Short sales ”” where the homeowner owes more on their loan than the home can be sold for ”” are popping up a lot. In the MLS, in conversation, and even in the Wall Street Journal.
Yesterday, the WSJ posted a good article titled, Why Lenders Are Leery Of Short Sales. The subtitle is fitting: This Foreclosure Alternative Helps Strapped Homeowners, But It’s Not Easy to Pull Off.
There is a fairly common misconception out there that buying a home in a short sale situation is a way to purchase a home for pennies on the dollar.
That simply isn’t true in the vast majority of situations.
Lenders are not real keen on forgiving debt. Mortgage investors want to make money, not lose it. This tends to make lenders and investors hesitant to approve short sales. No, they don’t want to foreclose on a home and carry the cost of that, but they also don’t want to lose money by selling short.
In the Phoenix real estate market, there are currently 5,468 properties tagged in the MLS as “Lender / Corporate Approval Required”. That is how all short sales should be flagged (as well as corporate/relocation owned homes), but that number has to be taken with a grain of salt as often agents don’t enter data correctly. (In other words, there are probably more than 5,468 current short sale listings in the Phoenix metro area).
Short sales are difficult transactions. They require extensive negotiations with the lender, and it can take months to get lender approval ”” if it comes at all. As such, the ”˜buyer pool” for short sales is small. Let’s face it, most folks buying a home can’t or won’t wait for weeks on end to get an answer. There are plenty of individually owned homes to chose from.
But if you are interested in purchasing a short sale, it can be done. Be sure to chose an agent that has worked short sales. One job of the agent is to convince the bank that an offer made on a short sale is a reasonable offer and will save the lender money over foreclosing on the home. Such negotiations are not for the faint of heart or inexperienced.
Just don’t expect the lender to accept an offer at 50 cents on the dollar. Different lenders have different criteria as to what they will accept, the costs they will pay, and the proof they require that the seller is in a position that demands a short sale. Some lenders will send short sale paperwork before a home is listed, some require a home to be listed for a period of time before a short sale will be considered, and some won’t even discuss a short sale until you have an offer in hand.
These various lender requirements make both listing and buying a short sale home tedious, at best.
Recently I’ve had a couple of discussions with people that are of the mind set that they don’t want to pay for a home that is declining in value. They are perfectly capable of making the payments, they just don’t want to make them. Well, that’s just not going to fly. It may sound harsh, but the lender doesn’t really care what you want or don’t want to do. You committed to making payments when you signed your mortgage, and they expect you to keep that commitment. Before any lender will accept a short sale, they will require financial statements and likely a “hardship letter” so they can determine if you can no longer make payments. The fact that you don’t like your payment is of no concern to them.
I’m not writing this to discourage people from selling short or buying short sale properties. It’s important though, to know what you are getting in to if you chose to sell or purchase short sale real estate.
Update: Jamie Geiger over at the Real Estate Cactus posted on short sales today, referencing the same WSJ article. Nice local stats included!
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The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
I'm in the middle of buying a short sale property right now. I put the contract on it Jan. 3. Only within the last few weeks has the lender begun to get the ball rolling. The BPO (Broker Price Opinion was done) just two weeks ago.
It's a bit crazy, but as long as you have the patience it is well worth it for the right price.
Jay, your right on the money with this "short sale" malarkey. I have had so many inquires about this subject it is like the television infomericals of the 90's telling people how to buy a house with nothing down. Only this is worse because every news station is carrying segments of the housing deals and providing "advice" to othewise normal people. It is Crazy!
I am beginning to think people are stupid. But, then again – I'm sure by the questions they ask me, they think I'm stupid. Wait! Wasn't that the slogan Clinton used back then? It's the economy, Stupid.
Next, I'll be getting calls asking me if I know about HUD homes. Like it was all invented yesterday. "Give me a Break!"
Jay, I don't deal with short sales but I'll be happy to help clients buy a foreclosure where an answer from the lender can be expected. I also will not represent someone who only wants to make absurd lowball offers.
As to those who don't want to continue to make payments on a home that is declining in value, I don't want to be too harsh either but…
the lender did not increase the monthly payment when properties were rapidly appreciating in value. The real issue is personal responsibility.
I hope there isn't a government bailout because it will just encourage more reckless behavior in the future and a general feeling that bad decisions will be subsidized by the taxpayers.
This is an awesome post for me to find today. We've just started looking for our first house. The market here in the Fredericksburg, VA area is full of foreclosures and short sales. Our Realtor explained that short sales are difficult, but now I understand a bit more. Thanks!
The funny thing is that another Realtor I know thinks short sales are a great way to buy a house. To each his own, I guess.
I am in "pre" escrow with a short sale listing- The buyer presented a very good offer- and I have a direct number and email to the gal that is processing the file- my client did his homework and had all the paperwork required by the lender and a plus for him -there is only one loan involved. The offer was submitted on April 7, and sent to the negotiater on the 14th. We are hoping to have an answer by the end of the month. Luckly the buyer is patient and well qualified. The lender is WAMU. I will keep you posted on the outcome.
Having had something to do with mortgage lending, I would like to ask the clients that you came across. Had the prices shot through the roof, as they are known to have done a number of times, what should the lender do?
The short sale process can be long and tedious. There are companies that are experts and will do all the negotiating for you. The cost is between $1,500 to $2,500+. Whether or not the listing agent wants to pay that fee, the fact remains that lenders want to talk to people who are knowledgeable about the process and have little desire to train "newbies". I have an entire series of posts on short sales if anyone is interested:
http://www.foreclosureexpert.info/about_short_sal…
If any agent can't do the short sale dance and requires an "expert" to negotiate a bank deal then, in my humble opinion, they should turn in their license. Of course, if they are dumb enough to pay someone more than $2500 then shame on me for not exploited that niche market. More power to you, Ron.
newbie Greg
There is much more to the short sale process then most people realize and much has to do with the investors who one the note. For example Countrywide could have two loans that are in default with two separate investors (A & B). Investor A may be willing to discount and investor B may have a no discount policy.
What this means is Countrywide can play ball and negotiate on investor A but not on Investor B. Additional factors which can be very complex is if the note was part of a securities sale. To keep it short the security could have guaranteed returns to the investor and discounting could ruin those returns.
That said short sales are a great opportunity when one realized it is purely a numbers game and even the same lender or loan servicer could be easy to work with on one loan and a pain in the butt on another.
Gerald Romine
http://www.geraldromine.com
Great article Jay. Unfortunately the people that need to read it the most will likely never see it.
Sad.
As a lender and Denver real estate broker, short sales are "genuinely" the biggest pain in the ass – and usually the "worst" buy for most buyers! Good article – i wish we had regulations to regulate the home short sale mess!!!
I myself have written now a few articles on the reality of short sales having represented both buyers and sellers in the last few months…it is not the easy process and slamdunk cheaper route that so many believe it is.
Great post. We have seen the number of short sales in our area increasing and it amazes me how easy people think it will be to walk away from their home.
This really is a great article, Jay. Hope you don't mind that I linked to it in a post that will publish in a couple of days. Just couldn't think of saying it better than you did!
Short sales and foreclosures are going to be the DEATH of real estate values – and consumer buying confidence in Phoenix – and in nearly every market. But the bigger question remains…how in the world are we going to sell-off 6-12 months of excess home inventory when buyers can't get loans and investors can't EITHER!!! Vote for the Presidential candidate who'll fix the mortgage mess – PLEASE!!!
Jeff Boyce
Realtor
http://www.Home-Deals.net
Concerning Jeff Boyce's Comment:
You've got the wrong approach there my friend. Short sales and foreclosure are not the death of real estate markets they are a result of the current real estate market.
The fact is if buyers must have 100% financing to get a loan then MAYBE they shouldn't be buying! Here's a revolutionary idea… how about if people started spending less than they make and saving money so they would have a down payment, rainy day stash, etc.
I get that bank financing is hard to come by for most buyers but where one door closes another opens. I have properties I'd like to sell but it is better to hold them now and be in the buying mode looking for deals.
And one does not need bank financing to buy properties. Alternatives include cash, subject to, private money, hard money, and owner terms.
As an agent a LONG time ago I remember simultaneous note purchases and this is still a possibility for owners and agents if they get creative. Have you ever carried a real estate commission in the form of a note?
Wake up, this is nothing new and some of us have been there before and could tell you some real war stories about 23% interest and banks offering financing like it was "you name your terms."
Best thing for the market is if the government stays out of it and it is left to correct itself. And PLEASE, what could the President do to fix this mortgage mess? Throw more taxpayer money at it?
Gerald Romine
http://www.geraldromine.com
"Vote for the Presidential candidate who’ll fix the mortgage mess – PLEASE!!!"
Do you seriously by into the idea that the president has anything to do with the mortgage mess or can fix it if they want to? It can't be done, not even with Billions of tax payer dollars will this go away.
"Amen" to the last couple of comments. It really drives me nuts when people suggest that Mr. Market doesn't have the responsibility of correcting himself. Alcoholics usually don't take recovery seriously until they've "hit bottom." Every time we try to rescue and enable him, it just prolongs the misery, makes a bigger mess of things and delays him getting into that nice half-way house. How 'bout an "intervention" instead?
Also, I couldn't agree more with Gerald . . . who needs banks, anyway? There are always ways to put deals together if sellers are willing to be flexible. I got a call today from someone who is selling and carrying paper on a total of 48 residential properties he owns free and clear, and then he plans to sell the note(s)… a simultaneous closing, and stick to commercial development instead.
A simul is a little trickier to pull off these days, but it can be done if the deal is put together well, and the seller understands that he will be taking a fair-sized discount no matter what.
The note holder may need to be willing to collect 3 months of payments before selling, though, or consider a partial to reduce the discount and get more potential investors on the hook.
Yeah, that last link is from me. I did it again. Thanks, Jay
BPOs are important its a good idea to a detailed list of every repair and cost for agents if you want a lower value. Every little bit helps.