fewer brokers accepting earnest money deposit funds. Often an agent will include a copy of the earnest money deposit check, but more likely it is just noted on the offer that, upon acceptance, the buyer will deliver or wire the deposit to escrow within three days.

  To gain an edge over your competition, and depending on the situation, you may want to request that your agent also includes a cover letter, telling the seller a bit of your story. For instance, if the sellers are selling the home where they raised their children to adulthood, they might like to think that another young couple would want to do the same. Or maybe share a bit about your volunteer work and why you want to be in that particular neighborhood. It’s even okay to include a photo of you or your family. On the other hand, if it’s an investor selling, looking to maximize his return on a rental property, a letter will likely have little impact. It is the responsibility of the listing agent to make sure that their seller has not specified that they only want to see offers from a particular sex, religion, race, ethnic group, or any other group that might raise Equal Housing Opportunity issues.

  Once your offer is submitted, make sure your agent receives confirmation of receipt, as different email programs will sometimes recognize an offer as spam and put it in the trash file. Unless you have offered on a short sale or REO, in California, you should hear back from the listing agent within three days with either a rejection or a written counteroffer, unless a faster response time was otherwise indicated in the offer.

  Should You Write Multiple Offers?

  So, you’ve just put in an offer on a home and you’re waiting to hear back. What next? Depending on the market, you might want to consider putting in an offer on another home in the meantime. This is especially true in a highly competitive market, or if you know there are multiple offers on the home you hope to purchase. Remember, it is always easier to get out of a deal than to get into one!

  Should You Write a “Blind” Offer?

  Writing an offer on a property you haven’t viewed is referred to as a blind offer. Blind offers are generally written in markets where the inventory of available homes is low and you have many buyers vying for the same property. Often, buyers will write an offer as soon as a home comes on the market, just to have a chance. So, what is the risk in writing an offer without seeing the property first?

  In my opinion, the only real risk is that you might overpay. As long as you don’t remove inspection contingencies from your offer, it is not difficult to cancel a contract if you are dissatisfied with the property once you see it. While having many photos and even video will give you a good idea of what the home looks like, there are many things you can only assess by physically viewing the property. For instance, the photos probably won’t show an outdated A/C unit or pool heater on its last legs, or the unexplained stain on the ceiling. Writing an offer based solely on comparable sales means that, in a competitive situation where you know there will be multiple offers, you are likely to write a higher offer than you might have had you viewed the property and been able to take into consideration any necessary repairs.

  That being said, there is usually the opportunity to negotiate repairs after a home inspection. So, I say if you’re in a hot market with limited inventory, go for it! If you see a listing online and think it might be “the one,” write that offer, NOW! There is no upfront financial risk in submitting an offer, and waiting several days until you can view the property may put you out of the running.

  Writing a Contingent Offer

  Maybe you’re ready to move up to a larger home, or perhaps you want to change neighborhoods and you need to sell your current home in order to have sufficient money to purchase the next one. This gets tricky. Do you sell your current home before shopping for another and risk having to make an interim move into a rental, or do you shop for a new home and hope your current property sells in time to make the deal work?

  Writing an offer on a new home while yours still needs to sell is referred to as a contingent offer. The purchase is contingent on your home selling, and depending on your market, this can be a difficult offer to get accepted. If you look at it from a seller’s point of view, if they receive two fairly equal offers, one contingent and one not, it’s likely they will accept the non-contingent offer, as it’s a cleaner deal with less likelihood of falling apart.

  If you’re going to write a contingent offer, at least have your home on the market, and preferably in escrow. This may be sufficient to satisfy the sellers, especially if their property has been on the market for some time. On the other hand, if you are in a highly competitive market where every listing is getting multiple offers, your chances of getting a contingent offer accepted are slim to none. In this case, it would probably make more sense to sell first, move into a month-to-month rental, and put most of your belongings in storage so you’re able to write a non-contingent offer.

  Savvy Shopper Tips: In a competitive market where housing inventory is low, be prepared to pay actual market value, or even slightly more. On the other hand, if inventory is high, it is a buyer’s market, and it’s much more likely you’ll be able to purchase for lower than asking price. If offering above asking price, make sure you know how you’ll handle the additional cost before writing the offer. Whether this is your first offer or your tenth, review the key items, including price, down payment, and contingency periods before signing. Discuss with your real estate agent about making multiple and/or blind offers to improve your chances in a competitive market. If you find a property you like, don’t sleep on it or call in all the relatives for their opinion. Just write the darn offer!

>   Also, if you know you are going to write an offer on a particular property, have your real estate agent contact the listing agent and let them know when to expect it. They might be ready to make a decision, and you’ll be out of the running unless they know you will also be submitting an offer. You snooze you lose!

  Chapter 10

  Negotiation: How to Turn an Offer into a Deal

  Several years ago, I was representing a buyer who was looking to purchase a home in one of the most exclusive and expensive neighborhoods in San Diego. He was in a great position, as he was prepared to pay up to $1.8 million—all cash. We looked at quite a few properties before he settled on a grand home with over 7,000 square feet and a phenomenal view. It was offered at $1.75 million, so it was definitely within budget.

  The home had been a foreclosure that the current owner bought at auction just two months earlier for $1.4 million. Even though the house was just a few years old, there were some minor repairs needed, which the new owner took care of shortly after purchase.

  Knowing what the seller had paid for the property just two months earlier, and knowing how minor the repairs had been, my buyer was not inclined to offer anything above $1.5 million—despite the fact that the list price of $1.75 million really was market value.

  So, we submitted an offer at $1.5 million, all cash, with a 15-day close of escrow—certainly an attractive offer given that this was when the market had hit bottom, and there was a scarcity of buyers for houses in this price range.

  The seller countered us at $1.65 million, and we countered at $1.55 million. We were now just $100,000 off, so I figured we would eventually meet in the middle and my buyer would get the home. The seller came down another $40,000 to $1.61 million, and my buyer responded back with a $40,000 increase to $1.59 million. They were now just $20,000 apart! And then, the negotiation stopped. The seller refused to come down any lower, and my buyer refused to come up, even another $10,000! The seller was intent on squeezing every possible dollar out of the place, and my buyer was equally intent on getting a steal of a deal. So, despite my best efforts to have these two stubborn men see the value in just a little more compromise, the deal fell apart.