With the considerable declines we’ve seen in the Orlando, Florida real estate market and record numbers of foreclosures making headlines each day, you are in the minority if you still haven’t heard the word “short sale.” The term isn’t new, but for many, it still represents a fair amount of confusion – especially when considering its relationship with foreclosures.
- Foreclosures take place when a lender takes possession of a home from a homeowner (borrower) because the borrower fails to pay as agreed.
- Short sales take place before a home goes into foreclosure when lenders agree to make arrangements with the borrower to settle their mortgage for less money than was previously agreed. In doing so, these lenders agree to take a loss.
Through the short sale process, lenders avoid the legal process of foreclosure and borrowers keep from having a foreclosure listed as a derogatory item on their credit record. For Florida homeowners who are fighting to make their loan payments and remain unable to get their lender to agree to a loan modification, a short sale may make more sense than a foreclosure.
Short Sales don’t go through the legal process in the same way foreclosures do. For this reason, bargain hunting home buyers may see the short sale as the easier pathway to home possession. However, it’s important to note that the short sale process can be very complicated at best. This, coupled with the fact that every lender has different requirements for closing short sales, means that you should definitely map out the pros and cons of this type of transaction before you make an offer.
Orlando, Florida Short Sales Expert Chris Myers Shares His Expertise
I had the opportunity to speak with Orlando, Florida Realtor and Short Sale Expert Chris Myers today about the recent history of short sales in our area. He stated that during the real estate market bubble of 2005 and 2006, many Central Florida home sales were based on local buyer frenzy.
“Buyers engaged in bidding wars at the drop of a hat, which resulted in outrageously overpriced home sales prices,” said Myers. “What was really happening, it turns out, was that a house of cards was being formed under what appeared to be a strongly supported uptrend in home values.”
Myers continued by stating that “appraisals for refinances were based on these exorbitantly high sales prices, and when the market cooled, many homeowners found they “cashed out” too much of their home’s falsely perceived equity and owed more than their homes were worth. This situation is known in the mortgage industry in being upside down on your mortgage.”
Myers then explained that at this point, the homeowner has to decide if they can keep making payments on their home or consider alternative action. Often, those who feel they can no longer remain in the home opt for short sales instead of foreclosures, which makes sense from a long standing credit rating preservation standpoint.”
“However, just because a lender agrees to a short sale and thus, to take from you less money than you owe on your mortgage, doesn’t mean they are willing to take an absolute bath,” said Myers. “Lenders quite often insist on pricing these homes at values that are fairly competitive within fair market limits, which means they may not represent the “steals” buyers are looking for.
At this point I had tons more questions for Chris, and he graciously answered them each one by one. I’ve taken the opportunity to break them down for you below.
What was clear after our conversation is this:
If you’re considering buying or selling a home through a short sale, it is absolutely imperative that you contact a Realtor like Chris Myers who possesses considerable short sale experience. He’ll take you through the steps necessary to complete a successful transaction.
6 Things to Know Before Moving Forward with an Orlando Short Sale Purchase
1. Homes Sell “As Is”
The idea of making repairs on a home up for short sale is out of the question for most lenders, since they’re already taking a financial hit. They have the full expectation that you will accept the home in question “as is.” For this reason, you absolutely must secure the right to order and pay for a general home inspection or – at the very least – specific inspections including but not limited to the homes roof, pest situation (especially important in the Orlando, Florida area), and sewer. However, regardless of what these reports find, they are for your information only. They’ll help you decide whether you want to move forward with the sale, but in now way will they provide you with any leverage when it comes to negotiating with the lender.
What to do: Order inspections to ensure that you’re prepared for any additional investments you may need to make after you close.
2. Lenders May Renegotiate Anytime
Lenders will do what they must in order to limit their financial losses. Often, they include a clause in their short sale contracts granting them permission to renegotiate the contract at any time. This can man something given that short sales can take months to close. Lenders will want to take advantage of any upturn in the Orlando, Florida real estate market, a new law passing that may play things in their favor, or any other change that might enable them to increase the home’s ultimate sale price.
What to do: Locate an Orlando, Florida real estate agent who specializes in short sales who can keep you apprised of changing conditions that might negatively impact your short sale agreement.
3. Discounted Real Estate Agent Commissions
Agents working with short-sale properties may be accepting a reduced commission from the lender instead of what’s customary for your area. While this may not seem to affect you, it might come into play if you are working under a Buyer-Broker agreement and have agreed to pay a certain percentage to your agent. Your agent may expect you to make up the difference between what the lender pays and what you agreed to in your Buyer-Broker contract.
What to do: Before signing a Buyer-Broker agreement, discuss an adjustment to the commission rate for a short-sale property and include a clause or add an addendum later to cover this situation.
4. Higher Closing Fees
In the Orlando, Florida area, certain closing fees are normally paid for by or divided with the seller. In a short sale, lenders do not tend to be this generous. Remember, their main objective is to collect as much for the home as possible. They won’t be too keen on giving away any of these proceeds to supplement your closing costs. For this reason, you could end up with certain fees on your side of the balance sheet at closing.
What to do: Work with your real estate agent to make sure you are fully aware of any and all fees you will be responsible foe paying at closing.
5. Complications from Multiple Loans
More often than you might imagine, a homeowner selling through a short sale will have both a first and a second mortgage on the property. This may have taken place as part of a piggy-back 80/20 loan, or perhaps they took out a home equity line of credit (HELOC) to pay off some bills or complete repairs on the house. In any case, a second loan of any kind will make your short sale more complicated. The lender with the first mortgage may have to offer some payoff to the lender in second position. At the very least, this may extend the time period you will require to close.
What to do: Make sure you are working with an agent who is experienced with Orlando, Florida short sales and understands the potential complications involved with a multiple-loan situation. The first thing your agent can do for you is to research the title on your selected property to determine what lenders are involved and verify existing loan amounts.
6. Length of Time to Closing Date
There are no shortage of short sale eligible properties on the market here in Orlando. For this reason, the lender or lenders – who are fielding such offers from all over the state and across the country – may be overwhelmed. It may take these companies a few weeks or even months before they complete even the initial review of your short sale purchase offer. Lender response times throughout the purchase process vary, and if Murphy’s Law factors in, if delays are possible, then there will be delays.
What to do: Although the lender may be bogged down with foreclosures, an experienced short-sale real estate agent will know the best way to work with the lender to minimize delays and can include a deadline for the lender’s response in your sales offer.
Summary
Considering these and other unforeseen challenges involved with Orlando short sales, one might wonder why you’d ever want to mess with one. The reason why Orlando short sales are absolutely worth working through these anticipated complications is because you may find the perfect property at a great price!
Buying a home represents much more than purchasing a property: It’s a personal decision about where and how you choose to live your life. When you find that special home here in Central Florida, where you can imagine yourself enjoying a particular lifestyle and making memories that you will treasure for the rest of your life, the benefit of realizing those dreams outweighs potential pitfalls of buying through the short-sale process.
I hope you found this post useful! As always, if you or anyone you know is in need of a local Florida mortgage loan originator, I’m your guy. Call me at 888-859-7418 or apply online for your Florida mortgage. We’ll keep you posted and let you know when it’s time to pull the trigger!
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I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
Kevin,
It’s rare I find a blog post that makes me want to share so much, but this was a great post that clearly presents the facts.
I have a 7th reason to add: Buyers will likely be one of MULTIPLE offers, and their offer may or may not be signed by the Seller (topic for another day). It could be months before they find out if their offer is even accepted, and they very likely could get into a bidding war, with no guarantees about anything at the end of the day.
I concur that it’s critical to hire a Realtor specifically experienced in short sales. Many mistakenly hire agents that perhaps have dabbled in a short sale or two, but that doesn’t mean they know how to close a transaction. And if the listing agent doesn’t know what they’re doing, you’d better believe that your buyer’s agent must be savvy and able to help the listing agent with the process or good luck to you.
Finally, with respect to asking your agent to accept the reduced commission that the bank offers, I’d think long and hard about it. An agent that works 3 times as hard as he would for a “normal” transaction to get your short sale buy of the century approved probably deserves that extra 1/2% commission and then some!
>>Finally, with respect to asking your agent to accept the reduced commission that the bank offers, I’d think long and hard about it. An agent that works 3 times as hard as he would for a “normal†transaction to get your short sale buy of the century approved probably deserves that extra 1/2% commission and then some!<<
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Julia – this is so true. I was just recently faced with an issue in my own line of work as a Florida mortgage broker.
I had been working with a borrower – who is a great person with a wonderful family – for nearly 6 months. Rates were up, then down, then they wanted to hold off… then move forward…
At the end of it all, the borrower wanted to reduce his loan term on a refinance from 30 to 20 years, but he did not want to pay the resulting higher loan amount – or at least as much of it.
It was a physics problem really – it just wouldn’t fit! I explained that they could pay one extra payment a year- even split that one payment up by 12 and add that amount to their monthly payment a knock around 7 years off the 30 year loan. …. No Go….
So – after working with one of the nicest and most business savvy Lender Account Representatives I have ever met… (She knows who she is!)… we got the rate down to an acceptable level.
The punchline to this longer than intended story is that I refused to take a lower fee on my end for the deal. My company had worked extremely hard to put these folks in a deal where they were reducing their interest rate from more than 9 percent down to 6.5 percent. Plus, part of their old loan package had a HELOC as a 2nd, while this one was a single FHA fixed rate deal! (A really wise move for them – and I was very proud to have brokered it for them.)