Alternatives To A Short Sale? Negotiation tips, please?

June 13, 2008 3:37 PM

So I'm looking to buy a house, but my short-sale offer was rejected by the seller's lender. (I assume the seller's financial situation is not as dire as necessary for their bank to approve a short sale for them.) Any suggestions on how to buy the house without throwing money away?

Without their lender's approval, the seller has offered a counteroffer that is above his/her loan amount and just barely covers commission costs (which I would have to pick up). I want the house, but I don't want to pay that much more just to cover this guy's loan situation. Are there other options?

For instance, can I ask the seller to set the price of the house below their loan amount... and tell them to throw in their car/boat/furniture/1stborn? I'm thinking that I want to minimize the price of the house (so that its property taxes are kept low), but I get more "stuff" to justify my paying off the seller's full outstanding loan amount. Is that fair? (I assume people are going to say I'm a vulture or something, but I don't want to pay more for a house that isn't worth it. And I'd be helping the seller avoid possible foreclosure, I assume. Is that so wrong?)

Any suggestions? Should I just move on to find another house? Wait until the housing market calms down? Pay full price and stick my head in the sand for 10 years?

Thanks!

posted by mhh5 to home & garden (28 comments total)

Why do you care how much their loan is for?

You should figure out how much you can pay, and then find a house that costs that much.
posted by The corpse in the library at 4:01 PM on June 13, 2008

I know several people who have submitted offers for short sales; not one of them has been successful. A couple of times people had to wait months before the lender rejected their offer. Short sales appear to be more trouble than they're worth, especially if you're looking for a home to live in.

Your best course of action is probably just to figure out how much you're willing to pay for a house, find a non-short-sale house that you like, and that you (and your buyers' agent?) think is worth that amount of money, and then offer that much, regardless of the asking price. That's what we did a couple months ago, and how we bought a house that we love for a very reasonable price well under asking.
posted by dersins at 4:07 PM on June 13, 2008

Yeah, you really have to completely forget about what their loan is for (how do you even know?) It is irrelevant to your investment. The only thing you should concentrate on is the appraisal that you got for the house (it costs about $300 if you haven't gotten one yet and will tell you the true market value - it's a must). It would really help to know if your offer is a reasonable approximation at the house's appraised value, or just a number you made up.

No one wants to lose money on a house, including the seller. You have to decide a) what the house is worth, b) what you're willing to pay. If the seller gets desperate enough, he will accept your offer. If he doesn't accept your offer, you have to be willing to let the house go.

That said, are there any repairs that to be taken care of? It's quite common for people to either have the seller agree to fix those things before they move in (whereas normally a buyer is responsible for the problems the house comes with), or provide an "advance" of money for the repairs that is technically a discount of a few thousand off the asking price. So you say "wow, your carpet is made of banana peels and stinks, I don't dig that, please replace it," and the seller says "I don't have the money/time to do that, but I'm willing to knock off $2000 off my price so that you can get it done yourself."
posted by GardenGal at 4:17 PM on June 13, 2008

Thanks, MayorCurley. I think their 1st born child is worth more than a gallon of blood, tho. If forced to choose, I'll have to go with the kid. /sarcasm>

Seriously, tho, I'm not trying to violate these people. But it's not *my* fault that housing prices are dropping like rocks and the seller's loan amount is more than the current value of the home. The bank isn't willing to eat the loss, so I don't see why I should either.

I'm actually trying to look for non-evil ways to broker a decent deal. Furniture seems like one option. But I'm not sure their furniture is really worth it.. so what else is there?

And if the sellers did a no down-payment option-arm loan.. then they may actually be getting off scott-free for living in a house they shouldn't have been able to afford. I'm not blaming them for working the system.. but I don't want to be worked over in the process, too, right?

The other alternative may be to just wait until they go into foreclosure. Ka-Caw, Ka-Caw.. Then I can be a real vulture and closet Republican.
posted by mhh5 at 4:18 PM on June 13, 2008 [1 favorite has favorites]

It's also perfectly acceptable to submit a counter-offer that asks the seller to cover all associated closing costs and R.E. agent's fees.
posted by GardenGal at 4:18 PM on June 13, 2008

Do you have any information on why the short sale was rejected? How short was your offer from the full amount of the debt? It sounds as though the lender still believes the owner is a reasonably good bet to pay-off (either by payment or by foreclosure).

The "toss in other stuff" idea seems unlikely to work. That's scamming to reduce your tax burden, and generally not a good idea.

If you believe the house is worth only what you've offered, then walk away from the sale.
posted by 26.2 at 4:28 PM on June 13, 2008

You can ask them to throw in appliances and stuff like that. These things happen all the time.
posted by konolia at 4:53 PM on June 13, 2008

GardenGal,

So their loan amount is part of the disclosures that they had to hand over when the sellers accepted our short-sale bid. And I'm not sure that a $300 appraisal would be accurate in this market when all the housing prices are still falling. (How do "they" know what the "true value" of the house is?) I know how much *I* want to pay and the sellers would like to sell it to me for that price -- but they can't cover the commission, closing costs or the remainder of their loan amount.

The problem here is that the seller wants to sell the house to me. But they say they can't afford to do so b/c they don't have the money to pay their agent, etc. That's why we tried the short sale in the first place -- b/c it seemed like the only way the seller could financially accept our offer.

The seller could be just trying to avoid losing money, and he/she is trying to get the bank (or me) to realize the loss in value of the home... and maybe the seller actually can afford to sell it at a loss, but I'd think if that were the case, they would have done so by now...
posted by mhh5 at 4:59 PM on June 13, 2008

26.2,

So I don't think it's a "scam" to try to purchase a house for its market value. I'm trying to avoid paying "inflated property taxes" -- I'll still be paying more taxes than the current owners paid last year if I buy it for what I offered in the short sale. So I don't think I'm cheating the government -- I'm just trying to get a "fair" price for this house -- not a housing-bubble price.

I don't really know why the short sale was rejected, but I've read some stats that said less than 5% of short sale deals are approved. So it's not that surprising to me that we didn't get approved, going by the odds.

Perhaps the bank's rejection should be taken as a sign that the sellers are more able to take the loss than they let on? I dunno. hmm.
posted by mhh5 at 5:08 PM on June 13, 2008

It really just comes down whether there's a price you're willing to offer that they're willing to accept. It's starting to look like maybe there isn't.
posted by winston at 5:55 PM on June 13, 2008

they may actually be getting off scott-free for living in a house they shouldn't have been able to afford

This makes it sound as though you think this sale should be punitive. The sale should be fair to both you and the seller because that is the ethical way to complete a transaction. "Can I get their furniture or their kids in the deal?" isn't really hitting that mark.
posted by DarlingBri at 7:03 PM on June 13, 2008

mhh5 - I get it that Prop 13 creates a huge incentive to pay as little as possible for the house. I'm in the California real estate market too and I understand the pain of property taxes here. Tax considerations were part of the reason I bought my house. My house is eligible for Mills Act and I'm looking forward to lower taxes as soon as it's approved. ***crosses fingers***

Property taxes are huge business for California. With the residential real estate market cooling SoCal tax assessors seem to be much more nosy in deals that attempt to skirt property taxes. I'm not sure about Northern California. YTMV

Ultimately, is the house worth what it'll cost you each month? Mortgage, taxes, insurance, repairs...etc. It's worth a certain amount. If the deal is for more than that, then the house is overpriced for you.
posted by 26.2 at 9:52 PM on June 13, 2008

ok. some comments are being removed.. I didn't know AskMeFi did that..

Anyway, I have no desire to "punish" anyone. I'm just observing that other sellers have not been so lucky to avoid foreclosure/bankruptcy -- and the seller I'm dealing with may be escaping that fate on my dime. So I don't really appreciate the hints that *I'm* the bad guy for trying to negotiate a better deal for myself... (the deleted comment from MayorCurley suggested that I wanted to perform unsavory acts upon the seller.)

I'm all for being fair! That's why I'm looking for more suggestions on obtaining a fair deal. To me, though, it's not fair that I should have to pay for the seller's financial mistakes in order to buy this house. The seller's lender apparently made the decision to gamble that I would work out a deal with the seller, but I don't want to throw money away in this market.

So far, furniture and appliances seem like reasonable items to ask for. If the seller's credit is still good enough to get a cash advance on their credit cards... I'd think that asking them to consider using that option to pay their listing agent isn't unreasonable either. I assume that's the reason why the bank rejected the short sale -- because the sellers have assets or credit that could make up the difference without the bank losing money.

Are there any other suggestions? Is it fair to ask that the seller to work out payment with their listing agent on their own (instead of having me pay for their agent's fees)? Can I cut their listing agent out of this deal somehow?
posted by mhh5 at 9:55 PM on June 13, 2008

Why would the property taxes be affected by you paying a little more for the house? Aren't property taxes based on the assessed value of the house, not the purchase price? Or is that different in the jurisdiction you're looking to buy in?

Otherwise, I'd play off of what GardenGal said... are there things they can do to improve the value of the house that involve their time rather than (too much) money? That way you'd at least be getting your money's worth if you pay more.
posted by EmilyClimbs at 9:57 PM on June 13, 2008

26.2,

heh. I just learned what the Mills Act is. Too bad it's only for historical houses, and that the taxes you save are required to be used to renovate the home.. I doubt I'll ever be able to apply for it. :P

I guess the lesson I'm also learning here is that I have to prepare to walk away and move on. Time is also on my side, so I can just wait and see if my existing offer gets any more attractive to the sellers.. and then maybe they'll start offering me options, instead of me suggesting them.

Perhaps another option is to try to offer my highest bid with some kind of a "right of first refusal" clause... so that I can wait the sellers out and see if they change their minds....?
posted by mhh5 at 10:25 PM on June 13, 2008

In any negotiation, any option is open to discussion, offer, & counteroffer. However there are customary ways of doing things and if you go against the customary way, you may run into resistance for various reasons. But in principle there is no reason you can't make any type of arrangement for paying the real estate agent fees, that is agreeable to all parties, part of the deal. (Though the seller may not accept an unusual offer and the real estate agents may resist it as well. But there is one way to find out if that is the case, and that is to make the offer.)

(The seller probably has a contract with the real estate agent, so that is the reason you won't get out of it altogether.)

Anything that is currently in or associated with the house is certainly open to being part of the offer (things like drapes maybe?).

The other possibility is to require them to do some work (install a new roof, furnace, a/c unit, whatever). This creates certain difficulties for the seller--they could spend a lot of time/money fixing something to make the deal go through and then it could still fall apart--then they are out the money & time. So they may not accept such an offer but again the only way to know for certain is to make the offer.

Whatever you do, don't pay more for the house than it's actually worth. For various practical and sentimental reasons, the seller and the seller's bank are both going to be very attached to the current loan value as the minimum sale price. But that is completely irrelevant to the actual value of the house right now and you as the buyer must be the one to be completely aware of that and avoid paying more than it is actually worth.
posted by flug at 10:30 PM on June 13, 2008

EmilyClimbs,

As 26.2 alluded to.. Both 26.2 and I live in California. Proposition 13 is a law here that sets a homeowner's property taxes at the selling price of the house. Then the property taxes increase at a maximum of 2% every year.. or until the house changes ownership or the house is re-assessed. So there is a pretty big incentive to try not to "overpay" for a house when it looks like the market isn't on the rise....
posted by mhh5 at 10:36 PM on June 13, 2008

mhh5 - Just to clarify, Mills Act savings are not required to go toward house renovation. You agree to maintain the outside of the structure in a historically accurate manor, but the savings are not earmarked for renovation. It's not a reimbursement program and you don't need to collect receipts. If it's really important to you to have aluminum siding or vinyl windows than Mills Act won't work for you, but it's a good deal for the right home owner. In San Diego it's usually a 60% tax savings and sometimes a lot more.

EmilyClimbs - In California your home does not get reassessed for taxation. Your taxes are set when you purchase your home, based on the purchase price. (There are some exceptions, but generally reassessment does not happen.) If the house value goes up, the homeowner continues to pay the same tax. On the other hand, if value drops you can petition to have your taxes lowered.
posted by 26.2 at 10:46 PM on June 13, 2008

flug,

Definitely good advice not to pay more than a house is worth.. the trick is determining what that value is.

Obviously, the seller and seller's bank think the house is worth at least the amount of the loan between them... and I disagree about that assessment somewhat.

Anyway, there don't seem to be any necessary improvements to the house in question. So I don't think they can make repairs on a house that's about 4 yrs old. And if they had the money to do the repairs, I think we would have had a sale by now...

So I guess my leverage is time and various offers that might be acceptable to them... and that's why I asked this question -- to find interesting/acceptable/fair offers to suggest that don't necessarily increase what I want to pay for the house....
posted by mhh5 at 11:31 PM on June 13, 2008

Maybe too late, but some more info for you that may be of use... I am going through a short sale right now. I had to give my lender a lot of financial information (bank statements, tax returns, pay stubs, etc.) and write a hardship letter detailing how my circumstances had changed in order to justify the short sale. The lender then "pre-approved" my house for short sale. THEN we got the house appraised by the lenders appraiser and listed it based on that appraisal.

Note that I don't have a buyer yet. BUT if my home goes to foreclosure after taking these steps, it will most likely keep the lender from pursuing a deficiency judgement against me. I had a regular 30-year fixed loan from a single lender. If your seller took out multiple loans, or has a home equity line out, they may NEVER get approved for a short sale because the 2nd lender won't get paid.

I guess my point here is that the seller has to work with the lender throughout the whole process - it is very tedious and I have a third party negotiator who is experienced with short sales to represent me and deal with my lender. If your seller is trying to handle this on their own, they are not likely to ever get approved. Also if their financial situation has not changed significantly (i.e. they simply bought more house than they could afford, or had an ARM that reset on them) they are not likely to ever get approved. If that's the case, and you are dying for that particular house, you will have to wait for foreclosure.

Your best bet is probably to offer what the house will/does appraise for, or your lender will expect you to make up the difference (if you have a lender, that is, maybe you have shitloads of cash!). They will not loan more money than the appraised price less your down payment. You would have to front the extra money until you could sell their furniture/boat/firstborn/whatever else you have negotiated into the deal.

You could possibly have the seller sell their furniture/boat/firstborn and use it to make up that difference, then they would not have to be approved for a short sale at all because they would be paying the loan in full - the appraised price plus their cash equals their loan amount. But having them throw it into the sale will not really help matters with their lender and will probably complicate matters with your lender as well as inflate your property taxes.

I hope that made sense - in summary, if the seller can't get approved for a short sale, they need enough cash to make up the difference. If you buy for the balance of their loan (i.e. an inflated price), then you'll need enough cash to make up that difference, and you'll have to pay that up front before you can get any of items you've worked into the deal. And your property taxes will be a bit higher as a result of paying the inflated price.
posted by FuzzyVerde at 3:46 AM on June 14, 2008

You need to be very careful with any deal whereby the seller (in effect) refunds you part of the purchase price.

First of all, in the short sale context that value that the seller is giving you (the boat, car, appliances) is value that he is presumably representing to his mortgage lender he doesn't have the ability practically to give. Indeed, he may be hiding those assets from his lender so that the it will accept his short sale proposal in the first place. Were this to be revealed, the lender might take the view that you were engaging in tortious interference with contract (a civil liability) or even a conspirator or accomplice to fraud (a felony!)

Second, if you are yourself taking a mortgage, you ABSOLUTELY must make sure that your lender has full disclosure of the NET purchase price (what you are paying less the fair value of what you are getting back). You will be guilty of fraud if you do not disclose that, because your mortgage is being underwritten on the basis that your purchase price is the arms-length value of the property. What the lender does with that knowledge, of course, is up to them.
posted by MattD at 5:31 AM on June 14, 2008

I should say about appliances, that it really only applies to appliances of material value which are not customarily included in a sale -- which, come to think of it, doesn't leave many appliances left.
posted by MattD at 5:33 AM on June 14, 2008

And I'm not sure that a $300 appraisal would be accurate in this market when all the housing prices are still falling. (How do "they" know what the "true value" of the house is?)
...the trick is determining what that value is.

Appraisal, appraisal, appraisal. These aren't fly-by-night guys, these people study current housing trends, research what other properties are selling for in the area, know how much the market has gone down, and generally do lots of math to figure out what the house is truly worth. Which is crucial to your bargain. You're entirely correct not to want to pay what the seller did - he bought in an inflated market, and he's going to lose money, but it sucks to be him. The appraisers know that.

Most importantly, the appraisal of a house determines the size of the loan that your bank will give you. That's how important it is.
posted by GardenGal at 6:07 AM on June 14, 2008

As Gardengal and many others have said, if you want to know what the fair deal is, than an appraisal is the way to go. that will give you MUCH more data - and really, the most important piece of data beyond "do you like the house?" - to work with when structuring your deal.

As you yourself have pointed out, buying a house without an appraisal is difficult, especially in a falling market. It basically turns what should be a mathmatical proposition with a margin for house love into several hundred thousand dollars worth of voodoo.
posted by DarlingBri at 7:29 AM on June 14, 2008

GardenGal & DaringBri,

Hmm. Appraisal people in California let the housing bubble happen.... So I'm not sure where to find a trustworthy appraisal. A "lot of math" doesn't give me much reassurance. Presumably, the same math came up with the inflated price that the seller bought at -- and the original lender lent at.

I agree that an appraisal gives me another data point. But I am skeptical of the reliability of that data point. I assume that the appraisal will simply say that the house is worth somewhere in the range of $X (what the government assesses the house's value for property tax purposes) and $Y (the amount of the loan the seller has). Where $Y - $X <= $100,000. But I should look more closely into it...
posted by mhh5 at 7:43 PM on June 14, 2008

FuzzyVerde,

Thanks for your viewpoint. I don't know much about the seller, but the short sale idea came from my real estate agent (I think)... So perhaps the seller and the seller's agent did not lay the groundwork for a short sale with the diligence that you did. Until I showed up, the seller was still listing an asking price that was well above his loan amount -- but wasn't getting much interest (since that amount is no longer realistic in this market).

Anyway, the situation is now beyond the short sale. As you correctly state, either the seller or I have to come up with the difference since the bank isn't willing to.

And that difference, from what I'm hearing here, may not be worth haggling for -- due to various ethical and legal risks.
posted by mhh5 at 7:56 PM on June 14, 2008

Hiya again mhh5 - you're absolutely right that an appraisal is not a failsafe number. It is completely reliant on the market. But then, so are all housing prices, always.

Another final point on appraisals and then I will consider this well and truly run into the ground (sorry, I promise!): you don't have to offer what the appraisal suggests. It serves as a starting point and to tell you how much the bank will loan you. Thus appraisals were not, in fact, responsible for the housing bubble, though they did gradually rise to reflect the rising market. What caused the housing bubble were buyers (and sellers) ignoring the appraisals of the property's actual value and offering much more than the property was actually worth. Hence the hard return to reality now.

For instance, we bought during the housing bubble. We bid on 6-7 properties in a row. Each time we offered $10K above the asking price (which was usually a bit above the appraisal value anyway) because we were desperate to find something. Every time we lost to bidders who were bidding at least $50K more than the asking price. We only got our current house (and reasonably too!) because there was a bidding war and then both bidders had other complications, and it fell back on our offer. Yay!

But anyway, if the appraisal is too high you can still offer less and see what happens. If the appraisal is much lower than your proposed price, though, you'll know that you might have gotten ripped off even if your original price had been accepted!

Also, the seller will probably begin to see the light of day once he sees an actual official appraisal of his house's value. He might just realize that it's not worth what it once was and - since worth is all consensual hallucination anyway - begin to see things from your point of view. One can hope.

Good luck! And sorry for the multiple replies. :)
posted by GardenGal at 6:27 PM on June 15, 2008

GardenGal,

Thanks for the multiple replies! I agree it's good to gather as many data points as possible...

This has been an interesting thread!
posted by mhh5 at 12:31 AM on June 16, 2008