Frequently Asked Questions
1. What is the difference between a Short Sale and a Foreclosure?
A FORECLOSED home (also known as an REO meaning Real Estate Owned) is a property that the lender has already taken back because the seller has failed to make their agreed upon mortgage payments. The bank now owns the home.
A SHORT SALE is one where the seller still owns the property, but cannot afford to continue making payments and they owe more on the home than the home is currently worth. The home is now in a state of "Pre-Forclosure." The seller is then asking the lender to allow them to sell the home for amount less than what they owe on the loan. The seller hopes to sell the home for an amount acceptable by the lender, avoid foreclosure, and then walk way without liabilities or owing the bank anything further.
2. What amount will the bank take on a short sale or a foreclosure?
In a short sale, that depends on the amount of money the seller owes and what the current market is for homes similar in size and area. The banks will send out an independent appraiser/or licensed real estate broker to give a value based on current market conditions (called a BPO - Broker Price Opinion). Based on that amount, the lender will determine how much they will be willing to take to satisfy the majority of their losses. This process is similar for foreclosures. Keep in mind that the listing price on a short sale is one usually set by the listing agent and HAS NOT YET BEEN APPROVED BY THE LENDER (aka creditor). Quite often, that price is very low to solicit offers. There is no guarantee that a full price offer would even be accepted by the lender. Your Real Estate Agent will advise you on the values of homes by reviewing true comparables of similar properties that have sold in the area.
On a foreclosure, the list price has already been approved by the lender when the home becomes active on the MLS. As an FYI, current MLS statistics show that the average foreclosure in the Phoenix metro area is closing within 3-5% of the list price. This is because most foreclosures are priced below or close to market rates (based on it's condition) to get the home sold fast. Because the list price is already approved by the lender/seller, response time is much quicker than a short sale, usually within 3-5 business days.
3. How do I make an offer on a short sale or foreclosure and does it take longer to do?
On both a Short Sale and Foreclosure, your real estate agent will write up the offer on the standard Arizona real estate resale contract and provide recommendations on what the home should sell for based on current market conditions.
SHORTSALE: If the home is a short sale, the offer price will depend on how much the seller still owes their lender and the current market. In a short sale, the offer is sent to the listing agent who gives it first to the seller (owner) to review. If the owner agrees he will usually sign off on the contract and the listing agent will then send it onto the seller's lender for approval.
The time to get a response from the lender (whether they will accept your offer) can range from weeks to several months. During that time, the lender requests and review the owner’s financials, gets the home appraised, and submits the file to the investor of the debt to get approved or rejected. Often there are two lenders (a first and second lien) and both lenders will need to approve or reject the offer.
You must know, however, that during that time, the seller's agent continues to market the home, and most likely is taking in other offers as you wait to get a response on your offer. Some agents will submit all offers to the lender for approval upon receipt, thereby causing a multiple offer situation. Some agents will submit the first offer and negotiate that before they move onto the next offer in line (known as back up offers). Often times, buyers wait for months to get the lender's response, and then the response is "offer rejected" or the lender will want to negotiate further. There is no way to know how much the lender will truly accept in lieu of the seller walking away from their debt. Usually, no earnest money is required until the lender approves the contract. Sometimes the process take so long, the home gets foreclosed on before the offer is even considered or approved by the seller's lender, and sometimes values decrease while you await the lender response. Your real estate agent should advise you on estimated value for your home choice and they should stay in contact with the listing agent for frequent approval updates.
There is no pre-set time and no guarantees on how long it will take to get a response to your offer. No matter what the listing agent states about time expectations, they can never be 100% sure how long it will take to get a response from the lender and investor of the loan. Additionally, there are no guarantees the lender will accept your terms.
FORECLOSURE: On a foreclosure, the offer is sent to the listing agent and they communicate it to the lender via electronic on-line forms. The list price has already been agreed to and approved by the seller (aka lender/creditor) so response time for your offer takes usually less than a week. Often we will see multiple offers on Foreclosures, at which time, the seller/lender will usually ask for all offerors to submit their highest and best offer. The lender will negotiate or choose the offer with the best net terms. Making a cash offer over a loan is not necessarily incentive to lenders on foreclosures, as they truly are looking at all the terms to get to the highest bottom line. Negotiation usually takes place verbally between the parties until all terms are agreed upon. Your agent will help you with the negotiations and work with the seller's agent closely to get your offer(s) on the table. It could take a few days going back and forth. Once all terms are agreed upon, you will be required to sign Seller Addendums before you are considered under contract. It may take some additional time during escrow for the seller to sign closing documents, but after formal addendums have been signed, we usually close the home within 30-45 days, depending on your loan. Foreclosure purchases are quicker than a short sale from the writing of contract to closing.
For both short sales and foreclosures, once the offer is accepted, the
escrow process remains the same as any other transaction to purchase
property in Arizona.
4. Can I get the seller to make repairs prior to closing if I purchase a short sale or foreclosure?
In a short sale, the answer depends on whether the seller has
any money to do the repairs. Usually, sellers are already financially
distressed and do not have the funds to do any additional work. The
seller's lender will usually never agree to pay for repairs.
On a foreclosure, we may be able to get the lender to make some major
repairs, but that will be on a case-by-case basis and it is usually only
occurs because "your" loan will require the home be in a certain
condition prior to your lender loaning you money to purchase the
property.
Most foreclosure and short sale properties are sold "As Is." As part of
the sale, you may be requested to sign an "As Is Addendum." This means
you will take the house "As Is" and understand that seller is not required to make any repairs, no matter what the condition. However,
keep in mind, you do not waive your right to an inspection. You can cancel the contract after your inspection if there are issues you cannot agree to
keep as part of the sale. In Arizona, the
standard contract states you have a 10 day inspection period which
begins to run from the day you enter into contract with the
seller/lender but this may be shorter. All of your earnest money will be returned as long as you cancel the contract within that inspection period set forth in the
contract.
5. Can I get my closing costs paid by the seller on a short sale or foreclosure?
Sometimes. On a short sale, it's not usual for seller's to
agree to contribute money toward buyer's closing costs. Depending on
the seller's circumstances in a short sale and the arrangements they
have made with their lender, there is a chance they may agree to the
terms. However, it will also be based on what the offer price is and
other terms.
On a foreclosure, closing costs may be paid by the
seller. The lender/seller will take into consideration what the bottom line will
be to them before they agree to paying closing costs. You also need to be sure the home will appraise for the price plus the costs you request or
you won’t get your loan.
6. Will I get equity on a short sale or foreclosure no matter what?
Not necessarily. The market is changing daily. The home may
be perfect for you, and you may end up paying what is equal to current
market pricing because it is exactly the home you desire. Your agent whould counsel you on what the current market rate is for the
home you choose. This will be determined on a case-by-case basis
depending on the price, neighborhood and current market for that area.
7. Will I have to pay anything extra to purchase a short sale or foreclosure?
Other than your usual closing costs, loan fees, taxes and
insurance... on average there are usually no other costs. However, in a
short sale, the only extra cost you have may not be monetary in value,
but instead in the time it will take to get through the approval process
and escrow if your offer is accepted.
8. If I offer the full list price, will the lender accept it?
In a short sale...not necessarily. Unlike a Foreclosure where
the lender as dictated the list price, the list price on a short sale is
determined by the seller's agent and usually is not reviewed by the
lender until at least one offer has been made on the property. On short
sales, often the listing agents place a lower than estimated value price on the home just
to get an offer, which will get the lender working on approval. There is no guarantee that an offer of full list
price would be accepted by a lender. Again, it never hurts to try, but
just be aware.
On a foreclosure purchase, the answer will depend on whether there are
multiple offers on the property. In most cases, multiple offers will
push the price up and over the list price. If the home is in good
condition and priced appropriately, there may be multiple
offers on the home. Listing agents are not required to disclose any information about other
offers.
9. Why do I see prices go up or down on these types of listings?
If you are watching the history and pricing of listing on this
site, you may see prices go up or down and you may be wondering why?
On Shortsales, prices will often times go up after previous offers are
rejected by the lender. If that occurs, the listing agent re-lists the
home at the price that the lender had approved. That is often why you
will see a statement in the listing, stating "Approved Price." That's
because a previous offer flushed out the lender's bottom line, and often
times, that original buyer disagreed with the lender and walked away
from the offer and home went back on the market.
On a Foreclosure, the lender/sellers usually have an automatic drop of
price every month if the home does not sell. There is no way to know
how much they will drop, or if they will, but if you look at history of
the home, you will most likely see a pattern to price drops.
10. If the home shows active, is it really available to see and to write an offer on?
Possibly. On a short sale in Arizona, the listing agent is required to
change the status of the home to "Pending: or "Active with Contingencies or "AWC" if they are already negotiating an offer on the home.
Sometimes, the agents do not make that change because they want to keep
getting offers in as back ups. Although the agent must Pend or AWC the property pursuant to MLS rules, you will often see the home remain in Active status even if offers are awaiting approval.
On a foreclosure, there is a 3-5 business day response time from the
seller/lender if an offer or offers come in. During that time, the
agent will leave the home active on the MLS until the lender responds
and chooses one of the offers.
Your agent should always contact the seller's agents to
get a true status of the home before you go visit the home. If there
are multiple offers already over list price, you may not wish to waste time viewing the home and submitting an offer on it.
I hope these questions and answer help explain the Short Sale and
Foreclosure process.
If you have more questions about the short sale and foreclosure purchase process, please Contact Us. We would be happy to answer any questions and provide you lists of homes to see that fit your wants and needs.
