Not all short sales are good deals. Sometimes a listing agent will price the home way below market value to attract multiple offers, and it’s completely reasonable for a bank to reject an offer that is half the market value. However, some banks will reject ALL short sales, regardless of how good the deal is. Why? Because they’re greedy and stupid. And that’s why the government has had to step in to nudge them along, again. It’s also yet another reason why banks are arousing my stabbiness.

Why Reject Short Sales?
There are a few basic reasons why banks reject short sales:

  • The offer is way below market value. In this case they may actually be able to make more in foreclosure, but this is rare.
  • The homeowner can afford the payments, but doesn’t want to anymore. If the homeowner is trying to claim hardship and there isn’t a hardship, then the bank should rightly focus on homeowners who really are suffering.
  • Greed. If a bank still owns the loan, they may have it insured. If they settle, they won’t get as much as they will if they foreclose and the insurance kicks in. Unfortunately, then they’ll be stuck owning a house and may not get full value for it even with insurance.
  • Short-sightedness. It’s simple: banks are short-sighted. There’s no communication between departments and sometimes within departments. No one stops to think: if we sell this house at foreclosure, can we get more than this offer? That’s because the people in the short sale department don’t really know what the foreclosure department is doing.

The Downside of Rejecting Short Sales
When a bank goes to foreclosure, they incur a whole slew of additional expenses that they wouldn’t have with a foreclosure, including property tax, maintenance costs, listing fees, attorney’s fees, etc.

In addition, they automatically net more money if the short sale offer was decent. Let’s take an example where the market value is $650,000. The short sale offer is $600,000. After commissions and a credit for closing costs, the bank will net $558,000. Not bad.

In the area I’m considering, the average short sale price per square foot is $305. The average foreclosure price per square foot is $295. Right there you can see a difference. Assuming the house is 2000 square feet, they automatically net $20,000 less on the deal if they go to foreclosure, and that’s before factoring in the additional costs of foreclosure. I’ve seen reports of banks receiving short sale offers of $600,000 and selling the house at auction for $455,000! That’s nearly a $150,000 loss that can only be chalked up to short-sighted stupidity.

I’m sure the staffer rejecting the offer thinks, “This house is worth more. We’ll easily make $650,000 if we sell it as a foreclosure,” but the foreclosure department doesn’t have the same mandate. That department just wants to get rid of the house.

Other Stupid Bank Tricks
Of course, this isn’t the only way banks are stupid. They continue to offer big bonuses to CEOs who lose money. They continue to refuse to lend despite government pressure and funding. They continue to employ too little staff to manage the incredible workload of all these foreclosures and short sales. They continue to advertise themselves as your friendly neighborhood bank while screwing over everyone in the neighborhood. They continue to fail to establish uniform procedures and standards that are based on logic and efficiency.

And they wonder why we hate them?

Well, it is summer, so I suppose it’s apple pie season (which is odd, really, because apples are a winter fruit and yet we think of apple pies and the 4th of July together.) Anyway, I digress. So let’s get straight to it.

First, the Carnival of Personal Finance #204 hosted by Earn What You Spend.  In addition to my post about determining house affordability, I also recommend My Dollar Plan’s auction experience. If you plan to buy at auction, read this first.

Second, the Festival of Frugality #177 hosted by Savings Not Shoes. In addition to my post about staying cool this summer, I also recommend the note from the husband at the Bargain Jargon. Not related, just hilarious.

Third, the Money Hacks Carnival #64 hosted by My Life ROI. In addition to my post recounting my recent credit limit reduction, I also recommend Bargaineerin’s analysis of a good credit score.

Yesterday, the government announced an additional program under the Making Home Affordable Plan. In light of the fact that some homeowners still can’t afford their homes after a loan modification, the government is now creating a program that would encourage banks to accept a short sale or deed-in-lieu rather than foreclosing.

Why Avoid Foreclosure?
The simple fact is that foreclosed homes lose value fast. They also decline in condition after the foreclosure because no one is maintaining them. Unfortunately, short sales take longer to process because of all the paperwork involved, and many lenders are resistant to short sales. They’d rather foreclose and just have it be done with. That’s not good for homeowners or communities.

Details of the New Program
Details of the new program are still coming out, but basically the government will offer banks cash incentives for accepting short sales and deed-in-lieu agreements instead of foreclosing. They will also lay out a streamlined process to help short sales close faster. Right now it can take at least 2 months to close a short sale. 4-6 months is typical.

Who Will Qualify
The qualifications for Making Home Affordable still apply. You must be eligible for a loan modification under the current plan, but unable to meet the new payments. This is common because many borrowers have seen payments stay the same or even go up after fees and past due balances are tacked onto the loan balance.

Under the original plan, you must be the owner-occupant of the home and be current on your payments. The original plan only modified loans up to 105% of the original loan amount. It’s unclear whether the new plan would include homes that have lost significantly more value, which is typically the reason for the short sale in the first place.

I Support This Plan
I don’t support many of the new programs, but I do support this one. Although foreclosures result in lower home prices, buyers have many fewer protections and more costs. In a traditional sale, the seller discloses everything they know about the property, including defects. They also usually pay for a termite inspection and may make repairs to the property. In a foreclosure, the bank discloses what it knows, but that usually isn’t much. The buyer is responsible for all inspections and the bank will rarely agree to repair anything. In a short sale, the owner offers the same disclosures as a traditional sale and may pay for the pest inspection to help move the process along. Although most aren’t required to make repairs, some sellers will be willing to. Most of all, the home is generally occupied during the process, so you don’t have to worry about vandals or thieves stripping out wires, plumbing, or fixtures.

With so many foreclosed homes still waiting to come to market, it doesn’t make sense to add more to the pool when banks stand to lose less money by agreeing to short sales.

When the economy was humming along, fashion magazines liked to tout high-priced accessories like shoes and handbags, or even whole outfits, as “investment pieces.” I don’t care how rare or expensive a piece of clothing is, it’s not an investment. It will likely not increase in value over time. The mere suggestion that it will makes me stabby. What makes me even more stabby is that some designers are still continuing to suggest that you should buy an expensive handbag if it’s on sale and you will die if you don’t have it.

No Matter How You Justify It, $2,000 for a Purse isn’t Cheap
Some of these things cost $10,000. Even if you carried the $10,000 bag every single day for the next 60 years, it would cost 45 cents a day. Sounds reasonable when you think of it that way. Except that the average $100 handbag will easily last three years, at a cost of just 9 cents a day. And it will serve you just as well. Heck, you could be a $10 bag at Payless and it will probably last several months.

Who Needs a $2,000 Handbag?
No one. I don’t care how famous you are, no one needs it. Let’s think for a moment about the things we women do to handbags. We slam them in doors. We toss them in car trunks. We plunk them in grocery carts. We cram junk in them. We stuff snotty tissues in them if we have kids. We carry them in all rain, snow, and sun. We set them on bathroom floors. I’m sorry, but I don’t want to set anything I paid $2,000 for on the bathroom floor.

The Lack of a Handbag Never Killed Anyone
Well, I suppose that’s not strictly true. Somewhere, a mobster died because he lost a handbag that happened to be loaded with cash and/or drugs. But the lack of a handbag has never killed the typical woman. This is a thing that is used to carry your crap around. It will not change your life, unless your fortunate enough to scale down enough that you don’t have to lug a ten-pound sack around on your shoulder. And then you won’t need a $2,000 handbag anyway.

Clothing Doesn’t Increase in Value
In most cases, clothing, shoes, and handbags don’t increase in value over the years. I could maybe make an exception if the shoes were handmade by Manolo Blahnik himself and studded with diamonds, but then I wouldn’t wear those on my feet. They’d be in a safe deposit box. Even when a clothing item is “vintage” it’s not usually purchased for more than the original value (after inflation), especially for items that are mass-produced, as all those expensive handbags are. Only the rare and custom items really increase in value.

Will that Bag Really Be In Style Forever?
That’s the other argument they like to make. I can see a basic trench coat lasting me the rest of my life if I take good care of it and don’t change clothing sizes, but an orange handbag? There’s no way that will be in style for the rest of my life.

If you have lots of cash to spare and simply want an expensive handbag, shoes, or piece of clothing, go for it. It’s your money. I don’t feel that rich people shouldn’t spend the money they’ve earned because the economy is down. On the other hand, you shouldn’t be convinced to buy “investment pieces” you can’t really afford on the argument that you’ll use them forever. Take a good look at your closet. How many of those things do you imagine yourself wearing or using for the rest of your life?

If you’re looking for a home, the first thing you should do is get pre-approved for a mortgage. You could opt for a pre-qualification letter, which won’t require anyone to pull your credit, but we found that we pre-qualified for a much higher mortgage than we actually qualified for with a pre-approval. In addition, most sellers want to see a pre-approval letter before considering an offer.

What Is Mortgage Pre-Approval?
When issuing a pre-approval letter, the lender or broker reviews your salary, liquid assets, employment history, credit file, debt payments, and credit scores. They then determine the size, interest rate, and terms of the mortgage you’re likely to qualify for. A pre-qualification is done without reviewing your credit file, and therefore isn’t as accurate. Because the broker or lender is reviewing your actual credit, the pre-approval is a strong indicator that your loan will be funded. It isn’t a guarantee, but it’s a strong indicator.

What Is a Good Faith Estimate?
When requesting your letter, you should also request a Good Faith Estimate, which lists all of the fees that are likely to be included in your closing costs. Although not all of them are controlled by the lender, the estimate will help you compare origination and other lender costs when deciding which lender to use.

When to Get a Pre-Approval Letter
Most mortgage pre-approval letters are good for 60-90 days, after which time the lender will have to pull your scores again to make sure nothing drastic has changed. It’s best to get a ballpark estimate of your target price before going to open houses, but wait until you start actively shopping with a real estate agent to submit a pre-approval application.

If your letters expire before you have an offer on a house accepted, you can wait until you put in your next offer to have your letters updated. Once the initial letter is complete, the lender or broker can quickly pull your scores and update it anytime.

How Many Letters Do You Need?
The answer is it depends. We requested one from a broker and one from a bank. Our agent usually submits the one from the bank with our offers. If you’re submitting an offer for a short sale or foreclosure, the selling bank may require you to be pre-qualified through them to help them determine whether your loan is likely to close if they accept your offer.

Preparing for Pre-Approval
It’s a good idea to check your credit and order your scores a few months before applying for a pre-approval. That will give you the chance to correct any errors and hopefully boost your scores a little. After you request your letter, don’t make large purchases or take on new credit or debts. If you’re paying down debt, you should certainly continue to do that. You should also continue to increase your savings. It’s best to wait until you close the loan to accept a new job, but the bank may overlook a recent job change if it resulted in a substantial increase in income.

The Documents You’ll Need
The exact list of documents varies depending on the lender or broker, but we have needed the following at some point:

  • One month of paystubs
  • Federal tax returns for 2007 and 2008
  • Savings account statement/current balance
  • Checking account statement/current balance
  • Retirement account statement/current balance (if using for funding)
  • W-2s from 2007 and 2008
  • Name, address, and job title with current employer

If you’re self-employed, you’ll need additional documents. Keep copies of all of these in a folder so you have them ready whenever you need to request a pre-approval. You’ll also need to submit the bank statements with your offer as proof of funds, so make sure you have online access to your account.

You may remember the good old days when all you needed was a pulse and a Social Security number to buy a house. Those days are over, and that’s a good thing, but be prepared for a full-doc approval process. Get all your ducks in a row now and the pre-approval process will be quick and easy.

I’m extremely near-sighted and have sensitive eyes, so I’m fortunate that my employer provides vision insurance. If you don’t have it, it may not be worth it to buy it on your own, but you should take advantage of it if your employer offers it. Ask your HR department for details of your plan, but this is a review of what it typically includes.

Vision Insurance Benefits
Although the exact levels of coverage vary, most policies cover at least the following:

Optometrist Exam and Fitting
If you wear glasses or contacts, then you should visit the optometrist annually. Even if your vision is fairly stable, your prescription may change slightly from year to year. If you wear glasses, it may not be too noticeable, but it can be very noticeable with contacts. Most vision insurance plans cover the exam and follow-up visits for fitting, with a reasonable co-pay of $10-$25.

Glasses
You can buy the frames and lenses directly from your optometrist. Most plans offer at least a $100 reimbursement towards the cost of glasses or contacts. Some plans will cover select frames and lenses in full.

Contact Lenses
Most plans will reimburse up to $100 a year if you opt for contact lenses in lieu of glasses. Some plans will cover two sets of contact lenses (four boxes) in full if you buy brands that are included in the brand. If you need specialized lenses, they will typically reimburse a portion.

If you have both glasses and contacts, consider which is the better benefit. You may not need to replace the frames every year, in which case four boxes of contacts may be cheaper than new lenses for your glasses. Or maybe you need new glasses, and can spread your contacts purchase throughout the year to take less of a hit up front.

Individual Vision Insurance
If you have an individual health plan rather than insurance through your employer, you may not be offered vision insurance. Even if you are, it may not be worth it unless it’s less than $10 a month. If you have to pay more than $10 a month for the coverage and only have a $100 materials reimbursement and an exam co-pay, you’d save about $100 a year if you choose expensive contacts. If you choose cheap contacts, then you might save $40 a year. If you only receive a discount on services and lenses, then vision insurance isn’t worth the cost. You’d probably be better off buying a Costco membership and receiving vision services there.

If you have employer-provided health insurance that doesn’t include vision insurance, your best bet is to put aside money each month for your vision needs rather than attempting to buy a vision plan on its own.

I watch about 11 hours of TV a week at this point. In the fall, I’ll probably be down to 5 or 6, the way the networks are scheduling. My goal is to limit my viewing only to those shows I really love. But how do you break the habit of plopping down and just watching whatever is on from 8-11?

Summer is right around the corner, and the TV season is about to end, so now is the perfect time to break the habit.

Saying Goodbye to TV Shows You Don’t Like Anymore
It’s easy to say goodbye when the show has worn out its welcome. If you find yourself flipping through magazines or wandering away from the TV in the middle of a scene, you know it’s time to cut it from your schedule. This year was my last year for Heroes. I tried, I really did, but it’s just not working anymore.

Saying Goodbye to Daily TV Shows You Still Like
It can be a bit tougher when you still really like the show. That’s me and the Daily Show and Colbert Report. I do still love those shows most of the time. Since we have a DVR, I only watch the first half of each show, and I love the weeks when it’s not on. I don’t know how much longer I’ll continue to watch, but for now I’m keeping it, just watching less.

Saying Goodbye to Weekly TV Shows You Still Like
Try this next fall: don’t check the schedule to see when the show returns. Don’t buy the TV Guide preview, and don’t watch a lot of TV during the summer to avoid the previews. Delete it from your DVR.

If you get to mid-October and are wondering what’s happening on the show, catch up online and see if you still care enough to watch it. If it’s not a show you really value, odds are good you won’t even remember you’re not watching it.

Plan Your Viewing
I may be weird, but I plan my viewing, especially now that I have a DVR. I have a rule that I write from 9-10 weeknights, and not much gets in the way of that. I use the DVR to allow me to watch the stuff I like from 10-11. This only allows one hour per day of TV, plus the Daily Show, which we watch during dinner.

Fill the Time
Rather than mindlessly watch whatever is on in place of your usual shows, fill the time with something else. Visit the library to stock up on books. Sit outside with your spouse or kids and look at the stars or just enjoy the night. Play games with your family. Play Wii. Take up a hobby. Do something besides sit on the couch and stare at the box. Once not watching TV becomes a habit, it will be more difficult to fall back into the TV watching habit.

Don’t Let “Water Cooler Talk” Suck You In
I’m the rare person who has never seen one single episode of American Idol. I’ve never seen a single episode of the Bachelor or Bachelorette. Ditto for Grey’s Anatomy, CSI, or several other hot shows. You know what? I don’t feel out of the loop. Maybe it’s just my office, but no one I work with talks about TV shows the next day. None of my friends talk about TV shows. You will find other things to talk about.

And remember, you can always catch a show on Hulu or on DVD if you really love it and miss not watching it. In fact, watching it online or DVD is better in some ways because you can pause it or watch it all at once – no waiting a week to find out what happens next. Plus, it’s only 42 minutes – that alone saves you a quarter of an hour.

I envision a day when all shows are available on demand and we can pick and choose only what we like when we want to watch it. Until that day, it’s up to use to break the TV habit and reclaim our time. If these tips don’t work for you, check out last year’s ideas for watching less TV.

Yeah, it’s  a stretch, but it’s the best I could do.

First up, the Carnival of Personal Finance #203 hosted by Weakonomics.  In addition to my post about the real estate offer process, I also recommend Steadfast Finance’s reminder that your income really does matter, even with home prices down.

Second, the Festival of Frugality hosted by Always the Planner. In addition to my post about the home office deduction, I also recommend Free From Broke’s tips for using your tax refund.

Third, the Money Hacks Carnival at I Pick Up Pennies.  In addition to my post about mortgage points, I also recommend No Debt Plan’s tips for negotiating closing costs if you’re refinancing.

It’s starting to heat up around the country. Here in Los Angeles, it usually doesn’t really get hot until late June or early July, but right now we’re being walloped by a heat wave, just two weeks after the last one.

This is the perfect time to start planning how you’ll keep cool this summer. Aside from last year’s tips for efficient air-conditioning use, here are a few tips that will save you money, too.

Ten Ways to Stay Cool This Summer
There’s one really expensive way to keep cool: crank up the AC to full blast and let it run until icicles drip off your furniture. If you’ve got cash to spare and don’t mind killing the earth, go for it. If you want to be kind to your wallet and the environment, consider these instead.

Install a Ceiling Fan
Ceiling fans are much more affordable than AC because they draw less power. They also keep the air circulating in the room so you feel cooler than the air actually is. Unless it’s a really hot, really flat day, the fan should help keep you cool enough to sleep at night, especially if you can also open a window to allow fresh air in.

Use Box and Stand Fans
If you can’t install a ceiling fan, or need something more, then it’s time to stock up on box fans and stand fans. A stand fan will rotate, which creates a breeze in the room. Box fans are stationary, but you can turn them into air-drawing devices. First place two or three box fans in strategic positions facing into the room, then place one in the window facing out. In theory, this draws the warm air out of the room. At the very least, it will create airflow and prevent you from feeling sticky.

Run the AC Just Before Bed
We usually run our AC just before we go to bed so that we’re comfortable enough to sleep. Since we live on the first floor above a garage, our apartment really heats up about 10 PM. Set the AC to turn off about 30 minutes after you get in bed so you don’t waste energy once you’re asleep. If you have pets and want to keep the comfortable, crank it up to 80 while you’re gone during the day, then set it to 78 when you get home.

Open the Windows
If there’s a nice breeze outside, then open all your windows to create a nice cross-breeze. Keep them closed and the drapes drawn during the day to prevent the sun from heating the room.

Avoid the Oven
If you can, avoid using the oven on really hot days because it will heat up your home. Instead, do as much grilling as possible.

Eat Lighter
I don’t know why, but eating lighter foods makes me feel cooler. During the summer, I tend to eat a lot of salads, light fish and chicken, grilled foods, and cold pastas. I save the heavy dishes for winter when the extra weight makes me feel warmer.

Drink Cool, But Not Cold Beverages
Maybe it’s just me, but I find that water that’s just below room temperature, as opposed to ice-water, is actually more refreshing on a hot day. Cold water is bracing, but it’s almost like a shock to the system. Adding a slice of lemon or lime makes me feel a lot cooler, too.

Install a Window Unit in the Bedroom
If your ceiling and box fans just aren’t cutting it, consider installing a window unit that you only run before bed so the room gets cool enough to sleep.

Choose Lighter Sheets
We use light cotton sheets year-round. If you tend to switch to heavier sheets in the winter, choose an all cotton blend so your body can breathe at night.

Take a Cool Shower
You don’t necessarily want a bracing shower, but jumping in a cool shower for just a minute will cool down your skin and remove any sweat or stickiness that makes you feel hotter. Dry off with a fresh towel, then jump into your pajamas and go straight to bed. You’ll fall asleep feeling cool and refreshed.

Install Blinds or Window Coverings
Keep the heat out with quality, many of which can qualify for energy reduction tax credits. If you don’t already have blinds, that credit can help cover the cost. If you do have blinds, close them during the day to keep cool.

Of course, you could always just go naked, but then you’d have to close the drapes. That might be cooler, but there goes your breeze. Personally, I’ll stick with the ten suggestions above.

This weekend I’m going to look at a short sale. I’ve looked at several short sales, but most of them have been listed as approved short sales. This one appears to be unapproved. If you’re in the market, it’s very important that you understand the difference, because one could close within the regular time-frame, and the other could take months to close, if at all.

The Short Sale Process

  • The short sale process generally works like this:
  • The seller realizes they can’t afford their payments and want to avoid foreclosure.
  • The seller contacts the listing agent.
  • The listing agent and the seller contact the bank to receive permission to list the property (in most cases.) The lender won’t formally approve the short sale or determine an acceptable price until they have an offer to consider.
  • When an offer is received, the listing agent submits it to the bank along with a thick packet detailing the seller’s hardship and comps for the home. The offer must include proof of funds, pre-approval, and proof of deposit (it doesn’t get cashed until you go into escrow).
  • You wait, and wait, and wait. The lender orders a Broker Price Opinion to determine whether the offer is a fair market price.
  • The lender approves, rejects, or counters the offer. In most cases, the lender must net 82% of the market value after commissions and closing costs.
  • If approved, you go into escrow. Once that happens, you’ll need to do your inspection, appraisal, et al, fast. In most cases, you won’t be able to get anything fixed or have the seller pay for the standard inspections because both they and the bank are losing money. In this respect, it’s similar to buying a foreclosure.

Approved Short Sales
In an approved short sale, the lender has already agreed to the short sale in writing. In most cases, this means that an offer was submitted at some point and then the deal fell through, either because the offer was too low or the buyer withdrew it. In rare cases, the bank sets a price before it gets listed.

When the listing is “approved,” the bank has communicated the price it wants to the listing agent. Your agent will find out this number, then it’s up to you to decide if you think the house is worth that. We saw one where the bank wanted $600,000. Given the location and work it needed, we didn’t want to pay that. Honestly, we probably wouldn’t have paid any price because of the location, but banks don’t worry about location.

Unapproved Short Sales
In this case, the lender may not have any idea that the house is for sale, or if they do, they’re not paying attention. A BPO has not been ordered. The seller may not have compiled their hardship package. The home could be priced ridiculously low, or it could be priced appropriately.

If the seller isn’t suffering from a hardship and simply doesn’t want to own the home anymore, the deal will not be approved, no matter how good your offer. A short sale is intended to avoid the cost of foreclosure for the bank. If they don’t feel the original loan is at risk, they have no reason to accept a short sale. It’s very important that your agent make sure the seller is in financial trouble before you even bother making an offer.

Buying a Short Sale
If you want to buy a short sale, you need an agent who is experienced with them, which means he or she has actually closed one. In my case, my agent teaches courses on short sales to other agents. It’s not enough for the buyer’s agent to be an expert though, because the listing agent is the one doing the heavy lifting. Your agent must be sure that the listing agent is experienced with the process or you could be waiting forever. If the listing agent has never done a short sale, then it’s probably best to walk away from that deal.

If the lender counters or accepts your offer, you can still reject the counter or offer acceptance if you’ve decided you don’t like the house anymore. (In California. Other states may vary.)You should also include the standard contingencies for appraisal, inspection, loan funding, etc.

Continue Looking While You Wait
Since you never know when the bank will answer, an offer on a short sale is less binding than an offer on a traditional sale or a foreclosure. You’re completely within your rights to make an offer and then keep looking while you wait. If you find a house you like better, you can withdraw your offer on the first house.

Tips for Being a Good Buyer
When it comes to short sales, it pays to be a well-qualified buyer. If you have all cash, you’re in a strong position because the deal will close quickly once approved. If you have 20% down with a pre-approval letter and good FICO scores, then you’re also in a fairly strong position. If you’ve got 5-10% down and an FHA loan, good luck. These take a long time to close and the bank may not want to take the risk that you won’t get approved.

You can get good deals on decent homes with a short sale, but you need to be prepared with all of your documents and steel yourself for a long wait with a high potential for disappointment at the end of the offer process.

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