Did you know that 80% of short sale listings never close? This is due to a variety of factors, the biggest factor being the competence of the listing agent in regards to dealing with the bank. Simply put, it's a complicated process.

I recently had the privilege of attending a short sale seminar led by Jon Mann and the Prudential Locations short sale team. Jon and his team have learned the ins and outs of both selling and buying short sale listings through experience, trial and error. Jon used to work as a banking industry examiner and consultant examiner and has developed a fantastic process to take short sale listings and actually close them.

Short sales currently account for 10% of all the properties for sale in the Oahu MLS, and this number has clearly been on the rise for the past few years. Although the vast majority of short sales do not end up resulting in a sale, the Prudential Locations Short Sale team has proven that closing this type of transaction is absolutely feasible. In the past year, Prudential's Short Sale team has taken 9% of all Short sale listings on Oahu in 2009, but 25% of all Oahu short sale closings have involved Prudential Locations Short Sale listings. This is due to the effective 82 step process they have developed.

Through their effective negotiation tactics with the banks, the short sale team has effectively gotten more than $600,000 of mortgage debt forgiven on behalf of their clients.

So, what is a short sale? A short sale occurs when a person owes more on their mortgage than the house is worth, they are experiencing financial hardship, and they don't have the money to cover the difference between their mortgage and what they could potentially sell the property for.  Home owners in this type of situation are clearly at risk of losing their property to foreclosure, and as a result short sales are also known as pre-foreclosures. The reason so many short sales do not close is because the property ends up being foreclosed on before the proceedings to close the short sale transaction can be completed, especially if the listing agent isn't well versed in the bank negotiation process.

Considering buying a short sale? Jon gave this advice:

1. Consider looking for another property that isn't a short sale. 8 out of 10 will not close.
2. You must be patient. Short sales typically take between 90-120 days to close.
3. The best "deals" in real estate aren't foreclosures, REO's or short sales.  The best deals are the situations where an owner has a lot of equity in the home, and is motivated to sell.

If you are still considering buying a short sale, asking these questions of the listing agent will help you determine both the agent's knowledge of the process, and your chances of actually closing on the property:  If they don't know the answers to any of these questions, run the other way!  You will be wasting your time.

8 Questions to ask the Listing Agent of a Hawaii Short Sale:

1.    Are there multiple lienholders on the property?
If there are two lienholders, it may actually be easier to close on the property. This is because the 2nd lienholder expects to take a total loss, so they will be happy to get something rather than nothing. It may take longer to close, though. If the 1st and 2nd liens are with the same lienholder, it can be easier also because you are dealing with one institution making a decision rather than two.
    
2.    Has the listing agent contacted the bank to get an authorization letter?
An authorization letter is a document the client signs so their agent can actually talk to the bank regarding the short sale. This is important for the listing agent to do because it takes 5-10 days to actually get the authorization letter THEN you can submit offers.  

Agents need to convince the bank that they will lose less money by doing a short sale than if the property goes into foreclosure.

3.    Are there any offers on the property?
Banks typically don't do counter offers, they just pick the best offer, so you should only submit your BEST offer right off the bat, you won't get another chance normally.  Don't offer too high either, because it won't appraise, and the bank won't accept it.

4.    Has the listing agent submitted a hardship package to the bank?
You need to make sure the lienholder negotiator is aware that this is a short sale, and that the property owner is experiencing true financial hardship. Otherwise the bank simply won't accept this as a short sale.  Short sale are not a "get out of jail free" card. If the homeowner can pay the shortfall in the mortgage, they bank will want them to do that.

5.    Has a loss mitigator or negotiator been assigned?
This question is designed to find out if the listing agent is moving the process forward.

6.    Has the BPO been ordered or completed?
This is a critical step in the process. A BPO is a Broker Price Opinion. It is similar to an appraisal, but its typically done by a Broker or Real Estate agent rather than an appraiser. Another note about BPO's: if the BPO is too high, the bank will have an unrealistic expectation as to the value of the house, and they won't accept the offer.

7.    Has a Bank Acceptance Letter been received?
If the answer is yes, forget about this property because it will go into escrow shortly.

8.    How long do we have to close?
If they say in 30 days, then in the 1st ten days you should request to get an extension from the lienholder. One of the problems with short sales is that if you can't close when you say you can, the bank will start to charge you by the day for every day it goes over.

Closing the deal
If the listing agent has answered all your questions to your satisfaction, and you're ready to make an offer and try to buy the property, here are some tips to actually making it happen:

1. Make it a best price offer, you wan the strongest offer to make it to the finish line. Banks don't do counter offers.
2. Ask if there are any other forms or addendums needed.
3. Request a closing credit of 1-3% and inform the sellers/listing agent that you are flexible.  Don't specify that it is for repairs!  It will be denied.
4. When the appraiser goes to the property make sure the power and gas are on to avoid any additional delays with appraisals.
5. If you find potentially unpermitted items, VA and FHA loans will die a slow death. Walk away!
6. Provide a preapproval letter and proof of funds to close.

Now you have a good idea of the process and complexities of the short sale.  If you or  someone else is interested in looking for a short sale property, please take a look at the Prudential Locations Short sale team listings.  You have a much better chance of actually closing on one of these listings.  They will be able to answer the 8 questions listed above.  Good luck in your property search!

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