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With property markets across the U.S. in decline, the term short sale is quickly gaining recognition. Sellers eager to avoid foreclosure convince lenders to approve a sale for less than the loan’s value and investors are eager to snap up these properties at discounted prices. But buying a short sale property can be a long, exhausting process and investors would benefit from knowing how to navigate these transactions.

It may be debatable whether or not short sales are a good investment strategy, considering the amount of time and stress that goes into them, but determined investors can walk away with good deals. Short sales can take anywhere from 30 days to six months from contract to closing. During this time offers can be lost, forgotten or simply ignored. Loans can be sold before closing and send the process back to square one. Or, after months of negotiations, the lender can shut down the deal. (For more information about short sales, see our article Short Sales: Fact vs. Fiction.)

Dan Forbes—a licensed broker-associate, certified residential specialist and leader of the Forbes Advantage Team at RE/MAX Gulfstream Realty’s Lakewood Ranch office in Bradenton, FL—offered this semi-serious timeline as a rough guide:

 

1 to 3 Days An offer is made, subject to the lender's approval.
Week 1 The short sale package is prepared and submitted to the lender.
Week 2 The lender processes the package.
Week 3 The lender orders a broker’s price opinion (BPO).
Week 4 to 5 The lender says they can’t find the package and asks the buyer to resubmit it.
Week 5 to 6 The BPO is submitted to the lender.
Week 6 The BPO is evaluated by the lender.
Week 6 The lender says they can’t find the package and asks the buyer to resubmit it.
Week 7 to 8 A loss mitigation specialist is assigned and the whole package is reviewed.
Week 9 The lender proposes a counter offer.
Week 10 to 12 Negotiation continues until an agreement is reached.

 

The key words with short sales are patience and persistence. Because the housing market is floundering, banks are overwhelmed with so many short sales and foreclosures that they may not have the resources to handle them.

“You’re talking about a bank that has one negotiator with 130 files at a time and getting 10 new submissions every day,” Mia Lutz, president of Say No To The Bank, a community counseling organization that works with foreclosure buyers and sellers, said. Investors need to remember that their offers are likely not at the top of banks’ priority lists and should act accordingly.

“Every phone call I have I say, ‘When should I hear back from you?’ If they say a week or a week and a half, I’ll probably call them back in four or five days,” Forbes said. Because there are so many files on a loss mitigator’s desk at any one time, keeping in touch can help keep one’s deal on top of the pile. “It’s like the squeaky wheel gets the oil,” Lutz said.

The ultimate goal is a win-win scenario. This can work to the investor’s advantage when negotiating. A 2002 report showed that the cost at that time for a lender to foreclose, remarket and resell a property averaged $58,000, Forbes said. It is often less expensive for lenders to agree to a short sale rather than foreclose on the home and it saves them the hassle of taking possession of the property.

After an initial offer has been made, the lender will hire an agent to produce the BPO. Once the BPO comes in, it can be very difficult to convince the lender to lower the price, according to Lutz.

Forbes said that the BPO may be too high if done by an inexperienced agent or not conducted thoroughly. “I try to influence the BPO by making sure that I’m the contact person for gaining access to the house,” he said. “That gives me an opportunity to talk with them about price, talk with them about the condition of the property, talk with them about the market and try to educate them a little bit so they can do a fair job.” Some brokers go so far as to meet with the agent in person to discuss the property and point out any deficiencies, he said. It may also be possible to request a second BPO.

Perhaps most importantly of all, investors looking to buy short sales need to brush up on their people skills. Getting angry or making unreasonable demands could quickly destroy an otherwise promising deal.

It might sound easy, but after months of waiting and dealing with red tape even level-headed investors may find themselves getting a little testy. Forbes said he recently inherited a short sale transaction from a real estate agent who became angry and rude in negotiations with the lender. The lender eventually refused to take the agent’s calls or e-mails, he said.

“I think if you’re a little more compassionate with the homeowners and the people that are out there, you can make a lot of money in this business. But the compassion has to be there,” Lutz said. “Treat people fairly and a lot will come your way.”