Can I submit an offer on a short sale property while I keep looking?

One of our three readers posed a good question:

I have a question on short sales or foreclosures.  If we find one we like and make an offer, and we have to wait to hear back, can we back out if we find something better?

There are two issues here, really. One is the legality of backing out, and the other concerns, for lack of a better term, dealing in good faith. I’ll tackle the latter first.

A story was related to me recently about a woman who was shopping for dress for a big event. So obsessed was she that the dress be perfect, she ended up buying six different ones, fully expecting to return five. Now, Nordstrom will probably recover from the return pretty quickly; they have a large buyer pool, and moving the typical evening wear ensemble doesn’t require a two to three month marketing period, a stager and five hundred glossy brochures. Not so with homes.

We have been on the receiving end of the “placeholder” offer too often. And each time (what turns out to be) a casual, uncommitted shopper cancels because he found one he liked better, there is a seller who has been emotionally and, often, financially impacted. Lost market time and time spent by the seller and the agents involved in the transaction are just two of the costs. Add a declining market, which ours still is in many price ranges, and there is a very real cost associated with a misfire.

As with just about every other topic remotely related to real estate, we have talked about this before.

But can you cancel legally? The answer, of course, is yes. Per the typical contract, you can cancel at anytime prior to written removal of contingencies. And, until your offer has been accepted, you are free to roam about the county. With short sales, however, there may be some fine print.

Before we get to short sales, I’ll dispense with the foreclosure sale first. Foreclosures are in a different category. They feel more like a traditional sale in the sense that there is one seller with the authority to approve and reject the offer. The obvious difference is that the seller of the foreclosed property is the lender.

Foreclosures are fraught with exciting plot lines and surprise twists, but the waiting period from offer to response is not generally terrible. Banks don’t work weekends, so stupid old Saturdays and Sundays (and holidays) can delay a response. But, buyers offering on bank-owned properties usually need wait no longer than a week to be put out of their misery.

Short sales are a different story entirely (and often of the tragedy genre). The seller of the property will likely respond fairly quickly to an offer, but upon acceptance, the offer is shipped to the lender for review and, hopefully, approval. Think of it as believing you have safely crossed the border to find that you are suddenly thrown into secondary. Bank response times vary wildly, ranging from a typical best case of one month to a more typical period of three to six months. So, the question as to whether or not the would-be buyer can continue to shop while they are in a holding pattern is a good one.

And the answer is, it depends.  Many times, the seller’s acceptance comes with an addendum that specifies that all time frames start upon the lender’s approval of the short sale. In these cases, no escrow is opened, and no deposit checks are cashed. The buyer, therefore, can cancel at any time – no harm, no foul (except to the seller, who now has to rinse and repeat). But there is a popular new trend emerging in short sale land.

More often these days we are seeing the sellers in short sale situations accept an offer with the provision that escrow be opened and the buyer’s earnest money check be deposited. Further, they are adding language to the contract that puts the deposit at risk in the event the buyer cancels prior to receiving a response from the lender. In other words, they expect the buyer to commit. In return, the buyer is given first position and protected.

This seems fair enough, but the cost to the buyer is that there is absolutely no guarantee that when they cross the finish line there will be a home at the end of the stick. Therefore, short sales are not for the “must move by Tuesday” crowd, nor are they for the meek. The popular notion is that short sales present an opportunity to purchase a home at a below-market value, and many times this is true (although one could argue it is true less often than you think). But opportunity comes at a cost. Often this cost is in terms of time, uncertainty, and the possibility of having to start over. More frequently these days, there is also the cost of having to commit.

The truth about FHA according to Dan Green

I had the privilege of chatting about FHA loans with my friend Dan Green (the “mortgage machine”) at the recent Inman Real Estate Connect conference in New York City. This preceded the unveiling of the new guidelines, so we were having some fun in the land of speculation, and much of the discussion is now moot. But Dan is a very smart cookie, and he also took the opportunity to impart his wisdom about FHA goings on in general. It’s worth a listen.

Watch live video from spinnio on Justin.tv

Listing feeds for your favorite San Diego Zip codes

I’ve been averaging about one post a week which makes me, in technical blogging terms, a lame-o. There may be a dearth of homes for sale, but there continues to be a boatload of buyer interest. Consequently, we have been working the day, night and swing shifts trying to keep up.

Also, I have been perfecting my bowling game.

A 257 is not bad for a girl with the inherent athletic prowess of a warthog, but I was knocking down a couple dozen pins more last week according to my Google Alerts. I can do better.

Despite all of the frenzy, some time during the past couple of weeks, I managed to slip in a new tab (“Listing Feed”) above. Brought to you by the great geeky minds at Diverse Solutions, you can now take a gander at the most recent 25 listings in your favorite community. From the feed page, you can alternatively sort all listings by price, lot size and other fun parameters. Of course, if you want new listings delivered to your mailbox, you can always set your search parameters here and sign up. We won’t spam you — I promise.

I’ll be back with a more topically post on the State of the Real Estate market shortly. In the meantime, talk amongst yourselves and search for some homes.

FHA Guidelines Announced. (It could have been worse.)

Give me an “F”! Give me an “H”! Give me an… well, you get the point.

I know you have all been sitting at the edge of your seats waiting for the final shoe to drop. Today FHA Commissioner David Stevens announced the changes to the government insured loan guidelines we have been anticipating.

In short:

1. Up front mortgage fees will increase from 1.75% to 2.25%. Buyers will still be able to finance these fees.

2. Minimum FICO scores of 580 will be required. They will be required, that is, if you covet the 3.5% down payment. For lower credit ratings, you will be looking at a minimum 10% down payment requirement.

3. Seller allowable concessions will drop from 6% to 3%. As I have written before, this is really moot. Good luck artificially bumping your offer price by even 3% to reflect seller credits if you want the offer to be accepted or the appraisal to come in on target.

Exciting stuff for a Wednesday, this is. I would add my two-cents commentary, but we have pretty much beat this horse here. Plus, I have a little matter of several escrows to open this morning.

As a side note, honorable mention goes to FHA’s one-year suspension of the flipping rule, the rule which formerly prohibited FHA insured financing on a home which had been purchased within the previous 90-day period. I have personally had several buyers run into this bad boy over the past few months, so I offer my thundering applause on this change. It was a rule which never made much sense in the first place.

Life after New York, the 2010 real estate market, and a little chat with a guy named Craig.

It was a bit of a whirlwind this week as I trudged through New York’s Time Square looking like I had misplaced my arctic expedition team and longing for the chilly 60-degree San Diego nights. It takes something pretty compelling to get a California girl to brave the elements, and the Inman Real Estate Connect conference always seems to pull me away from my comfort zone.

Black scarf to keep your neck from snapping like an icicle (the one that someone stole while I was moderating a panel session, none the wiser)? $14. Getting an opportunity to interview some guy named Craig who reportedly has a “list” of some sort? Priceless.

(A huge shout out to both Gerry “Realtyman” Bourgeois for snapping this picture that I could subsequent right-click, fair and square, from his Facebook page, and to Dustin Luther, social media guy extraordinaire and grand master of the live-streaming Spinnio booth where I enjoyed my fifteen minutes channeling Larry King.)

The big topics this Inman installment were social media and the prognosis for the real estate market in 2010. Since our three readers probably care a lot less about how I might effectively use Twitter to earn their business (@krisberg) and a lot more about the housing market, I will share my take-away on the latter.

In speaking with agents, brokers, and mortgage brokers from the left side of the country to the right, the general consensus is that the first quarter of 2010 is going to feel pretty good. After that, all bets are off.

The trepidation among industry professionals about the market beyond the first quarter (among the professionals who are studied and honest, at least, and not the one in the NAR ads who is leaning smugly against the white picket fence in the suburbs) is related to a series of upcoming events. We are staring down the barrel of a troika of potential game changers, a hat trick, a triple witch – uh, three things.

First up will be the Fed’s exit from the mortgage backed security shopping spree which has been helping to prop up an otherwise weak-kneed market. Once this happens, it is expected that interest rates will rise. Higher rates, all things being equal, mean homes are less affordable, so absent a real recovery environment, prices may feel downward pressure. At a minimum, pace of sales due to a smaller qualified buyer pool and waning buyer enthusiasm could slow.

Then there are the anticipated changes to the FHA underwriting guidelines. Increased minimum down payments, higher funding fees, and other changes yet to be defined will make one of our more popular loan vehicles today less attractive.

Finally, there is the little issue of the Homebuyer Tax Credit program. Get it while the getting is good; on May 1^st, it will be a memory – probably for real this time.

Collectively, these three things mean that there is a window of opportunity for both buyers and sellers during the first quarter of 2010. Beyond that? It’s anyone’s guess, but mine is that we will slide into a 2009 redux, with sluggish sales and flat to declining prices in all but the lower price segments. And I sense that the buyers out there agree with me.

Yesterday I met some clients at the coming out party for a local new home development. This was just a previewing day; price lists aren’t even out yet. But, someone forgot to tell the crowd lined up into the street waiting for the pearly gates of the sales office to open about the recession. In San Diego, any reasonable detached home priced starting with a six or below is currently chum in the shark exhibit. Oh, the humanity!

But, back to that guy named Craig. I did take the opportunity to ask him a couple of “tough” questions. Was he concerned about Zillow’s entry into the rental classifieds market, I asked? “I didn’t hear about that,” he told me, showing as much interest as if I had just delivered a speech on the importance of the number “9” in long division.

What about that guy who keeps trying to rent my client’s home, the home that is for sale?  “Did you catch him yet?” I pushed on. He told me that they don’t have any plans to address the rental scams, and explained that consumers are getting smarter and can generally sniff out the scammers. So there.

The egg timer on my fifteen minutes is up, so it’s back to work, back to the blog, and off to stock up on high-fat finger foods for the Charger playoff game. It’s good to be home.