Evaluating a home that is being sold at a foreclosure auction can be difficult, and often requires guesswork. Remember that up until the foreclosure auction, the home is still owned by the individual who is being foreclosed on. The owner controls access to the home, and as you might guess, there may be little or no incentive to allow people into their home. People facing foreclosure may be ashamed, frightened or even angry about their situation.

1. Home is vacant – A home may be abandoned prior to the auction, sometimes just a few days before, but other times may sit vacant for months. If it has been vacant for a long time, the home may be re-secured by the bank who holds the mortgage to protect their investment. Evaluating a vacant home generally involves peeking in windows to get a glimpse of the interior. You may also try to contact any companies that have posted notices on the door.
2. Home is occupied - Can you see the inside of a home that is occupied? It really depends, but in most cases the answer is no.
1. Maybe the home is currently listed as a short sale or was very recently listed. If it remains listed, your agent should be able to show the home according to showing instructions in the MLS. If it was recently listed, a call to the previous listing agent may gain you access, or at a minimum will give you better insight into the actual condition of the property. Previous listing photos can also be a great help in evaluating the potential condition of the interior.
2. If the home has not recently been listed for sale, it is unlikely that there are any photos of the interior, and it is also unlikely that the owners are going to let anyone inside. Folks facing foreclosure are not incented to have their home taken away and aren’t going to take kindly to random knocks on their door. You should be cautious about your own safety before you go trespassing on someone else’s property to attempt to see in the windows.

Let’s say that you are satisfied with the exterior condition of the home, and have enough data about the interior to be satisfied that the property is in reasonable condition. Property condition isn’t the only risk you face in buying a home at the foreclosure auction. You also need to be aware of the condition of the title. There could be liens and encumbrances on the property that become your problem as the new owner. The mortgage being foreclosed gets extinguished by the auction, as do 2nd or 3rd mortgages underneath that one. However, unpaid property taxes, HOA bills or other liens can become your problem as the new owner. At a foreclosure auction, you will not receive a title insurance policy, so you need to do the title research on your own.

Buying at a foreclosure auction can get you a great deal, but involves a significant amount of risk. The actual condition of the property is known to a limited extent, and you are not going to have the opportunity to formally inspect it. In addition to the unknown condition of the property, there can be nasty surprises on title that become your problem. Properties sell for significantly less at foreclosure because of these risks. The educated buyer will do their best to investigate the risks prior to auction, but recognize that in many situations you are left to an educated guess on what the property actually looks like inside.

It looks like a good deal

Some banks will price their homes at fair market prices and are willing to be patient to maximize their sale price. Other banks want a quick liquidation and will price the home significantly below market value to drum up multiple offers quickly. If you are watching the market and see a bank-owned home that seems to be a real bargain, chances are that 10 other buyers just had that exact same thought. You are likely to face a competitive bidding situation where the price gets driven back up. If you are going to make an offer, work quickly to get your offer submitted so that you don’t miss out on the opportunity.

When do banks respond to offers?

All of the banks that we have encountered facilitate offers on their homes with an online system. The listing agent for the home will review your documents to make sure all of the requirements are there and will submit the offer to a website, usually summarizing the key terms of price, loan, closing date and seller credits so that the bank can review them quickly. Offers are submitted to these websites on a first-come, first-served basis.

How long it takes a bank to review an offer varies pretty widely. Typically we receive a response back in 1-2 business days, but we’ve seen it as short as 4 hours and as long as a week. Typically there won’t be any action during a weekend, but this is not true in 100% of cases. It is important to realize that banks usually don’t respond to your offer directly. They will often use a 3rd party asset management firm to serve as the middleman, and those folks might occasionally work on a weekend to clear backlogs.

The most important thing to remember is that once a bank accepts an offer, any future offers become irrelevant because they have entered into a binding contract. If the bank choose to send a counteroffer, that also means that the first buyer has a binding opportunity to accept the counter, regardless of how many other offers have appeared in the meantime.

Do I need to be the first offer?

Being quick on your offer can help you be the winning bidder in some, but not all, cases. If your offer is reviewed and accepted quickly, you can preempt other bids, but in most cases, the moment a 2nd offer is received, the bank will send out a “call for highest and best” to all previous bidders. Let’s look at two examples.

Example 1

• Bidder #1 – submits offer at 10:00AM
• Your bid – submitted at 4:30PM
• Bank reviews offers at 4:00PM and accepts bidder #1’s offer, leaving you out of consideration.

Example 2

• Bidder #1 – submits offer at 10:00AM
• Your bid – submitted at 4:30PM
• Bank reviews offers at 9:00AM the next day, sees that there are two offers and issues a request for “highest and best offers” to both parties.

In Example #1, the first bidder wins because they acted quickly and the bank responded quickly. In Example #2, which is more typical, the order of offers received is not relevant because the bank will evaluate both offers before responding.

Call for Highest and Best Offers

Banks are not foolish about competitive bidding scenarios. They know that they have underpriced the home and want to give an opportunity to all bidders to raise their offers. By issuing a request for “highest and best offers” to all competing bidders, they give everyone a chance to revise their bid by a new deadline, usually a day or two later. This also gives more time for even more bidders to come forward.

In this scenario, you are not likely to know anything about the other bids. In fact, if the other agents are cagey about it, they will hold their offers until right before the deadline so that they can’t be shopped against others. It is unnerving, but all you can do is decide on what you feel is fair to pay for the home. Put your best foot forward and hope for the best. Make sure that you hit the deadline named, otherwise your offer may not be considered.

Don’t assume that you are being told the whole story by listing agents

Listing agents who represent hundreds of bank-owned listings often can’t keep all the details straight for every property. They also likely employ a staff of assistants who may be receiving offers and uploading them to bank websites. If your agent was just on the phone with the listing agent who said “we don’t have any offers yet,” that may not be true. One of their assistants may have received and uploaded an offer recently, making it available for the bank to review and accept. In this case, every hour that passes is a chance where you may miss out on the opportunity to bid.

Tips for timing your REO offer

1. Submit your offer as quickly as possible for a REO property that you are interested in. Generally every hour that passes is an hour that someone else can bid and have their offer accepted before yours.
2. The exception to this is when multiple bids have been received and a “call for highest and best offers” has been issued. Banks will not review any offers until that deadline is reached, and it can pay to hold off on submitting yours until the deadline so that it cannot be shopped against other bidders.

For buyers looking to purchase a bank-owned (REO) property, you need to be aware of contract terms that attempt to make the buyer pay these taxes. While not the norm across the bank-owned homes I have seen, we have seen this from two different banks recently.

The Washington law that governs this excise tax is clear. WAC 458-61A-301 states that “The tax is imposed upon the seller.” In a normal transaction, it is not even a point of negotiation, as it is an expected and customary selling cost borne by the seller in Washington state. However, there are banks out there adding this seemingly innocuous term to their contracts: “Buyer to pay any transfer taxes.” Guess what, if you agree to that on a $300,000 home, your costs have just gone up by $5,340.

Can banks even do this, given the law in our state? Well, most terms of a real estate contract are negotiable, and the state ultimately doesn’t care who pays them, as long as the tax gets paid. If you or your agent are asleep during your negotiation, you can easily get stuck with this tax.

If you are negotiating on the purchase of a bank-owned home, this is one instance to get out your black marker to cross out this term and insist that they change it. Remind the bank that the tax is by law the responsibility of the seller here, which may differ from transfer taxes in other states. The unfortunate part about banks that take this stance is that they may still try to treat the excise tax as a “seller concession” and negotiate less because of it. IMHO, that is not right, but it is what it is, so buyer beware.

This is one of those topics where the answer differs from state-to-state, as closing procedures and customs vary pretty significantly. We’re in Washington state, so if you live elsewhere, check with local real estate professionals for how it works in your area.

In order to get possession of the home that you are buying, the transaction must be closed. In fact, if you read the standard NWMLS contracts that are used in most transactions, possession of the property transfers to the buyer at 9PM on the closing date, offering some time for the sellers to finish their move-out on closing day. If you close at 4PM, you can receive keys at 9PM.

One of the biggest misconceptions among buyers in Washington is what constitutes closing. Many think that once they give their money to the escrow company and buyer and seller sign their paperwork, they own the home. That’s not the case, as signing and closing are two different events here. Closing means that the seller has delivered the deed to the property to the buyer, and funds are disbursed according to the contract. You won’t get handed the deed, as the other important piece of the process is to let the world now that the sale has occurred so that the property can’t also be sold to someone else. This is done by recording the deed at the county recorder’s office. Closing occurs when the deed is recorded at the county and recording numbers are available. (You can actually watch for this in real time on the King County Recorders site.)

In most instances, signing takes place a day or two before the actual closing, and the additional time is used for final documentation review by lenders. Once the deed (and your mortgage) is recorded, you own the home. If the home is vacant, customarily your agent can pass you the keys at any time after recording. If the seller is in the midst of final move-out, they may take until the possession time in the contract to pass you they keys.

In your contract negotiations, you can agree with the seller for early or late possession. The seller may need an additional day or two to close on their next home and move out, or perhaps the buyer is trying to get early possession to facilitate their own move. In general, we recommend strongly against early or late possession agreements of any sort. Early possession by the buyer can have disastrous consequences if the sale fails. We’ve had multiple clients get the keys a day or two early, move their stuff in and then have their sale fail and have to move out. Sellers in this scenario are faced with the unappetizing prospect of having to evict the buyer. More importantly, you don’t own the home, so what happens if a seller enters the home and takes your stuff? Or what happens in a fire or flood? The seller’s insurance covers the home, but not your belongings. There is a lot of liability to early possession, and we don’t recommend it.

Delayed possession is more common, giving the seller additional time to facilitate their next purchase or move. It does introduce similar sorts of risks, since the home you own is occupied by someone else, and what happens in a disaster? Allowing this is more of a judgment call, based on the seller’s situation. If a seller has lived in the home for many years and you see how they cared for it, there isn’t a high likelihood that they are going to damage it or leave you with an unwelcome surprise, but offering an extended possession time without a formal lease agreement can be a bad idea.

Some home sales may call for a little bit of flexibility in when possession is transferred, but anything beyond a few days should be formalized with a lease agreement to avoid disagreements and clarify liability between the short-term tenant and landlord. Very short-term leases may not have any rent associated with them, but anything beyond a week or two should involve negotiations of rent payments to take care of your holding costs.

Lastly, we’ve seen instances where buyers, in cooperation with their agents, snag a key from the keybox prior to closing and begin moving in or even doing work on the house! Sellers will want to make sure that their agent remains in control of the keys until closing has occurred, as there is no scenario where allowing the buyer’s contractors in the home to do work is a good idea when they don’t own it.

• ACTIVE – The property is actively listed for sale and available for offers. Agents are supposed to change the status within a day when they accept an offer, but occasionally a house may be pending before the status is changed from ACTIVE.
• CONTINGENT – The home has accepted an offer from a buyer that is contingent upon the sale of their home. Because it is not a sure thing, the home remains actively listed and available for offers, as other buyers can submit an offer and potentially bump the first offer if they can’t waive their sale contingency.
• PENDING INSPECTION – The seller has accepted an offer from a buyer and that buyer is still in the “inspection contingency” phase of the process where they are inspecting the house for defects. Inspection results and negotiations do fail on a fairly regular basis, so there is still a reasonable chance that the buyer may back out.
• PENDING – The buyer has cleared the inspection contingency and is proceeding towards sale. There is still a chance that the sale will fail on some other contingency like the buyer’s financing or a review of the HOA, but the percentage of homes that fail once they are pending is fairly low.
• PENDING FEASIBILITY – Similar to Pending Inspection, but most often used for properties that require extensive feasibility studies for future construction. Feasibility studies can take weeks or a year, depending on the scope and complexity of the property. Failure rates for this status are mixed, and you have to have a long attention span to continue watching the property.
• PENDING BACKUP REQUESTED – The seller has an accepted offer for purchase, but is nervous that the current buyer may not follow through. This indicates that the seller would like to have backup offers in hand in case the first buyer backs out. Definitely worth paying attention to these and submit a backup offer when the seller doesn’t believe that the initial buyer will perform.
• PENDING SHORT SALE – A new status that is very similar to Pending Backup Requested, but specifically for short sales. Short sale approval times are quite long, and the failure rate of offers is very high, so this is an indication that the seller is encouraging backup offers in case the current one backs out.

Many of the publicly available websites do show homes in “pending” status, but sometimes the description is more generic than the statuses above. Your agent can help you identify the exact status in the MLS if you are watching a particular property and are interested in being a backup bidder.

Also remember that accepted real estate offers are binding contracts which means that you cannot purchase a home in pending status until the initial buyer backs out for some reason.

I recently attended a seminar on short sale properties put on by Chase, where they described the approval process in more detail than most consumers (and their agents) ever think about. The real reasons that it takes so long are that there can be multiple decision makers behind the scenes. Let’s take a look at the main reasons that short sales are so slow.

Seller information packet delays

To sell your home as a short sale, you must apply for it as the seller. You can’t just say “I owe more than I can sell it for, let’s do a short sale.” To formally begin the approval process, the bank or banks must receive a complete application packet from the seller, in addition to the offer. This includes a hardship description, tax forms, pay stubs, etc.

Short sale sellers are notoriously slow at submitting this information, and the process doesn’t actually start until it is submitted. It could take weeks for the seller to get them everything they need, so if you are trying to buy a short sale, make sure that your agent pesters the seller to get this done in a timely manner. Nothing will happen with your short sale offer until this is complete.

Delegated authority

Just because you pay your mortgage to Bank of America does not mean that they own the loan. In fact, they are likely just servicing the loan on behalf of loan investors like Fannie Mae, Freddie Mac, or other mortgage investment funds.

When a large bank is servicing a loan, it is given “delegated authority” to make decisions on a short sale. The investor on the loan will say “If you get a short sale within this price range, go ahead and approve it. If it is out of that range, send it to us and we’ll decide.” Each loan investor has different documentation and approval requirements, so the bank has to submit to them for a decision.You may or may not be able to find out exactly who owns your loan, though even if you do, it is unlikely that you will be able to contact them to expedite their decision.

2nd mortgages and liens

If there are two mortgages on a property, the second mortgage holder must also approve the short sale. Usually the amount they are owed is being totally wiped out, but the practice right now is that most of them will allow a short sale to proceed with some token payoff of the 2nd lien. Could be something like $5000 or 10% of the unpaid balance. Sometimes that will match what the 1st mortgage is allowing, and sometimes it will not.

Other liens can also be problematic and require negotiation during a short sale approval. If there are tax liens, utility liens, contractor liens or other private party liens, those parties must agree to release their interest in a property for a successful sale to occur. Many will agree to negotiate, but this adds time to the process.

Mortgage Insurance (PMI)

Many loans may have a mortgage insurance policy against them. As a consumer, this is where you pay Private Mortgage Insurance (PMI) as part of your monthly payment to protect your lender in the case where you default. Sometimes there are hidden mortgage insurance policies that your lender took out on your loan behind the scenes to protect themselves.

If there is mortgage insurance on your loan, the mortgage insurance company is yet another party that must approve the short sale, since they may be paying a claim to the lender because of your default. More approving parties = long processing times.

Tips for a faster short sale approval

There are strategies that can help expedite the approval of a short sale. The most important one is to make sure that the seller is motivated to provide the required information to the bank quickly. This means that the short sale approval packet is submitted with, or shortly after, the completed offer. This also applies during the process. If the bank wants more information (pay stubs, bank statements, letters, etc.) provide it as quickly as you can. Complaining about or fighting their requests isn’t going to help. They need the documentation for a reason. The same applies to anything requested from the buyer. If the bank wants documentation signed, every day it takes you to respond is a day further away from an approval.

Going into a short sale, you also want to understand how many liens there are against it, as this can have a direct impact on how long the process takes. One or two mortgages are commonplace, but if there are other liens, you need complete visibility on what those are and the likelihood that they will release the lien.

The process remains bureaucratic, and big banks remain overloaded with short sales, but approval times have improved and banks are motivated to successfully approve short sales, rather than foreclose on the home. Whether you are a buyer or a seller, working with a real estate agent who has a track record with short sales can make the process go smoother.

Fair Market Sale

Most sales are between two private parties represented by two different real estate agents. You submit an offer to the seller’s agent, who then calls back and says “I just got another offer in addition to yours. We’ll be reviewing tonight, so let me know what you’d like to do.” First reaction from most buyers is “This feels like a bluff. The real estate market isn’t that great, so I don’t believe there is another offer. I want to see it before I raise my bid.” Let’s look at why that likely will not happen.

I’ve seen competing offers hundreds of times now, and I can say that the ethical and savvy listing agent will not play this game. One, they are legally and ethically bound to be truthful in their dealings. More importantly, play out the scenario if they are lying. They tell you there is another offer, you get cold feet about competing and remove your offer. Now they are left without their only legitimate buyer. A few days go by and the lie is revealed since the property isn’t under contract. The seller’s pricing position with you, their only legitimate buyer, has now been seriously compromised by the fib. I suppose there are some bad apples out there who might try this approach, but I find that even the fast-talking slicksters know better.

Why can’t the listing agent send offers to other buyers to confirm their existence and details? Buyers don’t authorize sellers to publicly air the details of their offer, and as a buyer, you don’t want to be shopped around. If you are in legitimate competition, you don’t want ANY details of your offer shared with competing parties. It has the potential to be used against you. Even confirming the existence of your offer with a competing agent could lead their client to act faster than you, and you lose the house. Mum’s the word.

Escalator Clause

Using an escalation clause in your offer is one instance where proof of a competing offer must be provided. An escalation clause says you’re willing to pay $XX more than the highest offer, up to a limit of $YY. Well, to invoke that clause, our MLS contract requires the seller to provide proof of the next highest offer.

Bank-Owned Homes

Bank-owned homes or REO properties have their own unusual procedure. A handful of banks use auction-style websites that let you see the current highest bid, but that is not the norm. Many bank-owned properties are priced aggressively to elicit multiple bids. If you think it is a good price, there are likely 5-10 other folks who feel the same way.

Most banks do have a “highest and best” procedure. If they receive two or more bids before something has been accepted, they will send a form back to you that says “We have multiple offers. You’ve got until 5PM tomorrow to send us your highest and best offer.” The request for highest and best offer is generated by the bank or their asset manager, not the listing agent, so funny business is unlikely. They are swamped with hundreds of these properties, and don’t want to waste a minute more than they have to on each one.

Can you find out anything more about your competitors on a REO bid? Not likely. Many REO agents are overloaded and notoriously hard to reach. If you do reach them, about the most information you are likely to get is an offer count. “I’ve got 10 offers, submit your highest and best. click.” Maybe you’ll get a bit more like “offers are well over list” or something like that, but many times you are on your own.

Dealing with that uneasy feeling

It is unsettling for buyers to have to compete with a nebulous competitor, and the desire to see proof of your competition is certainly understandable. But all of these competing interests aren’t likely to share their details with you. Besides, you don’t want your details shared if you are really competing.

Some listing agents will give guidance about how strong the other offer is, home many offers there are, or what the seller is looking for. Usually the answers are somewhat vague, and your agent can help you to probe and read between the lines. Other agents will be tight-lipped and you won’t know a damn thing about your competition.

Between you and your agent, you need to take your best guess on what someone else might be willing to pay based on neighborhood data, time on market, quality of house, etc. From there, figure out the most you are willing to pay for the home and stick to it. Don’t let your competitive side get the best of you, and remember there will always be another house to bid on.

We get their dislike of short sales. The process can be slow and maddening, and the percentage that actually close is still much lower than a regular home sale. We actually write lots of short sale offers that don’t pan out. But they couldn’t ignore the numbers. In King County, there are 10,789 active listings at the moment, 2,034 of which (19%) are short sales. I’m guessing that other markets may even have higher percentages.

The change is good for their customers, but if you are in the Seattle area, findwell remains a better choice if you are considering buying a home that is a short sale. The obvious reason is that if you use a Redfin agent to buy a short sale, their commission rebate goes from 50% down to 15%, presumably because short sales are more of a hassle. That means if you are buying a $500,000 home, your commission rebate is $2,250, with Redfin taking $12,750 for their services. We’re sticking with our 50% rebate on short sales, and for the exact same $500k transaction, your rebate would be $7500 if you use a findwell agent, a $5,250 difference.

Our approach is that we want to charge a consistent fee for our services and expertise, whether or not a property is a short sale. Are short sales a hassle? Yes, but no more a hassle than some other “regular” transactions. We’ve had some hair-raising fair-market and bank-owned transactions that easily consume more time than a short sale, and we’ve had some extremely painful short sales as well. Is a short sale worth a 70% increase in our fee? No way. I challenge the math that leads them to come up with such a big difference in their fees.

We’ve always supported short sales, whether you want to view them or write offers, but frankly we’ve been at it for 3.5 years longer than they have. We know the time and effort it takes to successfully get through a short sale and have the experience needed to guide you through any scenario that you encounter.

We’ve always respected what Redfin is up to, but if you are looking for an agent to help you with a short sale in the Seattle area, drop us a line. You’ll be happy that you did.

I should start by saying that there are three main types of home sales on the market today. One is a fair market sale from a private-party seller. You may also encounter distressed properties that are bank-owned or short sales. Negotiating on a bank-owned home or a short sale are different animals that deserve their own unique approach.

As a home buyer, you may feel emboldened in today’s slower housing market. Negative reports in the news lead you to believe that there are deals to be had for aggressive negotiators. Friends and family may offer up a variety of semi-educated advice about how to take advantage of the situation. Our experience with hundreds of offers over the past few years has shown that overly aggressive up-front offers may reach a dead end, or backfire on you in later inspection negotiations.

When we represent buyers, our job is to get the property at the best possible price. That obligation is balanced by a competing factor, which is that we also must help you to actually get the property under contract. Having seen hundreds of deals over the past few years, I can say with quite a degree of certainty that extreme low-ball offers are not the path to success with private-party home sellers. A very low offer from a buyer with a large range of negotiability is almost certainly going to get a worse result than a more carefully thought out offer that involves less negotiation. Here are some of the emotional factors that may drive how a home seller negotiates with you.

1. Attachment to the home – Never underestimate a seller’s personal attachment to their home. If they’ve lived in it for years, brought up children there or celebrated other major life events in the home, parting with the home can be difficult. Many sellers have a conscious or subconscious desire to see the home passed to someone that they feel good about. They may make this judgment based on the offer terms you are presenting.
2. I’m offended – I’ve seen some of the most rational, data-driven creatures come totally unglued when presented with what they feel is an unfair offer. Sometimes they legitimately get their feelings hurt, as they perceive their home value differently than you do. Many times they just don’t think you’re a serious buyer. (Clearly you are, if you spent the time to write up an offer.)
3. My home is better than the neighbors’ – This is a tough one, particularly in fairly homogenous neighborhoods. Sellers may perceive their yard, lot location, or the finishes of their home as wildly superior to their neighbors. All you can do if offer up your own opinion and analysis of competing properties, but some gaps simply can’t be bridged. A private backyard may be worth $20k to one buyer and nothing to the next.
4. I just spent $50k on upgrades, so my house is worth $50k more – Recent upgrades were likely costly, and their memory is fresh in the seller’s mind. New countertops or updated bathrooms do legitimately add value to a home, but not on a dollar-for-dollar basis. Other upgrades like a new roof or siding may simply be maintenance items that add no measurable value to the home. They simply make the property sellable. Try to step back from debating the value of individual upgrades and focus on the overall price of the home and how it relates to similar sales in the area.
5. I just lowered my price – There is a totally predictable psychology at work when a property is first listed and each time the seller makes a price drop. Negotiability in the first few days or couple of weeks is definitely limited. Low offers have a greater chance of success with properties that have been at a particular price point for long periods of time.
6. Get to the point – Most sellers do not relish negotiation. It makes them nervous and uncomfortable. Craft an offer that will get you to your desired result in 2-3 steps at most. Any more than that, and I can almost guarantee that a seller will begin to feel that they are being taken advantage of or that they are being nickeled and dimed.
7. Don’t forget about the inspection – Unless you are buying a brand-new home, you are going to be worried about repair and maintenance items that show up during your home inspection. Buyers want perfection, and long-time home owners recognize that every older home has issues and ongoing maintenance items. If you beat a seller down too hard on price during the initial negotiation, there is not going to be anything left to give if your inspection turns up issues that you want fixed. We find that inspection negotiations can often be more contentious than initial price negotiations.

You should always try your best to negotiate a great deal on a house, but if you can put yourself in the seller’s shoes for a moment and acknowledge some of the emotional factors driving their decisions, you will craft offers that have a better chance of success. Nothing here says that you should overpay on a house, and if all of the data tells you are overpaying, sometimes letting more time pass is the only solution that is going to get the seller in a frame of mind where your offer can be successful.

Short sale negotiators are hired by listing agents and sellers to take care getting the sale approval through the bureaucratic short sale process with banks. They all charge a fee, and that fee can either be paid by the seller (who likely can’t afford it), the listing agent or the buyer. In many deals that our buyers are seeing these days, buyers are being asked to pay for the short sale negotiator fee.

Buyers out there will all react the same way to these fees. “The property is listed for $400k and they want me to pay 1% on top of that to the short sale negotiator? No way, that is the seller’s problem.” Of course crafty listing agents have concocted a scheme to get over this objection to the fees. Let’s take at look at the scam with a hypothetical example.

1. Short sale home listed for sale at $400,000.
2. Buyer makes an offer for $400,000.
3. Seller accepts the price of $400,000, but insists that the buyer pay 1% to the short sale negotiator.
4. Listing agent tells the buyer to rewrite their offer as $400,000 with a 1% seller credit towards their closing costs. (Net offer = $396,000)
5. Short sale negotiator presents the offer to the bank with 1% seller credit and gets it approved.
6. Buyer pays the 1% short sale negotiation fee directly at closing, which is offset by the 1% seller credit towards their closing costs, so the net result to the buyer is zero.

This certainly gets the seller, listing agent and the short sale negotiator what they are hoping for, plus it removes the buyer’s objections to paying the fee. What’s not to like, right?

Well, take a closer look at what the listing agent just did. They received an offer to buyer the home for $400,000. They then encouraged the buyer to submit a lower net offer than what they were originally willing to pay, and that gets presented to the short sale lender. Quite simply, the listing agent and seller received an offer for $400,000 and then modified it for presentation to the bank at $396,000. Where did the extra $4000 go? Into the pocket of the short sale negotiator.

I may not be a lawyer, but I don’t think I need to be to call this what it is, which is misrepresentation. Real estate agents are ethically and legally bound to present all offer terms and deal honestly with all parties to a transaction, including banks. This certainly feels like a form of mortgage fraud being perpetrated by the seller, listing agent and short sale negotiator.

What if you encounter this situation when buying a short sale? My advice would be to never participate in a scheme that intentionally misrepresents the terms of a deal to the bank. Like real estate commissions, short sale fees are negotiable. Also, it helps to look at the overall transaction. If you are getting a decent deal, even when paying the extra fee, it may be worth proceeding. If you run into roadblocks, a gentle reminder to the listing agent may be in order insisting that they present the actual terms of your offer to the lender. That is their job.

Getting a home sold through a short sale can be a pain in the rump, and real estate agents selling these listings are trying to mop up on the opportunity. As a buyer, you need to be aware that these properties may represent a good value, but they may be loaded with extra costs to line the pockets of real estate agents and other short sale facilitators.

Every week, my inbox is littered with offers from real estate agents who want to “take my short sales and pay me a referral fee.” Many real estate agents have neither the time, experience, nor the inclination to take their seller through a short sale process, so it is a logical decision to refer the business to another agent. Referral fees are common and expected in such situations, but let’s take a look at how all of this stacks up for some short sale buyers in a simple example from a solicitation I just received.

The total commission paid out in this scenario is a whopping 7.5% of the sale price, or $30,000 on a $400,000 home. 6% of that is “built-in” to the sale price, and is typically what is approved by the short sale bank as part of their payoff. The additional 1.5% is being charged to the buyer directly for the services of the short sale negotiator. The seller is likely not financially able to pay the negotiator, and the seller’s agent doesn’t want to give up any of their commission, so they pass the additional cost directly to the buyer, yet the negotiator is providing a service on behalf of the seller. With four fingers in the real estate commission pie, the agents are forced to beef up the fees to make it all go around, and the buyer gets to pay the extra.

Buyers need to be fully aware of the fees that they are being asked to cover on the purchase of a short sale and need to make their determination of whether the home still represents a value with those fees tacked on. You can try to negotiate the add-on fees, of course, but short sale sellers and their agents can be stubborn, as they have signed contracts that obligate them to certain commissions and short sale negotiation fees.

My own opinion is that some real estate agents are gaming the situation to try and offload their work to short sale facilitators, while not giving up any of their fees in the process. If you are going to employ a short sale negotiator to do all of the legwork, then those fees should be paid by either the seller or deducted from the seller agent’s commission. There are short sale agents out there using this approach, but it is definitely a case of “buyer beware,” when looking at short sales. Be sure to have your own agent investigate each individual property and fully understand any contract terms that you are being asked to sign that will incur additional fees.

Understanding the participants

When a bank takes ownership of a home through foreclosure, they will eventually attempt to sell the property on the open market. There are three key players in a bank-owned sale that you need to be aware of.

1. Listing Agent – In the vast majority of cases, the homes get assigned to a local real estate agent who lists the home for sale on the local MLS and advertises on behalf of the bank. The listing agent’s job is to help the bank set their price, advertise the property and procure offers from buyers and their agents. Often these agents also facilitate ongoing maintenance and utility payments for the duration of the listing.
2. Asset Management Company – Many banks do not want to be in the direct business of listing their properties, maintaining their properties or interacting with listing agents, so they assign their portfolio of REO properties to an 3rd-party asset management company. The job of the asset management company is to act on behalf of the bank to keep the property maintained and to get the property sold through their network of real estate agents.
3. Asset Manager – The asset manager is either an employee of the Asset Management Company of sometimes a direct employee of the bank. These folks are given a list of properties to manage and sell and are the person who responds to offers and serve as the voice of the bank. They have varying degrees of decision-making capabilities on a particular property.

Initial listing process

Once a bank takes a property back through foreclosure, they have to decide when they want to list the property for sale. Sometimes the listing process begins as soon as the next day, but other times they may hold off for weeks or months to sell the property. It all depends on how quickly they want to liquidate the property and the overall inventory of bank-owned listings on the market. (They don’t want to depress prices by flooding a market with bank-owned homes.) Here is what happens during the initial listing process.

1. Assignment to agents & property preservation vendor – The property is given to an asset manager who sends the assignment to a local real estate agent and property preservation vendors.
2. Occupancy check and eviction – If the property is still occupied, the bank needs to go through eviction proceedings to remove occupants and their belongings. Laws and timelines vary state-to-state. In Washington state, the process can take 30-60 days.
3. Trash out & sales clean – A foreclosure sometimes means homes that are filled with garbage or in poor condition. Banks will pay to have debris removed and for basic clean up.
4. Valuation – The bank needs to know an estimate of the current market value of the home to set a listing price. They will use a combination of Broker Price Opinions (BPO) and appraisals to make this determination. On my own recent bank-owned listings, I have been asked to give a BPO value, a second BPO opinion was obtained from an unrelated agent, and a formal appraisal was completed. Using these multiple data points, the bank can determine the current market value so that they can set their price. Note that the process has NOTHING to do with what they lost on their previous loan. They know that they can only sell a property for the current market value. Banks do not make valuation decisions on a whim. They use valuations from multiple parties. Those valuations may not always be correct, but it is how they make their decisions.
5. Listing – Banks set a listing price and tell their agent to list the property on the MLS. Banks’ motivations change over time. Some banks will price the property high in the valuation range, knowing that it will take some time to procure an offer. Others may be motivated for a quick liquidation and will significantly underprice a property to spur competition and an instant sale.

Constructing a successful offer on a bank-owned home

Successfully buying a bank-owned home requires that you understand the process and motivations of the bank.

1. Money talks – This should come as no surprise, but banks are motivated primarily by their bottom line. They want to maximize their net proceeds from a sale, and will often not care so much about other terms like quick closings or a waived inspection contingency. If the bank can get 10k more from a buyer that has to wait 30 days for their mortgage to close, they are likely going to take that offer over a lower all-cash offer.
2. Negotiation is mechanical – The negotiation process is highly automated. Your offer will be uploaded to a website with a summary of the key offer terms. Response from the bank comes back on the website, usually with no interaction or conversations between the listing agent and the bank. Nuance and lengthy descriptions are often lost or ignored in the process. They focus primarily on your offer price and terms.
3. Decision makers are given parameters to work with – Asset managers are generally given some level of decision-making capability. They may not be authorized to sign contracts for the bank, but their job is to put together a contract that the bank can automatically sign without further negotiation. They are not going to tell you what their parameters are, but they may have the ability to negotiate 0%, 1%, 5% or 10% off the list price of the home. If you are within their parameters, they may say yes to your offer. If you are outside of the range, they will reject it. Their approval range does change as time passes, but you can be pretty certain that they don’t have the ability to give you 20%-25% off just a couple days after a new listing or price change.
4. Bank motivation changes as time passes – Banks know that it takes time on market to successfully sell a home, but they also don’t like listings that stay on their books for hundreds of days. They generally re-evaluate their pricing and marketing every 30 days, using refreshed BPO data to determine any new changes in market values. Often you will see price changes happen on a monthly basis. Sometimes the price changes are gradual, and other times they are dramatic. I saw a recent listing where they made modest price drops at day 30 and day 60, and then they made a drastic price drop at day 90 that brought out 15 competing bids and sold the property instantly for way over their list price.
5. You are a number – An asset manager is likely managing hundreds of properties at any given time. They want to sell them all expeditiously, but yours is no more special than the rest of them that they are dealing with.
6. Patience & persistence – Negotiating with a bank requires patience and persistence. Listing agents are often overworked and unresponsive because they have so many bank listings. Banks only work during the business week and it can take a number of days for each response. They also won’t always give you their best price on the first round of negotiation. Be patient and work the process through to completion, even if you have to iterate multiple times over a couple of weeks. If they reject your offer now, wait for more time to pass and then rinse and repeat.
7. As-is means as-is – Bank sales are sold in “as-is condition,” and in the vast majority of cases, they will not make any repairs to the property. The exceptions to this may be safety or loan-related issues that they need to fix in order to sell a place. i.e. They will likely have to install a missing furnace, but they are not going to replace the nasty carpets. There is no harm in requesting repairs, but you should go into a bank-owned transaction assuming that they will fix nothing. They hear the same begging and pleading from every buyer out there, so your request needs to be substantial for them to consider it.
8. Live with the bank contracts – Every bank is going to have their own contract or contract addendums to sign. Most of the terms are straightforward, but sometimes the contracts are slanted in the bank’s favor. You need to understand what you are being asked to sign and should seek legal advice if necessary. But remember that your chances of getting a Bank of America or Wells Fargo to make an contract change just for you is zero.
9. Skip the flowery sales pitch – When buying from a private party, you may include details about yourself like why you love the house, your great job, or other personal details. Banks could care less, and may not even look at your fancy letter. Focus on price and terms.
10. Competing offers – Bank-owned homes may come on the market at extremely low prices that bring out multiple bidders. If you are competing with other bidders, you will be asked to submit your “highest and best offer.” This means exactly what it says, which is to give them the highest number you are willing to pay for the home. You will likely have little or no information about your competitors, and you may not use escalation clauses. It is unnerving, but you need to work with your agent to determine the highest price you are comfortable with for the home. Price still wins in most cases, but terms like financing and closing dates do matter when pitted against other similarly-priced offers.

There are good deals to be had when buying a bank-owned home, but you need to understand the process and the players in order to successfully make it through the process. Consulting a real estate agent that is experienced in bank-owned deals can be helpful in the process.

Many of the homes that buyers see in this market, especially homes that are distressed, come on market in tough shape, with no one on tap to make repairs – except for the future buyers. In other cases, having financial help with making updates could mean the difference between a house you like and a house you love. The FHA 203 (k) Rehab Loan is a loan program that rolls the cost of home repairs into the amount of the home loan. This loan program helps the buyer free up cash to make these repairs, and also provides some assistance to the new buyer in managing the remodel/repair process.

Basics of the FHA 203 (k) Rehab Loan:

• The cost of the homes repairs are built into the total loan amount.
• The home must appraise for the post-improved value. Your agent will be asked to show sold comps that support this value.
• Buyers can qualify with as little as 3.5% down.
• The loan process needs at least 60 days to close.
• The loan closes PRIOR to any work being done, and all repairs must be made within 6 months of closing.
• Many types of properties are eligible, but at this time you do have to plan to live in the home. (Must be owner-occupied)
• At the time of posting, the minimum repair amount is $5,000 with a max loan amount of $567,500 in King County.
• This program can be used for home purchases as well as refinances.
• There are many other guidelines – please contact your lender to review.

What types of repairs can be included?

The program is quite flexible in the types of repairs that can be made. It is very clear that “luxury repairs” are NOT included (addition of a swimming pool or hot tub, photo murals, barbecue pits, outdoor fireplaces, for example). However, allowable repairs include:

• Remodeling or structural alterations and reconstruction
• Aesthetic Upgrades (kitchen, bath, hardwoods, painting)
• Roofing
• Internal systems (heat, hot water, plumbing, electrical, AC)
• New appliances
• Landscape work & site improvements
• Energy conservation improvements and handicapped accessibility
• Modernization

 Process

The loan process is obviously more complex than other types of loans. One thing to remember is that you will be assigned an FHA consultant. The FHA consultant will work with you to write up a list of desired repairs and improvements, assist you in working with a contractor (the contractor does need to be approved by the bank), reviewing estimates (only one is necessary), inspecting work, and paying out the money.

It would be beneficial to use a contractor well versed in these types of projects – they are familiar with the standard of service, the timelines, and the paperwork and money distribution side of things.

 Is the FHA 203(k) right for me?

While not for everyone, this type of program would fit well with:

• Buyers who don’t have the cash on hand to make needed updates and repairs.
• Needs a support team in place to help with the project management of home improvements. Consider your lender, the FHA consultant, the contractor, and your real estate agent as a virtual team available for you throughout the process.
• Buyers who understand the risks and rewards of going through a home improvement process.
• Someone with a flexible living situation – if you can’t live in the home throughout the repair process.

 A word of caution: Only choose lenders that have verifiable experience processing the FHA 203 (k) Rehab loans and can prove that they have the team in place to successfully close this type of transaction. Change lenders if you have to!

Thank you to Eric Aasness of Bank of America for the great overview of how these loans work. We always recommend speaking to a lender to discuss the details of what loan programs are right for your personal financial situation.

On a recent inspection, I took a look through the toolkit of Bruce and Cullen MacKintosh from Centennial Home Inspection Services to see what sort of gear you should expect to see with a top-notch home inspector.

The Basics

Let’s get the basics out of the way. Every home inspector needs to show up with a digital camera and a ladder. No ladder means that they will avoid important hidden areas like the roof or attic. You’d be surprised by the number of inspectors who don’t even bother with the ladder and should avoid them if you value a complete evaluation of the home you are buying.

The Toolkit

Bruce and Cullen carry a toolkit loaded with a variety of fancy and not-so-fancy gadgets. Here are some of the important goodies.

1. Screwdrivers – Whether to remove panels, open a cover, or to poke through rotted wood, an assortment of long and short screwdrivers is probably the home inspector’s best friend.
2. Mirror – When you are trying to see in hard to reach areas, like on the inside of a furnace or vent, a mirror with an extension arm gets you there.
3. Water pressure gauge – Low water pressure is pretty obvious, but high pressure isn’t. Both are bad for a plumbing system, and a pressure gauge gives a quick and accurate reading to see if you need pressure regulation or enhancement for the home.
4. Matches – A simple device that is infinitely useful to test how a chimney flue draws air or to light a pilot light.
5. Circuit tester – Improperly wired receptacles are more common than you think. This handy little device will tell you if the polarity of the circuit is correct, whether it is grounded or not, and will allow you to check to see if the Ground Fault Circuit Interrupters (GFCI) are working correctly.
6. Coveralls – Any inspector worth their fee is going to have to get dirty and crawl around in cramped crawl spaces.

Moisture Meter

Some moisture damage is obvious due to stains or wet walls and flooring, but most moisture damage is hidden behind walls and underneath floors. An electronic moisture meter can read water content behind these surfaces and tell you if an area is dry or potentially wet and damaged.

Remote Laser Temperature Reader

These thermometers can instantly read the temperature of any surface that the laser beam can reach. The most common use for these is to quickly evaluate if all heat/cooling vents are operational. It is even handier for things like heated floors which heat up slowly and can be hard to determine whether they are operating properly throughout a particular room.

Carbon Monoxide Detector

Any home with fuel-burning appliances can be at risk for excess carbon monoxide emissions. An improperly burning flame in a furnace or water heater can give off this odorless, yet poisonous and potentially fatal gas. A portable combustion analyzer will allow your inspector to measure for this quickly and accurately.

Combustible Gas Detector

If your home has natural gas or propane service, there is a potential for your piping to have leaks. Natural gas is infused with odorants to give it a strong smell like rotten eggs. For significant leaks, your nose is all that you will need to detect it, but for minor leaks, one of these detectors will catch what your nose cannot, finding even minute leaks due to improper piping.

Multimeter

Testing the flow of electricity isn’t something you can eyeball, and it isn’t something you want to try to test by hand. A multimeter allows you to quickly and accurately test electrical circuits.

Sewer Camera

This might not be carried by the typical home inspector, but there are companies who specialize in scoping underground sewer lines for problems, pipe breaks and blockage. A small camera and light is placed at the end of a stiff cable that is pushed through the pipes underneath the home. A video recording of the entire length of pipe is captured, and if problems are discovered, the inspector can use an above ground locator to find exactly where you need to dig. (The camera sends out a radio signal so that you can locate it from above ground.)

Choose a professional inspector

A professional home inspector will comply with state licensing and training requirements, often is a member of one or more professional inspector associations and will come equipped with a wide variety of gadgets to help uncover potential problems in the home you are buying. Shop carefully for an inspector and ask your real estate agent for recommendations.

A short definition is probably needed here for those of you not familiar with short sales. As home prices have declined, there are many sellers who are underwater on their mortgages, owing the bank more than the home is worth. If a seller has financial difficulties and needs to sell the home, they likely do not have the funds necessary to pay off the remaining portion of their mortgage. A short sale is when the seller asks their bank to help them out by accepting a payoff that is less than what the bank is owed. This gets the seller out of the home and avoids costly foreclosure proceedings for the bank. The bank review process can be lengthy and stressful, so it pays to understand how to optimize your price for a bank approval.

How are short sale listing prices set?

In the vast majority of cases, the listing price is determined by the seller and their real estate agent with no bank involvement. Remember that the seller still owns the house and gets to make decisions about its sale, but those decisions are subject to further approval by the bank. We see a few different strategies being used by short sale sellers:

1. Price the house at or above market value – These sellers may be trying to milk the process to live in the home as long as possible. Continuing effort to list the property may delay foreclosure proceedings, but only for so long.
2. Price the home based on best estimate of the price that the bank will approve – Banks have a process for determining what sale price they will or will not approve on a short sale. The most experienced short sale agents will understand this process and price the property realistically within a range that is likely to be accepted. (More on this process in a moment.)
3. Price the home very low to get a quick offer – The hardest part of the short sale process is getting an offer in hand so that the bank can start the review process. In their haste to get an offer to the bank, sellers often set prices far lower than will be realistically approved by the bank to get an offer in hand. If a home is worth $300k and the seller lists for $200k, you can be certain that they will get a quick offer, but you can also be certain that the price will not be approved by the bank.
4. Pre-approved bank prices – Every once in awhile, a home will have a listing price that has been pre-approved by the bank. That is a great situation, because they have done a preliminary review and said what they are willing to accept. An offer at the approved price should be accepted quickly, though a bit of negotiation may still be possible.

How do bank determine the price when they approve a short sale?

For a bank to accept a payoff of less than they are owed, they want to understand two things. They want to make sure that they are not being taken advantage of, and they also want to know what they could sell the property for if they foreclose and have to sell the home themselves. If they can achieve a better result through foreclosure, they will not approve a low short sale price.

The exact process of short sale approval is a bit of a mystery, and each bank behaves differently. However, there are a few key pieces of due diligence that banks will utilize to approve a short sale. First, they likely have internal statistical models that give them a rough estimate of the current market value of the home. Second, they will use appraisals or Broker Price Opinions (BPOs) to get a real person to visit the home and estimate its value based on local market trends. Lastly, they will look at internal factors like the cost to foreclose, current inventory of distressed homes and how quickly (or slowly) they want to incur the losses on their balance sheet each quarter.

By far the most important factor for determining the current market value of a home is the BPO. I have done hundreds of BPOs for countless different banks, and the process and criteria that they use is remarkably consistent. While the bank will not share the BPO results with you as the buyer, you can use the same “recipe” for BPO values to give yourself a guesstimate on what the bank thinks about the market value of the home. Here is the set of factors you should analyze yourself when estimating a BPO price:

• Find 6 comparable homes: 3 recently sold listings & 3 active listings
  • Within a 1-mile radius of the property for urban & suburban areas
  • Comparable sold homes with sale dates in the last 3-6 months.
  • Age of comparables within +- 10 years of the age of the home.
  • Above Grade Living Area (AGLA) within +-20% of the home. Above grade living is far more important than below-grade rooms. Finished basements count, but very little.
  • Similar style & room count – An ideal comparable is the same style, with the same number of beds and bathrooms. Comparables with one more or less bedroom can also be used if adjustments are made.
  • Comparables with similar condition, construction quality and views.
• Most BPOs are “fair market” price evaluations, meaning that other short sales and bank-owned homes are ignored if there is a sufficient number of regular sales to choose from. Banks know that short sales and REO properties are discounted, but they want a price opinion that assumes a non-distressed listing.
• Once you have this list of six properties, BPOs will adjust values for differences in each property. You may add value for an additional bedroom, or subtract value for poorer views. The goal is to come up with data that is most consistent with the configuration of the property that you are evaluating.
• Final values are usually determined by looking at the adjusted sale values. If you show three sold homes that are similar to the property with an adjusted sale price of $300k-$325k, then the final value for the home in question will lie within that range.

It is not terribly difficult to figure out what the bank may think is a fair market value for the home. The tricky part is guessing how much of a discount from that value they will approve. Successful short sales almost always sell for less than the fair market value. The process is difficult and time-consuming, and there are additional risks that a buyer takes on to buy a short sale. Given the opportunity, many buyers opt to ignore short sales in favor of easier transactions, so a more compelling price is needed. Banks know this, and will approve discounted prices. How much of a discount is a mystery, and varies by the day and by the bank. There is a complex mix of decision makers that need to weigh in, including the investor on the loan and potentially a mortgage insurance company as well. Some banks may give a 5% discount, others may give 10%, and still others may not approve any discount. While it is impossible to say exactly what they will approve, it is safe to assume that they will not approve gigantic discounts. Banks are not going to approve short sales offers that are 25%, 30%, 40% lower than the fair market value of the home. In most cases, it will make better financial sense for them to foreclose on the home, rather than approve such an offer.

Strategies for a successful short sale offer

Successfully navigating the purchase of a short sale requires patience, persistence and willingness to deal with price uncertainty during months of waiting. Here are a few key things to keep in mind when making your offer:

1. Sellers generally don’t care about the price –Whether you offer $400,000 or $1, the seller makes $0 on the successful completion of a short sale. Their only motivation is to get the process over with and avoid foreclosure.
2. The seller’s real estate agent is highly motivated to close – Short sales can be a lot of work for agents. They only get paid if it closes, and a good percentage fail and go to foreclosure, so the agent gets nothing. Agents may be overly motivated to accept any offer that comes in the door to keep the process moving.
3. Low offers may be accepted, but not approved by the bank – Motivated sellers and their agents may accept offers that are unrealistically low out of desperation to keep the process moving with the bank. If you make such an offer, you may not hurt anyone’s feelings with the offer, but you need to be fully aware that the bank is very likely going to come back to you with an approved price that is much higher than your initial offer. If you understand you may wait 3-4 months for this unpleasant price surprise, they you have the right mindset. Remember that just because your short sale offer was accepted is no guarantee that it will be approved by the bank.
4. Time on market at each price point matters – If you see a short sale property listed for $400k that is not selling, then suddenly drops the price to $300k, it may look very appealing to make an offer. However, if you make an offer within a week of the price drop, you are almost certain to get a bank approval at a much higher price. As listing prices move downwards, the bank needs evidence that a property did not sell at a certain price point. Here are two examples:
   • Property listed at $400k for 90 days with no offers received.
     • Example 1: Price is dropped by $25k every 30 days until an offer is received. Finally an offer is received at a listing price of $300k. The bank sees the property history where it did not sell at $400k, $375k, $350k and $325k. Short sale approval around $300k is fairly likely in this scenario.
     • Example 2: Price is dropped from $400k to $300k and an offer is received instantly. The bank sees no history of attempts to sell at intermediate price points. They do know that it didn’t sell at $400k, but they have no idea if the market would have paid $350k or even $375k. In this scenario, it is likely that a bank will counter with a very high approval price relative to the offer.
5. The economics of short sales and foreclosures are difficult to estimate – You will never have a full financial understanding of the bank’s motivations. They may be receiving mortgage insurance payments behind the scenes or have larger macro issues that prevent them from approving a short sale price that seems logical to you. Our experience with short sales is that sometimes big banks make logical decisions, and other times their short sale approvals make no sense at all.
6. Estimate what you think the bank will approve – Do your homework and determine a fair market value for the home. If you make an offer close to that range, your chances for bank approval go way up, and you can avoid the unpleasant price surprises months later. By all means, you should attempt submit a lower offer to try to get the best deal, but that needs to be balanced with what the bank perceives the property is worth.
7. Realize that short sales are negotiated between sellers and their bank – Buyers mistakenly believe that they are negotiating with the bank on a short sale. In reality, short sale approval is a process that occurs only between the seller and their lender. Both of them need to agree on the final short sale terms. You may reach an approval price that you are OK with, only to have the seller back out of the deal because the bank wants to continue collecting the deficiency from the seller after the sale.
8. Assume that the house is “as-is” – Short sale sellers may have little or no financial capability or willingness to make repairs. Their banks will approve short sales only on an “as-is” basis. You should assume that you will be purchasing the home in “as-is” condition. That doesn’t mean that you can’t attempt to negotiate on needed repairs, but if you assume that the property is “as-is”, anything that you get through these negotiations will be a bonus.

Successfully purchasing a home that is a short sale can be a stressful and time-consuming process. By understanding how prices are set and approved, your chances for success will go up. It can also be helpful to engage a real estate agent who is well-versed in the process to help you through it.

A good real estate agent will guide you through the negotiation process of purchasing a home and act as your representative in the discussions. Negotiating the purchase price is about knowing the market, understanding the seller’s situation, and being confident with your “highest and best offer.” Contrary to popular opinion, your agent’s “aggressive negotiation” or “tiger-like tendencies” rarely determine the final price on a home. I’ve gotten big discounts on some homes that were overpriced or had motivated sellers, and gotten little to no discounts on popular, well-priced homes. Neither means that my buyers necessarily got a “better deal,” and in fact, I’ve had buyers purchase underpriced homes in bidding wars that end up being an exceptional price relative to neighborhood averages. Ultimately, price negotiation is about matching what a buyer is willing to pay with what a seller is willing to sell. It is a balancing act of sorts to find this mutually agreeable point.

This article will focus on purchasing from a private-party, “regular” seller. Buying a short sale or bank-owned property is an entirely different animal, and we’ll follow up this article with tips on negotiating short sales and negotiating bank-owned deals. Here are some tips to help you when negotiating the price of a home.

First, it is helpful to consider how the seller initially prices their home. A couple of things go into this:

• Comparative Market Analysis – The majority of sellers will consult a real estate agent to do a pricing opinion (Comparative Market Analysis, or CMA). The CMA will include sold data for similar homes and will also look at how competitors are priced.
• Financial Situation - The seller also looks at their own financial situation. Often there is a “bottom-line” that the seller needs to hit. Remember that a seller will have selling costs (in the 6-10% of sales price range) that they have to pay out of the sales proceeds. If the seller owes a certain amount on their loan, that often dictates their asking price. That does not mean that their bottom-line price is fair, given current market conditions, so you need to do your homework to make your own determination.
• Emotional / Life Situation – The seller’s emotional circumstances also play into their asking price. Many sellers want to start their asking price high to see if they can get an offer. Others will price aggressively to get the home sold quickly. You should never underestimate a seller’s personal attachment to a home where they have lived and raised a family for many years.

The Negotiation

Going into the negotiation, remember these tips:

• Do your homework – Have your agent pull recently sold homes and compare the home to other similar properties you have seen in person. Know the listing history and research the home’s sale and mortgage history. Ask why the seller is selling and make an educated guess on what you think their motivations are.
• Pay attention to Days on Market – If you feel the property is overpriced, and the seller has just come on market, it will likely be too soon to send a low offer. Sellers need a certain amount of time on market to come to the realization that they are not going to get the price they hoped for. Offering 20% off on the second day on market will likely get you no response. Wait a couple of weeks and then present your offer if it will be substantially lower than the asking price. The same concept applies at the point of price reductions. If the seller dropped their price $25k yesterday, and you show up the next day asking for another $50k off the price, you may get a very cold response.
• Be serious - Put your offer in writing and get it in front of the seller. Sometimes a seller needs to see a dollar amount staring them in the face for the conversation to turn serious.
• Start Low – In general, start at a point lower than what you are willing to pay. Be patient and allow the negotiations time to play out. A seller may reluctantly drop their price in baby-steps at first, and then agree to a more substantial drop. Remember that both sides are trying to “test the waters” to see how low/high the other side will go. It can sometimes be a silly game with an almost pre-determined conclusion, but there is a basic psychology at work that allows both parties to feel that reasonable compromises have been reached.
• Understand the “striking range” – Every deal has a “striking range” where sellers feel comfortable negotiating downward and buyers feel comfortable negotiating upward. Start too far out of that striking range, and you may reach a dead end with the seller.
• Be the first to the table - In general, it benefits you to be the first offer. If multiple offers do come in on the property, it gives the seller confidence in you, and shows that you may want the property more than your competitors. Some sellers actually feel a sense of obligation to the first person to the table, and will choose the first offer, if other terms are reasonably similar.
• Remain diligent - Should the negotiations die, wait a couple of days and re-present an offer. Never let the discussions die without giving it a chance to play out. Our record currently stands at 8 weeks for the longest negotiation. Most won’t go anywhere near that long, but in the end, our patience and persistence paid off.
• Price isn’t your only negotiation point – You can also negotiate on closing costs, closing date, inspection timelines, and earnest money. Consider compromising on one of these other areas to get to a mutually agreeable point.
• Seller’s mindset - Remember that the seller does (presumably) want to sell their home, and they face a lot of uncertainty and angst in whether another offer will come in. They have an emotional attachment to the home and have a perceived value that they feel the house is worth. They may get frustrated, angry, or feel offended. They may want to stall the negotiations. Even the coolest, most logical people sometimes come unglued during a real estate negotiation. As we’ve said before, remain patient, put emotions aside, and stay steadfast in your offer.
• Be fact-based - Personalities come into play here, so it is best to keep a direct, fact-based approach when dealing with the other side of the transaction. Present your case but don’t try to debate specifics – ultimately this is a battle of opinion and willingness to compromise.
• Know your high point – Be rational about how high you are willing to go for a specific house – and make those decisions based on what you believe the fair market value is and your own financial situation. Don’t let your emotions guide your checkbook.
• Look at the big picture - Sometimes negotiations will stall out over $5K – $10K. While this may feel like a large amount of money (it is), think about what it’s worth to get you and your family into the right house, and what it means as a percentage of a very large transaction. Consider the alternative of starting over.
• Don’t be afraid to go above asking price for the right house – Bidding wars are not unheard of, even in a slow real estate market. Sometimes sellers purposefully price their home aggressively to stimulate offer activity. You will recognize if a home is priced under market value if there is high traffic and multiple offers in the first few days. If you have been shopping for awhile and it feels like a great house at a great price, there is probably a bunch of people with the same feeling. In this case, discuss with your agent what a fair price for the home is and have them perform some detective work on the other offers. Multiple offers will short-circuit the back-and-forth bidding process, and you will need to go in with your highest and best offer to start with. Stay cool and don’t outbid your comfort zone and remember that there is always another house.

Try not to let your emotions rule the day when negotiating the price of a home. It is a back-and-forth process that you need to go through to get to agreement. Do your homework and stay rational about what you are willing to pay and remember that you can always walk away and find another home. At the same time, recognize that there is another human on the other side of the deal that has equally strong feelings about what they want. If you can balance those factors, you will have a better chance at success and a relatively stress-free buying process.

Here are the instances where you would not be required to receive a seller disclosure in Washington:

1. A foreclosure or deed-in-lieu of foreclosure – This exempt properties during the foreclosure process. This does exempt banks during the transfer of property AFTER a foreclosure, which is commonly misunderstood by agents and banks alike. So the sale of a bank-owned home technically requires the bank to provide a seller disclosure, but the bank has no direct knowledge of the property, and will fill out “don’t know” for 100% of questions. If you are buying a bank-owned property, do not rely on information in the seller disclosure, if there is any. You must inspect the property to your own satisfaction.
2. You don’t have to give a seller disclosure if you are selling to a direct family member (parent, spouse, domestic partner, child)
3. You also don’t have to provide a seller disclosure if you are transferring a property during a divorce.
4. If you have owned the property you are buying in the last two years, or even a portion of the property, then the seller doesn’t have to provide a disclosure.
5. If you are buying an interest that is less than fee simple, then a seller disclosure is not required. The most common example would be entering into a lease on the property.
6. When a seller dies, the estate has no direct knowledge of the property and doesn’t have to provide a seller disclosure.
7. When a seller enters bankruptcy, the bankruptcy trustee takes over control of the property and also does not have direct knowledge of the property and doesn’t have to provide a seller disclosure.
8. A buyer may expressly waive the receipt of the seller disclosure statement. However, there is a section about environmental questions that is still required if any of the answers are yes.

In most purchases of residential real estate in Washington, you are required to receive a seller disclosure statement, but keep in mind that you should always inspect the property to your own satisfaction. The disclosure statement is not a replacement for a competent home inspector or direct review of other property details.

Preliminary closing items

Your title insurance and escrow companies will work on a variety of tasks in the weeks leading up to closing. The title insurer will research the title history of the property and verify any liens that need to be cleared to transfer ownership. They will also make sure that the property qualifies to be issued a title policy, and if you have a common name, they may ask for identify verification documentation to prove you are not the same “John Smith” who has a judgment against him. Your escrow company, which may or may not be the same as the title company, will track down payoff statements for each mortgage or lien against the property. They may need you to provide authorization to obtain such statements on your behalf. As a buyer, you need to stay on top of documentation requests from your lender and prepare your down payment funds.

Loan documents sent to escrow

“Your loan documents are in escrow” are the magic words that all buyers want to hear. Nothing can be done or signed until those arrive, and in 95% of cases, this is the step that the entire process is waiting for. In order to generate loan documents, your lender needs to approve your file in underwriting. This means that the underwriter has reviewed your income, debt, credit and the appraisal of the home and determined that it fits within their lending guidelines.

In a perfect world, these arrive 2-3 days prior to closing. It gets pretty dicey to close on the same day as documents arriving, though it can be done if documents arrive early in the morning. Once documents are in escrow, the escrow agent needs a few hours to prepare the file. Basically they review all of the lender closing instructions and then prepare a HUD-1 Settlement Statement that reflects the purchase price, closing costs and all fees that are outlined in the purchase & sale agreement, the listing agreement (if you are the seller) and the lender instructions.

Seller signing

Sellers can generally sign their closing documents without having to wait for the buyer’s loan documents to arrive. During the signing appointment, you will sign a number of documents. The important ones are the deed transferring ownership, an excise tax affidavit showing the tax you are paying on the sale and a HUD-1 Settlement Statement outlining the sale price, any charges or credits to you and the net sale proceeds that you will receive. You will also tell them how you want to receive your proceeds, whether via check or wire transfer. Most seller signings happen 1-3 days prior to closing.

Buyer signing

Once escrow has received loan documents, they will schedule a signing appointment for the buyer. This is always a source of angst for buyers who want to plan their closing appointments ahead of time. The escrow companies can’t do a darn thing with you until they receive loan documents and the exact arrival of those documents is hard to predict. They won’t set appointments to sign without documents in hand, so make sure that your schedule is flexible in the days immediately prior to closing. Buyers typically sign their documents 1-2 days prior to closing.

During the signing, you will sign a small forest worth of documents, most of which are generated by your lender. In a nutshell, you sign documents that say how much you owe them, how you will pay them back and what happens if you don’t pay. It usually takes 50+ pages to get this across! In addition, you will sign a copy of the HUD-1 Settlement Statement showing what you are being charged, what you have already paid, and what remaining funds you need to provide to the escrow company. You will need to provide certified funds for the remainder of your down payment and closing costs, which means either a certified check or wire transfer. If you are providing funds on the day of closing, you will be required to send funds by wire. Note that most banks have a 12:00 or 1:00PM wire deadline, so you need to take care of such transfers in the morning.

Lender review

Once you have signed your documents, the loan documents are sent back to your lender for review. Some lenders require documents with original signatures to be couriered to them. Other lenders require 24-48 hours to review. The most flexible lenders are the ones who will fund your loan on the same day by reviewing a scanned copy of your documents. These lenders are known as “table funders,” and you won’t know how great this is until you get in a last minute bind with a lender that has lengthy review procedures.

Loan funding

Once the lender is satisfied with your loan documents and the settlement statement figures, they will wire your loan proceeds to the escrow company. Typically this happens on the closing day, though sometimes it can happen a day or two beforehand. Once again, these funds are tied to the wire deadlines. If these funds are not wired by 2PM, they won’t arrive until the next day. (All wire transfers are tied to east coast time where they are processed by the Federal Reserve.)

Closing day

Unless you have problems with delayed loan documents, in Washington the buyer and seller don’t really do anything on the closing day other that sit around and wait for the transaction to close so that they can exchange keys. However, there are a number of behind the scenes tasks that must happen before the sale is complete.

Real estate transactions must be recorded at the county recorder’s office for a sale to become official. The title company will send the deed, your deed of trust (mortgage) and the excise tax documents to the recorder’s office. The title company has a courier that shuttles these documents to the courthouse throughout the day. Your documents will likely be queued up in this process waiting for the escrow company to “release the file to record.”

There is a final lender review of the file on the closing date. They verify the final settlement statement, wire their funds and ensure that all conditions required have been cleared. Once the funding department is satisfied with the file, they tell the escrow agent to “release the file to record.”

Once the file is released, the documents are taken to the counter at the recorder’s office and submitted for recording. The moment the document is scanned, a recording number is generated and provided back to the title company. The recording number of the deed is evidence that the transaction is officially closed. The recording numbers then get passed along to your real estate agent, who gets to make the exciting call that your home has finally closed.

Post closing

Once your deed and mortgage are recorded, you own the home and escrow is able to disburse funds to all parties in the transaction. The previous lender is paid off, the real estate commissions are paid and the seller is sent their proceeds from the sale. You also get to receive the keys from the seller, depending on the possession time you negotiated in your contract. The default contract language grants you possession at 9PM on the closing date, but if the seller is moved out, the exchange of keys often happens earlier.

If you are a seller, you will generally receive your sale proceeds on the day after closing, so don’t go writing any big checks just yet. Technically the funds can be disbursed to you at any point after recording numbers are received, but from a practical standpoint, you have likely missed the wire transfer deadline for that day. Most sales officially close late in the afternoon.

Be flexible to avoid closing delays

The last few days of a real estate closing are when most things go wrong. If you are involved with a real estate transaction, make sure that you are available to sign documents at a moment’s notice and try to be reachable during this critical phase of the transaction. If you are prepared to be flexible, you can head off any last minute delays.

Chapter 7 versus Chapter 13 bankruptcy

Real estate is treated very differently if it is part of a Chapter 13 versus Chapter 7 bankruptcy proceeding. Homes in Chapter 13 bankruptcy remain in the control of the seller. To purchase one, you would negotiate with the owner directly. There is a requirement for bankruptcy court approval of your offer. This is a check to make sure that creditors are being protected and that the seller isn’t receiving any proceeds. Chapter 7 bankruptcies are very different. All of the owner’s assets are transferred to the possession of the bankruptcy trustee, who is appointed by the court. The trustee is responsible for the sale and disposition of all assets and the owner is no longer involved in the negotiations for the sale of their home. We’ll talk more about buying homes out of Chapter 7, as that is where the process differs wildly from a regular transaction.

Making an offer on a home in Chapter 7 bankruptcy.

A trustee often lists real estate in bankruptcy on the open market. If you decide to place an offer on such a property, there is usually a specific contract required by the bankruptcy court that has similarities to a typical real estate contract, but contains many bankruptcy-specific terms.

1. Subject to approval by bankruptcy court – Once the trustee signs your offer, it is not yet mutually accepted. They will set a court hearing a few weeks later during which a judge will review and approve the offer. You don’t have a valid contract until that point.
2. Right to accept higher bids – Up until the court approves your offer, bankruptcy law requires that the trustee continue to accept other offers if they are better than yours. The law allows you the opportunity to match those higher offers, but the risk that someone else beats your bid remains all the way until the court hearing. There could even be an oral auction at the court hearing to determine the final price and winning buyer. There is no way to avoid these risks, so you have no assurance that the home will be yours until the judge issues court approval of your offer.

Beware of looming foreclosures

Almost all properties in bankruptcy have a mortgage against them. Most times those mortgages are underwater and the banks stand to lose a considerable amount of money when the property sells. When the trustee accepts your offer, they will notify all of the lienholders on the home of the proposed sale. This gives lenders a chance to object to the sale to protect their asset from being sold for less than they would like.

Banks will make their own analysis of the fair market value of the home and what they are owed. They use this data to figure out what their likely proceeds will be if the home gets foreclosed versus being sold by the bankruptcy court. If the bankruptcy offer is too low, they will object and proceed with foreclosure instead. Remember that the bankruptcy court is trusted with protecting creditors, not getting you a great deal on the house, so the potential that the home you are bidding on will be foreclosed is quite high.

Trustee fees & unsecured creditors

To successfully sell a property in bankruptcy, the trustee needs to collect their fee. Oftentimes the court also wants to see some money being paid to unsecured creditors as well. There is a complex dance that plays out differently on every single property to come to the right deal that the lenders will approve and that the court will also approve. If there is equity in the home, some of these excess fees may come from that, but beware that the buyer may be asked to pay some of these fees to make the deal work.

Every bankruptcy is different

This post gives an overview of some of the major challenges when buying real estate through the bankruptcy court. However, the most important thing to remember is how different each and every transaction will play out in the bankruptcy process. There is no great way to predict your success or failure, and you need to be prepared for a bumpy process where you may or may not get the home. There is a ton of complexity that can’t be discussed in a short article like this, and you will be best served by working with real estate professionals and attorneys who are well-versed in the bankruptcy process if you intend to make an offer. Seek your counsel carefully, as most agents and attorneys have no experience in this type of transaction.

How can I find REO properties?

Tracking ownership of REO properties can be a challenge. Leading up to the foreclosure, you can try to determine which bank owns the mortgage on the home. The original mortgage holder is a matter of public record in many states, but keep in mind that ownership of the mortgage often changes hands during the term of the loan and the original lender may have been replaced by a different bank.

A more accurate way to track the lender on these properties is to find the foreclosure trustees who are active in your area. In the Seattle area, most of the foreclosures are processed through Northwest Trustee and Quality Loan Service Corporation. Both have online lookup capabilities to track foreclosure activity which will tell you when the foreclosure auction is taking place and what the auction price is.

Once a foreclosure has taken place, and if the property did not sell at the foreclosure auction, then the property will transfer ownership via a Trustee Deed. (This is in Washington State and other states have different procedures.) The trustee deeds are recorded at the county within about a week or so, and you will be able to tell which bank has taken ownership of the property.

What happens once a bank owns a home?

Once a bank takes ownership of a home, it becomes part of their REO inventory. In areas with relatively modest REO inventory, these homes are often listed immediately for sale, which is the case in the city of Seattle. In other areas with very high inventory, banks will hold back REO inventory so that they do not flood the market and further depress prices.

Some banks keep an online database of their REO properties for consumers to view. Here a few websites for large banks:

• Bank of America
• Wells Fargo
• Chase

Vacant properties can be listed immediately, sometimes within a couple of weeks. However, not all foreclosed homes become available immediately. Often there are evictions that need to take place or it is deemed unmarketable until issues with the home are fixed. Other states may have redemption periods for the previous owners which need to expire before a home can be listed for sale.

Can I buy a REO property before it is listed on the MLS?

Many buyers track specific properties and would love to short-circuit the process and bid on homes before they are listed for sale to the general public. In most cases, this is not possible. First, banks are not in the business of wanting to own real estate, and they do not have local staff to manage and market properties. Because of this, they hire asset management companies and real estate agents to help them with these tasks. When a property is managed by an asset management company, they will assign it to a real estate agent who does the in-person work necessary to prepare and list properties for sale. Banks do not have the staff or desire to negotiate the sale of their properties directly and rely on brokers in the area to help them with this.

Banks are obligated to look after the best interests of their shareholders, and in the case of mortgages, to look after the best interests of the investors in those mortgages. The best way to secure top dollar for a real estate asset is to expose it to the broadest market possible. This means listing it on the MLS and advertising the property in a similar manner to a regular seller. You can see that they are not incented to talk to an individual buyer about an offer before they have had a chance to expose it to the entire market of buyers.

Can you try to contact a bank before they list a home on the MLS? Sure, but in most cases they will either tell you it is unavailable, or they will give you the contact information for the real estate agent who has been assigned to list the property. In the Seattle area, the best source of available REO homes for sale is the MLS.

Short sales can be a pain in the butt, because you have to wait around for the seller’s bank (or banks, if they have two mortgages) to approve the short sale. The process can be maddeningly bureaucratic and time consuming, and it can be unclear what price the bank is actually going to approve. Many short sales take 2-3 months to receive bank approval, during which the bank is analyzing the market value of the house via a Broker Price Opinion (BPO).

So you patiently wait for bank approval for 3 months. What happens at that point? Once the bank has reviewed your offer, reviewed the seller’s financial documents and completed their own internal analysis, they will issue a short sale approval letter. I’ve seen lots of these letters from a variety of different banks, but most of them are pretty consistent. Here is what a short sale approval letter typical contains:

1. Approved Sale Price – This may or may not be the price in your offer. If the bank believes that the market value of the home is higher, this may very well come back at a higher amount than your offer, so this is a potential for an unexpected surprise.
2. Closing Date – Their approval is dependent on the sale closing by a certain date, usually 30 days from the date of the letter. If you can’t meet that deadline, the approval may become void, but most banks will approve 1-2 extensions if you pay a per diem fee for the additional interest accrued. Don’t mess around too much with the closing date. I’ve seen deals die when requiring extensions before.
3. Closing Costs – The bank will outline the exact closing costs that they will allow to be taken out of the sale proceeds before they are paid. These include real estate commissions, escrow/title fees and other expenses that a seller is required to pay for.
4. Seller Contribution – A bank may require the seller to bring funds to the deal to approve a short sale. This could be money that the seller pays at closing, or more likely would be a requirement that they sign a promissory note with the bank to remain indebted to the bank for some of the remaining balance of their loan. When sellers are in a poor financial situation, it is unlikely that they will have money to contribute and also may not want a monthly payment hanging over their heads after the deal closes, so this is another area where short sales can fail.
5. AS-IS – Banks will pretty clearly say that the proper is sold “as-is” and no repairs will be made. In almost all cases, they do mean it. It is exceedingly difficult to negotiate any sort of repair items with a bank on a short sale. If the seller does have some money available, it may be possible to negotiate with the seller, but many times the seller doesn’t have any funds available.
6. Sellers Will Not Receive Any Proceeds – The whole idea behind a short sale is that a bank is allowing the loan to be paid off for less than they are owed. If there is any extra money from the transaction, it certainly will not go to the seller. The bank requires that it be paid back to the bank.
7. Payoff Demand – The letter will outline the closing procedures, any review requirements and will instruct the escrow company on how payments must be made.

When a short sale approval letter is issued, it is critical that both the buyer and seller review its contents and be comfortable with the closing terms before moving forward. Buyers of a short sale need to understand the price they are being required to pay and need to be able to meet the closing timelines required by the bank. Sellers need to understand how they are going to be released from their debt, or if there is a remaining balance requiring a promissory note from the seller.

Is there an underground oil tank?

How do you find out if your property has an underground oil tank? Many times there are obvious clues in the basement near the furnace. There may be old oil lines that have been cut, but still stick out of the wall or floor. You may also see oil staining around the furnace area or other indications that the home once had oil heat. Sometimes you may also be able to see a fill cap in your yard somewhere.

If you think there is an oil tank in the yard, but do not know where it is located, there are oil tank removal companies that can survey the yard and help you find it. If the fill/vent cap is buried, they can use a metal detector to find it. If the fill cap has been removed, a larger, more sophisticated metal detector can help find it.

Has the oil tank been decommissioned?

In Seattle, oil tank decommissioning has been done under permits from the Seattle Fire Department since 1997. You can search for oil tank decommissioning permits on their website. Prior to 1997, permits were not required, so you would have to consult with the current homeowner for any records of the oil tank being decommissioned.

Decommissioning options for underground oil tanks

Discovering an abandoned oil tank on your property does not mean that it has leaked or caused environmental problems, but the potential is certainly there. Often oil tanks have been abandoned with a considerable amount of heating oil remaining in the tank, so emptying the oil and dealing with your tank now can help prevent future problems and expense. If the tank has leaked, the Washington Department of Ecology does have reporting requirements based on the extent of the contamination found, and owners can be responsible for cleanup of soil surrounding the tank.

Here are the options for decommissioning an underground oil tank:

1. Complete Tank Removal – Excavating and removing the tank is the most expensive option, but allows visual inspection of the soil surrounding the tank and more accurate soil testing. This can be a major hassle if the tank is located underneath concrete patios, walkways or decks.
2. Foam Fill – The oil tank is drained and rinsed and then is filled with polyurethane foam. The foam is inert and maintains the shape of the tank to prevent any future tank collapses.
3. Slurry Fill – The oil tank is drained and rinsed and then is filled with a lightweight concrete slurry. This prevents future tank collapses, but if the tank ever needed to be removed, the added weight of the concrete will require a crane to lift it out of the ground.
4. Pump/Clean/Cap – The oil tank is drained, rinsed and capped, but left empty. This is the least expensive option, but it does leave open the possibility that a tank make corrode and collapse, creating a sink hole in the yard and potentially affecting nearby structures.

What if my oil tank is still in use?

Oil tanks that are still in use can also leak and cause problems. There is actually a great liability insurance program run by the state of Washington that is funded by a fee that oil dealers pay when they sell heating oil. The insurance program will help cover cleanup costs caused by an oil tank, but homeowners must register with them before the leak occurs to be eligible for benefits. This is a no-brainer if you have have an active oil tank in your yard. Instructions on how to register for the Heating Oil Pollution Liability Insurance Program can be found here. Keep in mind that you need to re-register if you buy a home. The coverage does not automatically transfer to the new owner.

Oil Tank Advice for Home Buyers and Home Sellers

Here are the key things to remember if you are selling or buying an older home that may have an oil tank:

1. Home Sellers –If you home has an abandoned oil tank, make sure it is decommissioned before you sell the home and be prepared to provide documentation the buyer.
2. Home Buyers – If you suspect that a home has an abandoned oil tank, request that the seller properly decommission the tank to avoid potential future problems and expense. If you suspect that the tank may be leaking into the soil, soil tests around the tank will be needed to test for any contamination.
3. Home owners with oil heat – Make sure you are currently registered with the Heating Oil Liability Insurance Program, which will defray cleanup costs if you have an oil tank leak in the future.

(This is the part of the post where I need to mention that this is not legal advice. Some of these forms of ownership need the help of an attorney, so get one if you need it! I also need to mention that I am writing this from the perspective of a resident of Washington state. Washington has community property laws. Some states do not, so you need to research this for whatever state you are in.)

Community Property

Washington is a community property state. This means that any real estate purchase by two people who are married or registered domestic partners will automatically own the real estate together as community property. Even if your spouse buys a piece of real estate without you signing the purchase contract, it will automatically be owned by both of you as community property unless you take actions to make it separate property.

• How you own the property: You own the property as a single community, there are not two half interests in the property.
• How you sell the property: Both co-owners must agree to sell the property
• What happens upon death:  The deceased’s half may be given by will, or it passes to descendants by laws of succession. The spouse is the primary heir.

Separate Property

Separate property is the opposite of community property. It is everything that a husband and wife own separately. This includes property that was owned prior to marriage, anything inherited or received as a gift during the marriage, or anything earned after a separation. It can also be anything that one spouse gives to another during marriage in writing.

Separate property can actually become community property during a marriage if it becomes mixed with community property. A simple example would be a house that a husband bought a house with only him on title. His wife then proceeds to pay the mortgage from her income over a number of years. The house has now become mixed with community property and can no longer be indentified as separate property.

• How you own the property: You own the property as your separate property, and manage its income, expenses and sale independently from your spouse and your community property.
• How you sell the property: Separate owners can sell their property independent of their spouse, unless the property has become comingled with community property.
• What happens upon death:  The deceased owner passes their interest to their heirs via will or laws of succession.

Tenancy in Common (TIC)

Tenancy in Common is a method for any number of people to hold title to real estate. You can divide up the ownership percentages equally or have different percentages for each owner. For example, Person A owns 80%, Person B owns 10% and Person C owns 10%. Each tenant in common may sell or pass their share of the property through their will.

• How you own the property: Each owner has separate legal title to their own undivided interest. The owners’ shares in the property are assumed to be equal, unless a written agreement stipulates differing ownership percentages.
• How you sell the property: Each owner can sell their share of the property independently of the others.
• What happens upon death: The deceased’s ownership passes to their heirs via will or laws of succession. The other co-owners’ ownership interests do not change.

Joint Tenancy with Right of Survivorship

Joint Tenancy with Right of Survivorship is a method for any number of people to own real estate. In contrast to Tenancy in Common, joint tenants all have equal interests in the property and if one them dies, their interest in the property is automatically transferred to the other joint tenants, which is why it is called “right of survivorship.” This form of ownership is often used where people want to hold title together and want to automatically transfer their ownership to the other owners upon death, thus avoiding the probate process.

• How you own the property: All owners have equal interests and equal rights of possession.
• How you sell the property: All joint tenants must agree to sell the property to keep the joint tenancy in tact. If one person sells their portion independently of the others, their joint tenancy is broken and the new owner becomes a tenant in common with the other owners and their right of survivorship no longer exists.
• What happens upon death: If one owner dies, that owner’s interest will automatically pass to the surviving owner(s). The deceased owner’s interest no longer exists and cannot by inherited by their heirs.

Seek Legal Advice

All of this legalese can be confusing, but if you are are wanting to own property jointly with other people, proper legal advice is a must. By sitting down with an attorney, they can help you draft the appropriate legal documents that address the situations when one owner would like to sell, or when one owner dies.

Like I said, this article was written from the perspective of Washington State, which has community property laws. There are only ten states with community property laws, so your state may be similar, but many are not. Seek out the correct professional advice for whichever state you live in.

The Escalation Clause

Real estate offers are a closed bidding process, so most often you will know little to nothing about the price and terms being offered by the other parties. I have yet to meet a buyer who isn’t at least slightly uncomfortable with competing against another unknown bid, and allowing your offer to escalate gives you an opportunity to raise you bid, but only slightly past the other bidder.

The way an escalation clause works is that you specify an initial bid for the home, and then state that your bid will escalate above a competing offer up to certain limit. As an example, you may offer $450,000 for a home, with an escalation clause that beats a competing offer by $2,000 up to $475,000. If your competitor bids $460,000, your offer becomes $462,000. If your competitor bids $475,000, your escalation stops and both offer prices are equal.

Tips for an Effective Escalation Clause

An escalation clause can be a useful strategy to raise your offer price, while not overpaying compared to the next closest bidder. Here are some tips for effectively adding an escalation to your offer.

1. Determine your highest bid – Whenever you are competing with another bid, you have to decide what the maximum price you are willing to pay. Don’t get caught up in the competition and stick to your bid so that you don’t end up overpaying.
2. Make your escalation more compelling than your competitor – If you only beat the competing bid by $1,000, your offer will be evaluated based on other terms because the price difference is negligible. Let’s say that your bid is $450,000 with an escalation that beats a competing offer by $1,000 up to $475,000. If your competitor bids $460,000, your bid is only $461,000, even though it escalates higher than that. You should pick a larger dollar amount that makes your offer materially different than your competitor, at least $2,000-$3,000 higher than the competing bid in the example I just gave, sometimes higher.
3. Hold back your escalator – Remember, it is the job of the seller’s agent to play competitors off one another and obtain the highest possible bid for their seller. If you play your cards too early, the agent will encourage higher bids from your competitors. I like to hold the escalator until shortly before the offers are reviewed, giving a bare minimum amount of time for the seller to use it against me.
4. Ask to see the competing offer – In a normal real estate bidding process, competing offers are not shared with you. However, when you use an escalation clause, there is an obvious opportunity for sellers to game the system and claim that there is a competing offer that doesn’t actually exist. The escalation contract that we use requires the seller to show a copy of the competing offer before they can invoke the escalation clause.

Why Shouldn’t I Use an Escalation in My Offer

On the surface, it would seem that an escalator is a great way to compete on price without paying too much more than your competitors. However, it is not a guarantee to winning a bidding process.

1. Bank don’t accept escalators – If you are bidding on a bank-owned house, you can forget escalation in your offers. Banks won’t review offers that contain an escalation clause, so don’t bother with it. You will be asked for your “highest and best offer,” which means you need to pick a competitive price that you are comfortable with and stick to it. If you get the property, great. If you lose the competition, remember that there will always be another house coming on the market.
2. Sellers don’t always like escalations – I have lost more than one bid that contained an aggressive escalation clause. Sometimes the initial bid amount is too low, and sellers take that as an insult. Sometimes you appear to be a less serious buyer than a bidder who doesn’t need to escalate their offer to get to a competitive price.
3. Price escalation cannot make up for weaker terms – If the other terms of your offer are weak (low down payment, multiple contingencies, long closing time), the small premium in price that your escalation gives isn’t the most compelling offer. Money usually is the deciding factor on house offers, but when bids are close to one another, sellers often opt for the offer that looks like a sure thing.

Adding an escalation clause to your offer on a home can be an effective strategy to compete on price while minimizing the risk of paying too much, but think carefully about the situation before you use one. Sometimes putting your “highest and best” offer forward may be the right approach.

Read this previous post on the findwell blog which discusses whether you can buy a home that has a pending contract.