As you know, I specialize in the distressed asset field for Koenig & Strey in the North Shore, Chicago and NW suburbs as a REO and Short Sale Broker. There will be many opportunities to look at as you shop, as I do about 60-70 opinions a month for banks on properties that are in pre-foreclosure or bank owned, and list / sell about 5-10 short sale / REO properties a month. With this said, understanding how to bid successfully on a REO or short sale is essential as these homes are highly sought after. Having your offer stand out from all the others is critical in getting a contract accepted.
For sellers, there is a “method to the madness” in successfully selling your property by employing many of the principles listed within this article. Knowing how to use these valuation tools is critical, so hiring a seasoned Broker is a must in creating a game plan for a successful transaction.
Here is an article I wrote for Koenig and Strey regarding short sale contracts and insider tips on understanding valuation of REO and Short Sales. I
Enjoy the light reading and continue to let me know of your questions and what areas you are interested in. My team is committed to finding the best values in Park Ridge and throughout the North Shore and Chicago.
Regards,
Jason
Writing Contracts on Foreclosure Property
I am not an attorney but I do teach for Koenig and Strey across Illinois on how to complete pre-foreclosures and foreclosures with the highest standards. It is always wise to use an attorney if you have any legal questions on writing a contract. As a Realtor who represents banks as a REO and short sale broker, I have developed a list of standards that have been used in writing successful contracts for Short Sale and REO properties. Here are some critical tips for submitting a contract successfully.
Writing contracts for short sales and REO's is a different animal compared to traditional real estate sales. Having your "ducks in a row" is critical in presenting successful offers. They strengthen your position and present you as a ready, willing and able buyer who presents quality contracts. On all my short sale and REO transactions, I rarely receive a properly written contract from selling agents, putting their client’s contract in jeopardy by not doing the proper research in submitting qualified offers. Here are the key points that will make your contract stand out over others in negotiating a successful sale on a short sale or REO property.
Critical areas in drafting a strong short sale / REO offer
Improper tax pro ration - Banks will not accept more than 100% on tax pro ration. They will not cushion a homebuyer in regards to a property in default that has a high probability of getting their taxes lowered on appeal after they purchase. I often see contracts asking for 110-115% tax pro ration. In my five years in doing these transactions, I have never seen a sale over 100% for tax pro ration.
Assessing per diem rates to the seller - This is foolish to put in any contract as no bank will accept this language, yet I see it on almost every contract. If anyone will be paying a per diem rate for closing late, it will be the buyer and not the seller! It also creates an instant road block in negotiating a sale with a bank. Taking an adversarial approach is not recommended when bidding on any property, especially short sales and REO's.
Earnest Money (EM) - A picture of a check (or a cashier’s check) will do initially, but all checks must be issued as certified funds. Interest bearing accounts are generally not allowed on REO or short sale properties. EM will be written on the contract due "upon third party approval". At times, a nominal amount ($1,000) is appropriate to issue on short sales, but you will find that REO contracts require 3% for EM upon acceptance or after attorney and inspection periods are completed.
POF – Proof of funds – This is absolutely essential whether you are doing a mortgage or paying cash for the property. A certified statement which is stamped, verifiable and dated within 30 days is critical when you submit your offer. A VOD (verification of deposit) or a VOF (verification of funds) is also acceptable.
Funds equaling the purchase price – It is logical to have your mortgage pre-approval letter and funds match or exceed the purchase price of the contract, but it is often done wrong. The total amount needs to equal or exceed 100% of the purchase price.
Sign the "as-is" section within the contract. This section will need to be signed. You will still have your 5 days of A/I, but remember this is a contract that generally is not going to be amended regarding repairs to the property. Sometimes A/I will be extended and I have had cases where minor improvements were made to a property, but changes are often not done. There are some cases though that a loan may require several aspects to be addressed for the loan to fund, where repairs may be required. Overall when it comes to short sale and REO properties, in exchange for savings, it is basically Caveat Emptor - let the buyer beware. For short sales, the "As-Is" addendum is also recommended to be signed as is the Short Sale Rider, as these transactions extend beyond the traditional time for approval.
Crossing out all other sections of the contract not used. This should be done on all real estate transactions, but especially on short sales and REO's.
Have all necessary riders signed - Lead Paint, Radon, Mold. Self explanatory, but often not submitted during the offering. REO’s will have extensive addendums to follow upon acceptance regarding disclosures. For short sales, the SS Rider is critical to use and to protect you with your offer. Call us to discuss the critical elements that need to be employed in using this rider effectively for the buyer and the seller.
Have numbers, emails and fax #'s for your mortgage broker and attorney on the contract. People will need to be contacted and a complete offer means having proper representation on the contract. Leaving anything blank simply causes the offer to slow down.
For Heavy Cash Offers
Whether writing all cash or a mortgage, it is recommended to consider signing Section 42 which allows a specified party to approve the value, especially if there is clear indication that the home will not appraise at the offered price. On this line you would write: "A licensed Illinois Real Estate Appraiser to appraise the property at no less than $(purchase price)." This protects the buyer as the appraisal is required to be at least the offered price, or the contract is null and void. There are pros and cons to this tactic, and this needs to be examined on a case by case basis regarding distressed property.
Purchase price offer, quality offer or a pipe dream? - An area that many need coaching on is the "why’s and how’s" of writing a successful offer. REO homes that are priced aggressively are done so to receive offers at full list price or above list price. I personally have had several properties go 50-100k over list this year on both the buying and selling sides. Listing price research is essential in understanding how banks reason in selling or approving REO or short sale transactions.
The Analytics of REO / Short Sale properties – The following are guidelines that will help you understand how banks review key elements regarding valuation and what they employ in reviewing offers.
· Square feet – This will be used to calculate the proposed value of the subject on a square foot level versus the offered price. It will also be used to compare closed sales and active properties to the subject, which must be plus or minus 300 square feet within the subject properties square foot reading to be considered a comp. All square foot readings are above ground readings, basements are not included. Analysis of cost per square foot is used heavily in forecasting current market conditions and valuation.
· Location – Critical in gauging performance of a micro area, that creates stronger or weaker values of a property. This will be further explained in the critical Micro and Macro levels section.
· Acreage – Land values have decreased, and is looked at much differently than in the past. Micro and macro analysis is critical in evaluating values for land.
· Condition of property – Can it be sold in “as-is” condition, or will there need to be repairs to conduct a successful sale? How does the subject compare to closed comparable sales? Banks do a detailed analysis in analyzing repairs when calculating a list price for REO properties, and at many times repair properties to enhance value and marketability.
· 90 day comparables - This is considered the gold standard in understanding comparable performance when determining the list price of an REO property. Current conditions are critical and need to be used in the same fashion when writing an offer. Sales later than 6 months are not valid for valuation in current market conditions.
· Saturation of Micro and Macro environment – This is also very critical in understanding, with high probability, how a short sale or an REO will perform regarding price and market time on a micro and macro level in the community. Banks will place positive and negative values to the subject based on Micro (performance of listed and sold homes within .5 miles of the subject) to Macro (performance of listed and sold homes within 1.5 miles from the subject). Remember that banks are not in the business to carry inventory, they want to effectively sell their REO properties for maximum value in the shortest period of time, and critical elements such as absorption and saturation rates are of the utmost importance in understanding valuation.
· Age – How old is the property compared to most homes in the community?
· ARV (after repair value) – These costs need to be scrutinized when writing an offer to build in safeguards that the property will not be over-improved and for future resale ability.
· Street scene - What does the street show in matching the property for sale? Street scene is a very interesting element that weighs heavily in valuation in that properties are “like” properties, and do not stand out as a misplaced property in a very tight micro area.
· 30 day sale conditions – List and probable sale price for a REO property to sell in a maximum of 30 days.
· 90 day sale conditions – List and probable sale price for a REO property to sell in a maximum of 90 days.
· Auction – Starting bid and ending price probabilities to determine “fire sale” performance.
Using the above research in writing an offer gives us the highest probability of acceptance by an asset manager in a REO or short sale transaction. The end goal for a bank in listing REO properties is to see that the above analysis will result in the sale of the home in less than 90 days. Employing the above data is critical to your success rate and will increase the chance of having your offer accepted on all REO and short sales. Employing the above data effectively will also result in a higher probability of a short sale being accepted as detailed research has been completed on the property to bank standards that are used in valuation.
The final steps of acceptance with REO / short sale contracts
Third Party Approval - the final steps for short sales. When the third party (the bank) approves the transaction, a "Demand Letter", stating exactly how the sale will be conducted with specific fees outlined that need to match to the penny at closing, will be issued. There will also be a document called "Assignment of Unearned Premium Refund" if the home required insurance to be reimbursed to the bank, not the seller. A form also known as "Addition and /or Amendment To Escrow Instructions" will also be included. This form basically states that the home can’t be simultaneously sold to another party, and that the transaction can only happen between the parties listed on the contract.
For REO's, this process is often streamlined in getting approval, but often comes from multiple sources: an asset manager and the investor holding the portfolio. Until a contract is in your hands, accepted in writing, you do not have a deal! Often, you will receive a document regarding your counter bid from the bank stating that even though you accepted the bank’s counter offer, further investor analysis is needed for final approval. This usually takes 48 hours, but we have experienced some cases lasting up to 14-21days.
On a final note, townhomes and condos have other conditions to address regarding associations and solvency, and can be explained in more detail when we pursue writing an offer if this is the type of property you are considering. As with all properties, this analysis needs to be completed on a case by case basis. It is also important to note that a comprehensive listing package is needed to successfully sell a short sale, and participation is critical of the seller to provide all documents to the bank in a timely manner. The requirements vary per lender, but overall the regular staples are taxes, paystubs, checking and savings account, monthly ledgers of incoming and outgoing funds, and a homeowner’s hardship. As a selling agent, you should inquire how much the seller is participating in successfully completing their paperwork, as this is one of the main reasons that hold up transactions. Nothing is worse being in a deal that will not go through because lack of seller participation!
I hope you found this tutorial enlightening, as there are great opportunities out there for homebuyers in this field! Successfully negotiating them is an entirely different story and having quality representation from an experienced Realtor in this field is essential in not only drafting your contract properly, but using our detailed analysis to get the best deal possible, whether a home is traditional transaction, a short sale, or an REO.
Thank you for allowing me to assist you in finding your new home!
Regards,
Jason Pietrucha
Broker, Koenig and Strey
847-401-1200
IMPORTANT NOTICE: Koenig & Strey Real Living is not associated with the government and my service as a Short Sale Specialist is not approved by the government or your lender. Even if you accept this offer and use my service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.
