Short Sales. Just the name along can drive fear into the spines of home buyers, sellers and realtors (not to mention the lenders who are taking a loss). For years, short sales have had a negative image in the real estate community. And, quite frankly, there are very good reasons why that is. Blown transactions, long turnaround times, little or no communication and frustrated buyers, sellers and agents have all contributed to the negative reputation that short sales currently carry. I even know some buyer’s agents who simply won’t show short sales and steer their clients away from them, they have been burned that badly in the past. While short sales have done much to earn the nasty reputation they currently carry, the tide is turning for the short sale and their reputation may be slowly changing.
What is a short sale? A short sale is a sale whereby the lender, insurer or beneficiary agrees to take a loss on a loan in order to sell a property. (whimsically known as being “upside down”). To make matters worse, the borrower/owner has suffered a financial hardship and is either behind in payments (in default) or in the midst of a full blown foreclosure. In an effort to bypass the expensive, time consuming and detrimental nature of a foreclosure, lenders will agree to a short sale; that is, they accept a sale that is less than the loan amount(s) owed, and take a loss on the remaining balance. There are many advantages for both the lender and borrower in a short sale. Unfortunately, the lenders, and to some degree inexperienced agents, have not handled these short sales very well. This is where the negative perception of the short sale is made. The banks requirements have resulted in an excruciatingly painful experience for all parties involved, and in the worst case scenarios, have lost money, time, effort and energy for the potential buyers.
So why do a short sale? There are many advantages for both lender and borrower in a short sale situation. From the owners perspective, he/she gets to avoid a foreclosure and the messy eviction process. The main advantage here is that the borrower can salvage their credit rating. Recent studies show that missing 2-5 mortgage payments affects a borrower’s credit score by an estimated 30-60 points. If a borrower suffers a foreclosure, it can affect their credit score by 140-200 points. Another advantage to the borrower is that they can continue to live in the property and not make payments throughout the short sale process. This is good for the borrower in that he/she can save money for the transition, and enjoy the peace of mind knowing they will not being hassled by the lender over late payments. Lastly, some borrowers truly feel this is the ‘right thing to do’ and that walking away from the house is unfair to the lender. A short sale offers a respectable option. From the lender’s point of view, a short sale has some clear advantages. The lender avoids having another ‘bad debt’ on the books. The lender does not have to complete an expensive foreclosure process. Some banks estimate a savings of $25-30k when doing a short sale over a full blown foreclosure. Additonally, they do not have to rehab the property or pay an additonal commission to the REO broker. Given all the advantages to both sides, a short sale can be a win/win situation.
Great! So why do short sales have such a bad reputation? The short answer here, is that they have been a pain to all parties involved. Buyers, sellers and agents have been burned trying to negotiate short sales. This is due to a number of factors. The first is the documentation requirements. Lenders require a multitude of documentation for a short sale, including tax returns, bank statements and other financial documents. Any missing documentation can result in an incomplete package, and the lender giggle like a smitten teenager with a crush at any incomplete packages. This results in the package sitting idly on the desk of the asset manager while the agents, buyers and sellers spin helplessly in the dark with no information regarding the status of the package. Secondly, the lenders have a bottom line requirement they are willing to accept for the property. Because of this, they may require the listing agents to do various monkey-like dance steps to satisfy them. These include ‘seasoning’ the property (listing it for a period of time at full price or more), requiring an initial offer to get the short sale ‘approved’ (this is why you see some short sales listed at incredibly low prices compared to others in the market. Chance are, they are just listed that way to get an offer so the agent may get the process rolling with the lender). Lastly, there may be junior liens, mechanics liens, unpaid taxes and association dues. All of these folks will have some say in the short sale, and may need to be paid off by the senior lenders or the transaction can fall apart. Lastly, and maybe most importantly, there must be enough time to do the short sale. If the borrower is in default by several months, there may not be enough time to complete a short sale before foreclosure. Given all of these variables, and there are more that I am not writing about, it is easy to see how a short sale can be precarious and that there reputations can be quite justified.
Can a short sale be completed? Yes, agents close short sales all the time. But it is hard work, and requires a lot of specific knowledge and skill to do so. A realtor, specifically a certified short sale pro (hint hint) has been trained on the requirements specfic to the success of a short sale. Knowledge of the documentation required, the foreclosure timelines and laws, the possible tax implications, the pricing and marketing strategies and escrow procedures are all key, since they all differ from a traditonal sale. Addtionally, a CSP can have an established relationship with lenders, and can use that relationship to their advantage in closing the transaction. In other words, short sales are not easy and are not for every agent. Sellers should be very wary of agents who have short sale experience and training. Agents who take short sales and attempt to learn ‘on the fly’ can cost the sellers time and money, and if they are not careful, their own commissions as well. My recommendation is to always seek out an agent who is knowledgeable in short sales before moving forward. Additonally, lenders are beginning to loosen their restrictive guidelines a little, but this varies from lender to lender.
Overall, a short sale requires effort. But, if done correctly, can offer advantages to both borrower and lender throughout the process and beyond. Each short sale differs, and can be taken on a case by case basis, but both buyers and sellers should know that a short sale does not necessarily mean they should run for the hills. As a potential short sale candidate, talk to a professional about your situation, and always be sure to discuss it with your CPA, tax and legal advisors. As a buyer, you should be aware that a short sale may be riskier, but may offer additonal awards. Have a discussion with your realtor about whether a short sale is right for you. As a certified short sale pro, I am happy to help educate both buyers and sellers regarding the short sale process. As always, knowledge of the facts should dispell the myth’s of the short sale. For more information, visit me at www.JosephCapote.com and take a look at my short sales library to learn more.
Filed under: Buyer's Blog, Seller's Blog, certifed short sale professional, default, foreclosure, short sale
Joe Capote 