Yesterday, I blogged about Why I May or May Not Be Able to Just "Order the Appraisal Already"!. I blogged about the other processes that need to happen before a Mortgage Loan Originator (MLO) and their lender can implement the appraisal ordering process.
However, I intentionally did not go into short sale purchases because there are just too many variables to the whole short sale process that need to be addressed. In Part 2, I want to explain the different options that buyers have for ordering their appraisal when purchasing a short sale.
As I mentioned in Part 1, for most properties (REO/equity sale), the appraisal ordering process is relatively simple; not necessarily so for the appraisal ordering process for a short sale. For borrowers purchasing a short sale, there are other options that are available to them. However, too often I have seen some of these options come back to either bite my borrowers in additional costs and fees or to lose the property all together.
There are three options and like most things, there are advantages and disadvantages to them but hopefully I can help you decide which option is best for you.
Option A: Consider the transaction no different than any other loan process and begin the loan transaction as soon as the seller accepts the borrowers purchase offer and the borrower's MLO/lender receives a legible copy of the fully executed purchase offer. Order the inspection(s) (if the borrower plans to have more than one type of inspection) and appraisal and fulfill as many of the prior to doc (PTD) conditions as possible.
FYI: the short sale approval letter(s) (if there is more than one mortgage lien on the property) as well as any additional bank addendums will be listed as PTD conditions.
The advantage of this particular option is that when the short sale is approved, much of the loan has already been processed and the loan is ready for final approval. Quite often, the MLO/lender may be able to fund and close the loan in a matter of days. Short sale negotiators are infamous for countering 30-45 day escrow timeframes (that the seller accepted and agreed to) to 10-15 days.
The disadvantage of this option is that if the short sale is not approved for several months (very common with most short sale purchases), then the chances of the appraisal expiring are highly likely and the borrower will need to pay an additional fee to have it updated. Furthermore, if the short sale is denied, then the borrower will have lost both the inspection fee(s) (if they had more than one type of inspection) and the appraisal fee because these fees are not refundable.
Option B: Is the complete opposite of Option A. Do not begin the loan process at all until the short sale is approved. Do not order any inspections and/or the appraisal until the short sale letter(s) are received. In other words, do not do anything until the short sale has been approved.
The advantage of this option is that the borrower doesn't incur any costs or fees until they are certain that the bank has agreed to the terms of the sale that the seller has already accepted and agreed to. The disadvantage of this option is that when the short sale negotiator reduces the escrow timeframe that the seller accepted and agreed to, they will also institute a per diem fee for every day that the escrow date goes past the new closing date that was scheduled.
Furthermore, if the borrower rejects the banks counter-offer because of the lack of sufficient time to close the loan then the borrower runs the risk of losing the property. Quite often, these new closing dates can NOT be changed because they are often just days before a scheduled trustee sale date.
Option C: This is the option I actually like the best and the one that I most often recommend to my borrowers. Option C is sort of the happy medium between Option A and Option B. With Option C, I recommend that borrowers have their inspections done while waiting for the short sale to be approved. I also recommend starting the loan process and still fulfilling as many of the PTD conditions as possible.
FYI: a satisfactory appraisal along with the short sale approval letter(s) will be PTD conditions.
The advantage of this option is that the borrower incurs less fees and costs than Option A but they also have the advantage of still being able to close in a shorter timeframe than Option B. This option still has all the disadvantages of the other two options: losing the fees for their inspection if the short sale is denied as well as having the escrow timeframe shortened and being subjected to a per diem charge for being late. Furthermore, borrowers may still lose the property if they do not close according to the new scheduled closing date.
There may be other options but these are the three that I have actual professional experience with in serving by borrowers here in Los Angeles & Ventura counties. Today's real estate market can be really scary, which is why it's important to get as much information as possible before starting your search.
Buying a short sale property is not a simple process and it's because it can get really complicated and convoluted, that borrowers today need to really consider whether or not a short sale property is the right property for them.
If you have any questions and/or concerns, please feel free to contact me, Donne Knudsen, at 805.2069123 or donne4loans@earthlink.net. That's what I'm here for and I would love to be able to assist you with your mortgage needs here in Los Angeles & Ventura counties.
Photos courtesy of flickr: koyume quintcobb giacomomacis
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Donne Knudsen
Realtor® - CalState Realty Services
DRE#: 01364050 / NMLS#: 249822
805.2069123
Serving low-medium income individuals and families as well as first time buyers with both their real estate as well as their mortgage needs including down payment assistance
Los Angeles County -- Ventura County
© 2010 - All Rights Reserved
Donne-
Have you had a buyer use option C and receive some form of consideration because the inspection brought something to the bank's attention and it could be accounted for early enough in the process? Typically, my buyers choose option B and I'm wondering if that should change.
This is an incredibly good post Donne. Some are scared away because of the potential of losing their appraisal money but there are great deals to be had if they are patient and have an experienced short sale agent working with them.
As usual Donne - you have incredibly detailed articles that are like a continuing education class. Thank you for sharing your knowledge !
This was certainly worth waiting for. There's always a chance the borrower will lose the inspection fees, but being halfway to the gate is really important with a short sale. As you said, banks often insist on closing within days of acceptance and there simply isn't any time to waste.
Steve - I don't like Option B because every time one of my borrowers have chosen B it has always ended up costing them more and in one particular escrow, we nearly lost the property. Fortunately, the property recorded the day before the scheduled trustee sale.
As for Option C, as I mentioned, that is my recommended option and has worked out well for both me and my clients every time. I had one transaction that got a little scary towards the end but all worked out well.
As for getting considerations as a result of the inspection report? In the short sale transactions where I have seen my borrowers try to renegotiate their contract for inspection repairs, it has never worked out the way they wanted it to. Furthermore, none of them went to the bank first for the considerations. Why would they? To get considerations for inspection repair requests, buyers need to first get the sellers to agree. If the sellers don't accept or agree to the concessions, they bank never will.
Anita - I've had some short sale transactions that weren't so terrible and then I've had some short sale transactions from #%!!. Frankly, one of the most important aspects of a short sale transaction is the listing agent. I have been in short sale transactions where the listing agent knew what they were doing and I have been in short sale transactions where the listing agent had no idea what they were doing. Short sale transactions are challenging enough, working with a short sale listing agent that knows what they're doing can make the whole process a little less frustrating. JMHO
Sherilyn - I'm glad you like my post. As I mentioned, short sale transactions are challenging and it's because they can get so complicated that buyers and sellers need to be working with professionals who have the knowledge and experience of working them to help the buyers and sellers get to the closing table with their sanity still intact.
CA - Every short sale I have worked on with my borrowers, the short sale negotiator has changed the escrow time and closing date. Changing escrow times and closing dates is an absolute given with short sale negotiators, at least around here it is. While borrowers do have a risk of losing their inspection fee with Option C, it is an option that may allow them to actually get to the closing table and ultimately get the property.
Thx for stopping by everyone; I really appreciate it. Have a good night everyone and a great week too. :)
Donne - I agree that the Option C is a good one. After all if anything is lost and inspection fee is much less than an appraisal, as discussed in Part 1.
Donne, great post and suggested. I have not done a short sale to date, but have done foreclosure (cash deals).
Well-thought-out explanation of the appraisal options for a short sale, Donne. Which one to pick. Tough decision.
Donne - good thoughts! It is hard to counsel buyers because we are at the short-sale lender's mercy. We frankly don't have a clue whether they will come back and say "Sure, you can buy this house at your offer price. Go for it! Here's an extra 30 days to close!" (Wachovia has done that.)
OR... "Forget it, our price is $40K higher than you offered and if you want it, no termite and no home warranty! Take it or leave it!" (Bank of America has done this)
My advise? Do not pay for inspections or appraisals before you get the go-ahead. BUT... Satisfy your lender, have seasoned money in the bank, have a clear schedule and be ready to jump through hoops!
Donne--What a great post---one all agents should read and digest. It is in their client's best interest to get the timing right. Kind of like baking a cake---take it out too soon and it will fall. Money is usually tight for the buyers of these transactions so the less they have to waste on a deal that may not happen, the better.
Donne --- two short sales representing buyers in 2010 --- both used option B(for the most part). The loan process was in place for both -- updating info along the way --- though the actual appraisal, inspection, etc was not done until actually approved and then we had very short time frames which everyone was prepared. One transaction was a 30 day closing and the other 22 days. You presented a very concise plan here---nice job! Not as many short sales in my area and most first time buyers seem to stay away.
Hi Donne-Short sales are always so complicated. If I can stay away, I do :). This is some great information to have handy though just in case my buyers come across this situation. Thanks :)!
Ken - That is why I like and recommend Option C the most to my borrowers. Although, I have had borrowers who do not heed my advice and have chosen either Option A or B and in every case those decisions have come back to sabotage the transaction in one way or another.
Rebecca - Short sale transactions are a whole other beast. In addition to explaining the different options to my borrowers, I will often even check out the listing agent to see what kind of experience they have in successfully closing short sale and you can bet that I share this info with my borrowers. They need to know this in order to make the best decisions for them.
Jane - It is a tough decision and one that I really try and help my borrowers in making to best serve their needs. Fortunately, many of my borrowers end up foregoing on short sales after a bad experience.
Kathy - So you're an Option B supporter? Based on the short sale experience of the listing agent (or lack thereof) or on my buyers motivation, I have suggested that perhaps Option B would better suit their needs. However, in some case where my borrowers chose Option B, with a little more probing, I have helped them discover that the property was probably not the type of property best suited for them.
In these cases, my borrowers learned to let the property go and move onto another property better suited for them. Short sales are not for everyone and it's important that borrowers/buyers really understand what they are getting into.
Thx for stopping by folks; I really appreciate it. Have a good day everyone. :)
Pat - Even more important in short sales transitions (at least I think its more important) is to check out the listing agent for the short sale to determine how much experience they have in closing short sales.
Short sales are a complicated and convoluted process and not something for the inexperienced newbie Realtor/agent. Short sales need to be handled by a "true" short sale expert and not just someone who calls themself an expert just because they think it sounds more impressive but someone who has actually been trained and educated on short sales or someone who has actual experience successfully closing short sales.
Michael - While my area here in Los Angeles & Ventura counties is saturated with short sales, fortunately for me, most of my borrowers tend to stay away from short sales. However, I have had to do some and I have actually seen all of these options in place with some of my borrowers.
Brenda - For most buyers today, buying a home is a complicated and stressful process, why make it harder by buying a short sale property. If it were up to me, I would tell all of my borrowers to stay away from short sales. Oh wait, I do tell all my borrowers to stay away from short sales. However, not all my borrowers heed my advice. Some are just determined to do things the hard way. Such is life.
Thx for stopping by everyone; I really appreciate it. Have a good day everyone. :)
Donne: Being a former appraiser ... I just LOVE when appraising and the appraisal process is a topic of discussion here on the Rain! I think appraisals .. and how they are produced ... is a topic that could use some attention and a little education. So kudos to you for attacking this topic. That being said, again .. as a former appraiser and now as a lender ... I tend to do some real homework surrounding a property on my own, prior to actually ordering an appraisal. They aren't cheap .. and with so many properties (esp. condos) being a challenge for appraising "out" these days, I don't want to spend a client's dollars until I know and understand that the property has a chance in heck to appraise and not cause problems in underwriting. I think lenders that approach "ordering" this way, do their clients a huge favor. You obviously have a good grasp of this process, so your clients are in good hands. Again, I applaud that you broached an often-misunderstood step in mortgage lending. Great job, Donne ... as usual ...
Gene
Working both the RE and loan side of the biz I couldn't agree with you more
Gene - Thx for the kind words; I appreciate it. These days, we (MLO) need to not only be wearing our MLO hats but a few others as well. I used to be really good at guestimating my borrowers appraisals and more times than not, I wasn't too far off. However, for the past two years, appraising property around here is a crap shoot. I have seen my borrowers appraisals land all over the place.
With Option C, sometimes the inspection report can reveal overpriced money pits as well as any potential underwriter issues.
Maya - I'm sure you've seen the same scenarios with your borrowers too. When it comes right down to it, it's all about the buyers motivation and the reputation of the listing agent.
Thx for stopping by folks; I really appreciate it. Have a good day too. :)
I'm really enjoying this series. It was only a couple of days ago that I was talking to someone about Option A vs. Option B. I never considered Option C.
Excellent - I wish upfront on a short sale that the appraisal would be ordered by all .. not a BPO! That way the seller has the bar and the lender knows where things stand. Such a difficult process to work with when you have varied lenders with different ways they handle the process. Thanks for the explanation of choices!
Great information and you did a fabulous job at putting it into language that anyone can understand. I too believe that the more knowledge buyers and sellers have for all of the strange transactions these days, the easier and smoother the process works! I can't wait to work with you one day! :-)
Jill - I'm glad I was able to introduce you to more options. As I said before, short sales are extremely challenging and one of my biggest pet peeves with them is how short sale negotiators are always reducing the escrow times. AAARRRGGGHHH!!!
Connie - I've always been a little baffled by the banks that don't get appraisals. Guess they just don't want to spend the extra money from a BPO to an appraisal.
Kirsten - I'm glad you liked my post. The lending process these days is so complicated and convoluted I truly feel responsible for making sure my borrowers have all the info they need in order to make the right decisions for them. I too look forward to working together too. :)
Thx for stopping by ladies; I really appreciate it. Happy St. Patricks day too.
Two posts? What have I done? This one has a starry eyed, purple haired kid with a knife. I thought I got upset about appraisals! Oh well, I left a too long comment on your other post already. One thing is for sure I know YOU know when to order an appraisal! LOL.
Hey Donne -
Since you're doing a series I think I'm going to do a follow up post entitled "Just Fund the Dang Loan Already" LOL.
Tni
Tni - I just read your other comment. As for knowing when to order the appraisal, as you know, that doesn't really matter if I can't get my borrower to authorize it. While Option C is the one that I may recommend the most, there have been times when I have also recommended the other options too based on my borrowers means and motivation.
If I have a borrower who is absolutely in love with the property, is willing to wait for it, is not looking at other properties and is willing and able to do what's necessary to get it, I will recommend Option A. This way if the approval comes through, we can close quickly and if the approval doesn't come through, while they are heartbroken, they were well aware of the risks.
However, if I know my borrower doesn't care one way or another if their short sale offer gets accepted and they continue looking at other properties hoping to find one they like better, I will recommend Option B. Typically, the ones that choose to go with Option B are the ones that will eventually end up cancelling their short sale offer because they WILL find something else they like better.
You know I've been working so many short sales -- I would hardly ever expect or ask a buyer to order an appraisal before full approval. But once approval comes in it is time to move! Most lenders up here won't even begin the file before full approval because they have been burned by too many failed short sales. That is probably why I went nuts when they were still delaying after full approval WITH an auction date in place.
Either you are buying the house or you're not!
It takes so much to get everything lined up on a short sale-- you cannot assume that you will get an extension, or that the extension will be on the same terms. I read your post and that seems to be a good way to lay out the options to people. To me, delaying after approval with a sale date in CA is a bit too much like treating it like a normal transaction. Short sales with auction dates have serious consequences if they don't close on time.
Believe me I know lending is a process these days. Everything is.
We need to take our industry back!
Tni - I have no doubt you have probably done more short sales than me. However, I have no problem asking borrowers to authorize an appraisal. The answer always reveals their motivation. If they're not motivated, I really try and get them to reconsider their short sale offer. Fortunately, this tactic has worked out well for me. Many times, my buyers will realize that a short sale property is not for them. YEAH!!!
For those who do choose to proceed with the short sale process and choose to go with Option B, I make sure they understand the risks. I make sure that they understand when the short sale negotiator changes the closing date, if it is not sufficient time for me to close the loan, then they (the borrowers) will be responsible for the per diem fees (not me). Furthermore, they will still run the risk of losing the property all together if we do not close before any scheduled trustee sale.
Once again, this helps me determine my borrowrs motivation and some have either switched options or cancelled their offer altogether. There was one Option B transaction that I worked on where the borrower did incur nearly $1,000 in per diem fees and the property recorded two days before the trustee sale. Very stressful and frustrating!
OK Donne, this is so weird I wrote a comment on here as well that grew feet I figured out once I comment I run and do not wait until it actually catches since AR has been running so slow lately....
So now to my comment I agree Option C is a good one but many buyers opt for Option B....their loss when the time to scrable comes into play:)))
What a great explanation. For the life of me I can't figure out why it hasn't been featured. I suggested. I know there are some buyers out there who must go for option B. They can't spend money unless they know there's a realatively good change of getting that house. But I agree, inspections up front can actually help the process I think.
Donna...great blog! Some great comments also. Not much I can add but you make some great points!!
It depends on which will hold up the closing and how much the per diem is. I say each case is individual and should be assessed as such. Generally, where I sell, it's easy to get a home inspection with limited notice but not so easy to get fast turnaround on an appraisal. Per diem $100 per day x 10 days = $1,000. Appraisal: $450. Easy choice.
Endre - While I agree that Option C is the one I recommend most, depending on my buyers motivation as well as the LA short sale success rate, I may strongly recommend Option A. The problem I have run into every time with the short sales I have worked on is that the bank negotiator always reduces the escrow time and the new closing date is typically days before the trustee sale. This is why it becomes so vital to start the loan process prior to the short sale approval.
Buyers who choose Option B are just simply not committed and I just need to make sure they understand that I will NOT be responsible for any fees they incur if I am not given suffiecient time to close the loan. My borrower and I have already gone over that numerous times long before the approval ever comes in.
Tammy - You are correct that so many buyers simply do not want to spend money on a short sale that they may never get. With the reputation that short sales have around here, I do understand buyers who feel this way. This is why I will always check out the LA to find out what their short sale success rate is and will definitely share that info with my borrowers.
Working with an LA who has a proven track record of successfully closing short sales is the guarantee on whether or not my borrowers have a chance in the world of ever getting to the closing table on a short sales. Unfortunately, there are just too many inexperienced short sale Realtors/agents out their listing short sales.
William - I'm glad you like it.
Elizabeth - EXACTLY!!! And this is the same rationale that I use on my borrowers. I also agree that every short sale transaction needs to be assessed on it's own merits and shortcomings. On another note, if one of my borrowers were buying one of your short sales, I would strongly recommend Option A, just simply based on your proven track record as a successful short sale LA. I just wish we had more Elizabeth Weintraub's down here working our short sales.
Unfortunately Elizabeth, way too many short sales here are listed by Realtors/agents who have no idea what they are doing. JMHO based on my professional experiences with my own borrowers down here in Los Angeles & Ventura counties.
Donne, you are so spot on, I agree with your comment above Many Agents claim to be experienced in Short Sales, but the reality is to the contrary of it.
Donne: It's a challenge to decide when to begin paying for anything ahead when buying a short sale. I wonder how many buyers have paid for appraisal, home inspection just to have the seller cancel and try to do a loan mod or for the bank to come back and ask for 10K or 20K??? I don't have buyers spend a dime of their money until we get formal bank approval and then it's "Full Steam Ahead". But I'd rather call and get inspections done on short notice than have my buyer pay $350.00 to do it and then have the bank or the seller decline. I do have the clients go through the house on their own to see what problems may exist, but that's about it.
Endre - Short sales are challenging enough without throwing inexperienced agents into the mix. Don't even get me started on those who take a class and add a bunch of letters behind their name and then call themselves short sale "experts". PULLLEEEAAASSSEEE!!!
Jane - Short sales are a crap shoot and I have had a few borrowers lose time, energy and money on short sales that didn't close by no fault of the buyer. Before me or my borrowers spend any time, energy or money on anything, I make sure I check out the short sale LA to find out what their track records are for successfully closing short sales. Quite frankly, the LA's track record of successfully closing short sales has more influence on actually making it to the closing table than when the buyers do their inspections or appraisals.
Thx for stopping by folks; I really appreciate it. Have a good day and stay dry too. :)
Timing is so crucial on short sales. We have one right now, for instance, for which the 1st mortgage approval has already been successfully obtained but we are still working on the 2nd mortgage short sale approval. Trouble is the 1st has a trustee sale scheduled for 4/4/11 and stubbornly insists that they will not be postponing it. The 2nd is getting quite a bit more money than a 2nd customarily gets in a short sale but has not issued the approval.
When presented with the circumstances the buyer opted to move forward and open escrow, do inspections, and proceed with loan approval process and appraisal. Unfortunately the little amount of time allowed left us and him with this option or to drop the transaction altogether.