Red flag with short sale?

Question

Hey guys!I have some issues with a scenario I'm in and I was hoping to get some insight! My wife and I have been looking for our personal house for the past year or so, and we've made a few offers only to have them be rejected in favor of another offer. That is until last September.We found our dream house. A great house, with a great kitchen and garage and yard. The house was listed at 200k and we put an offer of 203k to have it accepted! Only problem was that this house is a bankruptcy case, and our realtor said this puts it into pre-foreclosure short sale status. We were informed that many short sales take a while, and we were (and still are) prepared to wait a while before closing. So far we've had to extend our offer once, (it expires on January 18th now). About a month ago, my realtor called me, and said she had heard back from the seller's bankruptcy attorney, and they said they were in the "final stages" and that they would be seeking an FHA appraisal the next week. Well, a few weeks had passed without hearing anything, the holidays passed, and my realtor assured me that the holidays must have slowed down the FHA appraisal process and to be patient.  I asked her to contact the lawyer to see what was up, so she did.

When my realtor got back to me, she said the lawyer got back to her, and said that within the bankruptcy case,  there was issues with the financial review of the bankruptcy. So the sellers are going to appeal, which will apparently slow down the short sale process even more for us.

However I've noticed that the house we have under contract, just appeared on auction.com with an auction date of Feb 19th 2016. So i asked my realtor, who messaged the attorney, and the attorney said that they cannot legally auction off the house, because it's a Wells Fargo file.

Obviously I feed pretty left in the dark about this. Can anyone ease my fears of losing this house, or has anyone ever heard of a house popping up on auction.com while being under contract to purchase?

Ben Curtin · Answer

thanks for the great info Brenda, I asked my realtor if she ever heard of the appraised value of it, but she said we don't have it yet.

Brenda Houghton · Answer

Hi Ben,

Is your Realtor also representing the seller and negotiating the short sale?

As Jeff mentioned above, there are many moving parts in this transaction. It is a bankruptcy situation, so the bank has be very careful to proceed in a manner that does not violate bankruptcy laws. Do you know if it is a Chapter 13 or 7? This can make a difference in the timeframe before the house is able to be released from the bankruptcy. Also, the seller being in bankruptcy does not automatically mean the house must be sold as a short sale. It is a short sale only when the value of the property is less than what is owed.

If the FHA appraisal was just ordered about 3 weeks ago, 'in the final stages' means you have about 2 more months to go. In reality, ordering the appraisal signals the very beginning of an FHA short sale, which is a 2 stage process. The lender obtains an appraisal to determine the value of the property, which then will determine the sales price the lender will allow. Also, the short sale lender will review the seller's financial situation and determine whether they are qualified to do a short sale.  If the lender determines the seller is qualified, they will issue an Approval to Participate letter (stage 1), which will instruct the seller to have a realtor list the property at the determined price, which is based on the appraised value. All this takes about 30 days from the time of the appraisal.

An FHA short sale must net the bank at least 88% of the appraised value. This means after all real estate commissions and closing fees are taken from the sales price, the lender must get 88% of whatever the appraiser says the property is worth. During the second stage of an FHA short sale, the lender will evaluate the buyer's offer against this bench mark.  This also takes at least 30 days, and sometimes much longer if there are any even small errors in the paperwork. If the offer does not meet the 88% mark, the lender can request a variance from HUD to accept a lower amount, and this will take a couple extra weeks.

Using this formula and assuming 1) whomever is negotiating the short sale is extremely familiar with the process to reduce potential time wasting errors, 2) the seller is cooperative and provides all requested financial documentation in a timely manner, and 3) the negotiator at the bank is reasonably competent - you are looking at another 45 - 60 days prior to receiving short sale approval.

Once you receive approval, you may need to wait for the judge or trustee approval to release the property from the bankruptcy so you can close. This is dependent upon what is going on with the bankruptcy.

And one more risk to mention, as did Jeff, Nationstar and other banks put their short sales on auction sites to 'validate' the offer on file. If they get a higher offer, you may have to raise your offer, plus pay a 10% auction fee, to keep your contract on the property.

If I were you, I would find out the value from the appraisal. If it came in significantly higher than your offer, you will spend a lot more time and possibly not see short sale approval. If the appraised value is near your offer amount, it may be worth it for you to stick around for a couple of more months as an approval would be more likely. The appraised value will be on the Approval to Participate letter from HUD. Your realtor needs to ask for a copy of that letter.

You will not be able to speak to the lender personally, as they will only talk to third parties approved by the seller.

The above information is consolidated from my 14 years of short sale negotiating experience.

Brenda Houghton

Ben Curtin · Answer

Thanks for the response. The reason I'm posing here is I'm trying to figure out whether or not to re-extend the contract for another 2 months this come january 18th, or to just lose hope and try to buy a new short sale. Is there a way for the buyer (as in me) to contact the bank and ask them directly if they will approve the sale? I know the price we have the house under contract is 197k (some repairs after inspection) but the original loan was something like 380k with 330k debt still remaining...

Jeff Bridges · Answer

a short sale contract is only a contract between the buyer and seller. Unfortunately since the sale requires the bank to forgive part of the original loan balance, you require bank approval to actually buy it at that value below the current loan balance. For example, I could sell my house right now as a short sale for $50, and get it under contract, but that will not guarantee that the bank will sign off on it (hint: they won't). Short sales and pre-foreclosure homes have so many moving parts like bank bureaucracy, appraisals, competent agents skilled in negotiating short sales with banks and steering through bureaucracy, when things fall behind schedule. You need so many resources on both sides to be on point and your seller organized. Because of this, people need to have very low expectations of a successful short sale and be pleasantly surprised when a short sale actually closes. I know of banks like nationstar, which require a seller of a short sale to list their unit on MLS, then they use an online auction method simultaneously and do some odd stuff as part of requirements. I'm not surprised the bank is listing the property on auction.com. I would still maintain a low set of expectations for this sale and not worry about it until you get bank approval. be prepared to move on if you need to get your dream house on a different timeline. Sometimes it's not worth the stress. I've waited 6 months for short sales in the past so nothing surprises me....