Hands On The Heartland
The Pulse Of The Kansas City Real Estate Market

This is Part 3 in our 3 part series on Kansas City Short Sales. Part 3 is “The Buying Side Of The Short Sale Process” and we’ll provide insight into what home buyers and a buyer’s agent are likely to encounter during the Short Sale process. As you read in Parts 1 and 2 of the series, Short Sales have become more commonplace in today’s evolving real estate market. Once a buyer has decided to move forward with attempting the purchase of a Short Sale property, there are several steps in the process that they’ll need to consider. Also, for the remainder of this post, the term “lender” refers to the “seller’s” current lender. Any reference to the “buyer’s” lender will be clearly stated…

(Part 1 of 3) The Kansas City Short Sale Process: An Introduction To The Short Sale Process
(Part 2 or 3) The Kansas City Short Sale Process: The Selling Side Of The Short Sale Process
(Part 3 of 3) The Kansas City Short Sale Process: The Buying Side Of The Short Sale Process

The buying side of the Short Sale process is typically much simpler than the selling side of the transaction. The most important trait a Short Sale buyer and a buyer’s agent should possess is patience. A buyer without patience should not be considering a property that is subject to a lender’s Short Sale approval. Buyers should anticipate that many Short Sales will see the close dates get extended at some point as all parties work towards an acceptable Short Sale agreement.

If a buyer is not willing and able to wait the weeks or months it may take to see if a Short Sale makes it through to the closing table, the buyer definitely should avoid listings that are advertised as Short Sales. Buyers should review the “remarks” section in the Multiple Listing Service (MLS) to see if the home is subject to a lender’s Short Sale approval. Keep in mind this information could be listed in the agent-only section of MLS (where a Realtor must be logged in to MLS to view it), so it’s important that a buyer ask their agent to look closely if they suspect a property may be subject to a Short Sale. It’s also possible the listing agent is not stating a Short Sale listing as such, so if the price of a property appears well below other area comparable homes in an area it could be an indication the property may be subject to a Short Sale – contact the listing agent to find out.

Lender’s response times during the Short Sale process can be very slow at times but the situation is improving as more lender’s commit to staffing more employees in their Loss Mitigation Departments. By doing so, lenders provide a better chance of a Short Sale being completed and potentially minimizing the lender’s loss on a given property.

A good initial question for a buyer’s agent to ask a listing agent on a Short Sale is whether the listing agent has made contact with the seller’s lender to discuss a potential Short Sale on the property. If a listing agent has not yet received a return call from the seller’s lender, it should raise a yellow flag. If the listing agent has not yet attempted to make contact with the seller’s lender, it should raise a red flag and a buyer should seriously debate whether the property is worth pursuing. One of the most important aspects in getting a Short Sale completed is the Short Sale Package that will have to be sent to the lender along with the contract later, so the listing should have contacted the lender by the time a buyer’s agent starts asking questions about the property.

Once a buyer’s agent has assisted the buyer in locating, viewing and moving forward with an offer, the buyer’s agent may find themselves limited in how much assistance they can provide with the Short Sale aspect of the sale. A buyer’s agent still has all the other typical buyer issues to deal with (such as the buyer’s financing and inspections) but a buyer’s agent should let the buyer know that only the listing agent has permission to speak with the seller’s lender during the process. A buyer’s agent should also explain the “seller’s” side of the process in detail to the buyer so they understand that a lot of patience will be necessary.

When making an offer on a Short Sale listing, a buyer should make a solid initial offer that they believe has a good chance of being accepted by the seller’s lender. Short Sales clearly are not about beating up the seller, rather they’re about gaining “acceptance” from the lender. Keep in mind that a seller is likely to accept any offer a buyer makes (assuming the seller believes it has a good chance of being accepted by the lender). Also know that many lenders are unwilling to do a negotiating dance with a buyer, so it’s important a buyer make a solid first offer if they have serious hopes of purchasing the property.

Once the seller has agreed to a buyer’s offer, the offer is sent on to the lender’s Loss Mitigation Department in hopes of gaining lender approval on the offer. Buyers should be prepared for a slow response from the lender and then once a response is received it may contradict actual market conditions affecting the property. The lender’s Loss Mitigation Department is probably located in another state or country and may not understand relevant “local” real estate market conditions. The agents involved in the transaction should work to overcome any lender objections by providing any “proof” that a buyer’s offer is legitimate and is in the lender’s best interest.

If the lender is considering a buyer’s Short Sale offer, the next step is the lender ordering a Broker Price Opinion (BPO) (or possibly a Certified Appraisal) to be completed on the property. As a general rule, a BPO is a price opinion of the property and something more detailed than a Realtor’s typical Market Analysis (but less in-depth than a Certified Appraisal). A BPO will be done by a real estate agent who is independent to the transaction and who is not the listing agent or the buyer’s agent on the transaction, if applicable. The BPO process involves forms that must be precisely filled out before they are submitted to the lender.

BPO agents get paid very little for their BPO services, so it shouldn’t be assumed that the BPO agent will make it a high priority. It’s acceptable for the agents involved to attempt to contact the BPO agent and let them know the importance of getting the BPO done quickly. With the goal of making sure the BPO agent uses proper comparable properties to arrive at a BPO value, a buyer’s agent (or listing agent) could send the BPO agent a list of comparables they believe are appropriate. The BPO agent must be willing to accept this assistance.

Generally, many lenders aren’t accepting Short Sale offers that are more than 10% below the BPO value. Thus if the BPO agent overvalues the home it could be devastating to the success of the Short Sale in the works. If this were to occur then the listing agent should provide the lender comps that indicate otherwise and/or request that the lender order a new BPO from a different real estate agent (which the lender may or may not be willing to do).

After the lender has made the decision to accept a Short Sale offer, they’ll send the listing agent an Acceptance Letter detailing the agreement between the seller and lender. The seller must be agreeable and sign the Acceptance Letter for the Short Sale to move forward. Once that part of the process is completed, the chances of a successful Short Sale are significantly improved.

Buyers should consider the risk of spending upwards of $1,000 on an appraisal and the inspection process, only to find out later that the lender will not accept a Short Sale or to see the Short Sale fall apart later for some reason. Unfortunately this is the buyer’s sole risk and if the deal falls apart there won’t be anyone standing around to refund the buyer the money they’ve spent to that point. With the idea of protecting the buyer, the buyer could write into the contract that: (1) the buyer’s Financing Contingency period is through the close date and/or (2) the buyer’s 10-day inspection period doesn’t begin until AFTER receipt of the (lender and seller) signed-off Acceptance Letter. This could prevent the buyer from an outlay of cash until the Short Sale process is further along.

Regarding the condition of a Short Sale property, expectations should be that neither the Short Sale seller nor the lender will be willing to make any repairs to the property. Thus Short Sale properties are almost always sold in “As-Is Condition”. Although buyers are usually welcome to conduct their own inspections and make a decision at that time on whether to “take it, or leave it”, it would be futile for a buyer to ask anyone involved with the Short Sale to make (or pay) for any repairs.

It’s recommended that a buyer put an escape provision (such as a 15-day or 60-day expiration date) in the contract that would give the buyer the option of canceling the contract should the negotiations between the seller and lender become prolonged. If this is the first Short Sale offer the seller has received, then a 60-day expiration could make sense. If the seller has received a previous offer that didn’t work out, then the expiration could be less. A reasonable amount of time should be allowed in anticipation of a slow response from the seller’s lender.

Because Short Sales have become more commonplace, many regional association of Realtors now offer a specific “Short Sale Addendum” that can be used in a buyer’s offer to purchase a Short Sale property. Here’s some verbiage from the Kansas City Regional Association of Realtors “Short Sale Addendum”…

* Buyer and Seller acknowledge that the Seller’s obligation to close on this transaction is conditioned upon Seller obtaining an agreement from Seller’s lender or other creditors to a reduction in the payoff amount required to obtain a release(s) of the mortgage/deed of trust or other lien(s).

* Buyer and Seller understand that all lien holders shown on the title commitment must be released in order for the Seller to convey clear title and provide a title insurance policy to the Buyer.

* Buyer and Seller understand and agree that it is the responsibility of the Seller to negotiate any reduction in payoff amounts due and that Seller’s agent will not and cannot be responsible for such negotiations.

* Buyer and Seller understand that negotiations with Seller’s lender(s) or other creditors may disrupt the normal closing schedule for this transaction and that delays can be expected.

* Buyer and Seller understand that Seller’s lender(s) or other creditors may require changes in the terms of this contract as a condition to their approval of a reduced payment (Short Sale).

* Buyer understands that any sums they spend on inspections, loan applications or other matters in anticipation of this transaction will be at Buyer’s expense whether or not Seller is able to obtain approval of their lender(s) or other creditor(s).

* If Seller is unable to obtain the written agreement(s) of lender(s) or other creditors to sufficient reductions to permit Seller to close within (insert # days) after the effective date of this Contract (or by the Closing Date if left blank), then either Buyer or Seller may cancel this Contract and Buyer’s earnest money deposit will be refunded.

After a Short Sale property goes under contract, in most cases it will remain under “Active” status, which means that other potential buyers can continue viewing the home and/or potentially making offers on the property. A first buyer’s offer would not have precedent over a future buyer’s offer unless any Short Sale Contingency has since been removed. This is handled differently than a typical buyer and seller real estate transaction because of the additional caveat that the seller’s lender must also be agreeable to the sale. If a second offer comes in on the property, a lender would give the most consideration to the offer that nets them the least amount of loss on the sale.

Some lender’s may require that the Acceptance Letter include that the lender is allowed to back out of the agreement (prior to closing) should any new government legislation be passed (which is not out of the question in our current real estate environment). Any such agreement would make both the buyer and the seller vulnerable to a lender canceling a Short Sale agreement at the last moment.

Even if the Short Sale process is moving along well, it’s recommended that a buyer have a backup plan in place. For example, don’t give notice to end a current lease until the Short Sale closing has occurred. It would be better to factor in having a rent payment and a mortgage payment simultaneously for a short period of time, rather than the buyer finding themselves homeless should the Short Sale deal fall apart at the last minute.

Other Realtors, sellers, buyers and lenders may report varying results from the Short Sales with which they’ve been involved. That would not be surprising with the unpredictable nature of Short Sales. If anyone has additional, supporting or contradictory information they’d like to share, please don’t hesitate to do so!

If you’re facing foreclosure, here’s info on starting the process of selling your Kansas City, Johnson County Kansas, Overland Park or surrounding metro area home in a Short Sale.

DISCLAIMER: Jason Brown is a licensed Kansas real estate agent and a licensed Missouri real estate agent. Neither Jason Brown, Jason Brown Premier Realty Group or Keller Williams Realty Partners, Inc. are attorneys or Certified Public Accountants. The information found on this blog and on our web site is strictly informational and should NOT be considered legal advice or tax advice. Laws, regulations and tendencies are changing daily so be sure you contact an attorney and a CPA for advice and current information on real estate laws and tax implications of any real estate decision you may make.  Buyers and sellers should seek representation from a qualified real estate agent. Without a signed listing agreement, a home seller is a customer and not a client. Without a signed buyer’s agency agreement, a home buyer is a customer and not a client.

Posted by Jason A. Brown

Comments Can Be Left Below…
Don’t see the LEAVE A COMMENT section below?
Click on the headline of this blog post at the top of the page.