SHORT SALE MISCONCEPTIONS COULD BE MISSED OPPORTUNITIES FOR AGENTS.
IS KISMET AT WORK IN THE MYSTERIOUS WORLD OF SHORT SALES??
SHORT SALES HERE, SHORT SALES THERE, SHORT SALES EVERYWHERE. The significant number of short Sale listings and sales these days have led to the misconception on the part of many agents licensed within the past 5 years or so that Short Sales.
Kathy Schowe writes today about a Gentleman who made $1,000,000 in the past years but now wants to sell his home as a Short Sale.
The ubiquity of Short Sales caused by the mortgage mess is unique to the real estate industry. However, SHORT SALES are not new and agents with some years in the business have likely been through a few of them in the past.
WHAT'S THE DIFFERENCE NOW???
- Value of the property - $300,000.
- Owner owes - $450,000.
- Estimated loss - $150,000.
That's a $150,000 loss that the owner's mortgagee(s) is expected to take. Further, the mortgagor, the owner who purchased the property, lived in it for some time fully expects to complete a Short Sale transaction and be left with no liability for the deficiency beyond a reduction in credit score. A reduction in loss of credit score that will be less than that they would experience with a foreclosure.
The difference in Short Sales now and in years that predated 2004 or so is that the mortgage company or investor is now expected to take the loss.
SHORT SALES OCCUR ANY TIME A PROPERTY TRANSFERS AND THE SALES PRICE IS LESS THAN THE OWNER/SELLER OWES ON THE PROPERTY. Over the years, as a Buyer's Agent, I have represented a number of home buyers who purchased homes whereby the seller owed more than that for which they could sell their home. In order to complete the sale, the OWNER/SELLER came to the settlement table with money to pay the mortgage company the difference in what the home was selling for and that which they owned. I've had closings whereby the sellers came to the settlement table with $10,000, $25,000 and one time over $70,000. It was still a Short Sale.
Short Sales whereby the banks take the loss are a very recent phenomenon.
The thought of a mortgage company taking a loss on the sale of a property was unlikely and foreclosure was the naxt logical step if the owner/seller didn't have the resources to cover the loss.
SO, WHY ARE THINGS DIFFERENT NOW??? LENN'S EPIPHANY!
- On the average, short sales sell for more than the same property after a foreclosure.
- Short Sales result in better public relations for the bank than a foreclosure.
- Short Sales avoid the lengthily FORBEARANCE offered to owners with government backed loans.
HUD (and VA) FORBEARANCE. Compare the relative short typical Short Sale transaction of 3-10 months with that of an FHA loan and the HUD forbearance of 1 to 2 years. With a short sale, the owner often continues to make mortgage payments, albeit perhaps not as timely as before, but the band is offsetting their loss. With a HUD forbearance, the home owner may not make a payment for 1-2 years before accepting a modification of their loan or the property going to foreclosure.
BANKS THAT FORCE FORECLOSURE OF EVERY PROPERTY IN DEFAULT contribute to the serious decline IN market value of communities. Market adjustments are often good for an inflated market, but severe declines eventually cost the banks, the home owners and the taxing income of local municipalities.
OPPORTUNITIES FOR LISTING AGENTS. Before you dismiss that owner as a Short Sale because the bank doesn't accept their HARDEHIP, it is sometimes possible that a seller will pay the difference themselves. It will surely benefit an owner with the resources to pay the deficiency themselves rather than have a credit report showing a deed in lieu of or foreclosure or even a short sale with the deficiency taken by the bank. A good credit report is, after all, money in the bank.
KISMET. One thing we've learned about financial institutions that take severe losses in the market place is that profits are enjoyed by the financial houses and their investors. Losses are suffered by the tax payers.
Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.
Very true, short sales aren't new, lenders taking the hit on a regular basis is. It must be nice though to have tax payer subsidized profits. I guess technically we sales people helping buyer take advantage of the tax credits for buying have some benefit of that, but it's not quite the same!
Amazing banks do not always see this. I have a short sale now where the bank wants more...only a few thousand but that is 5K more than the condos in same complex have sold for!
Lenn, I have been involved in many short sales over the years, and it's true that in the past the seller came to closing with money to make up the deficit. These days seller's are asking to put language in the contract that the sale in subject to the lenders acceptance of terms in a short sale. I recently had a seller cancel his short sale due to the disruption of his credit (that would have affected his business)...so sometimes the seller still uses the "condition to not close" or try to "force the bank to eat the loss"...it's a ploy either way.
Lenn... this is an excellent post and I will say one of your best ones in a long time.. some very good detailed info and insight. I don't want to get started on anything else about who takes loses, why, why not... but just to say that this was very well written with a very good message within and this needs to be flagged for a featured post. nice job..
Losses are suffered by the tax payers.
This is the elephant in the room that nobody wants to talk about.
We have had three or four close this past year with Sellers bringing money to the table. Used to be the norm in the 80s and 90s.
Thanks for the post Lenn. I learn something every day.
Lenn,
What's going on? Nowadays corporate profits are privatized and losses socialized. Something is wrong with this picture.
Esco. HA! Just shows who the government represents and protects. Is sure ain't you and me.
Jane. Don't we all?
Frank and Sharon. I recall the short sales following the S&L debacle. Sellers always came with money or they didn't sell.
Jeff. HA! You know how relatively (to the content published) features I get. In fact, I just posted a listing of real estate related posts for January that didn't get featured. Some folks only real featured posts. Not everyone subscribes. Shucks, I'm not shy.
Steve. I suspect that there are more than a few sellers out there that could cover their losses but don't. Don't get me wrong. I believe that the American home owner has gotten short shrift from the government in the housing bust.
Gary. That is rare. A short sale, by it's nature should sell below market.
Jason. The tax credit is peanuts compared to the bank bailouts.
"Short Sales" are going to be the name of the game for a decade or more. hardships are not really required. What is being required more and more often are seller contributions of either cash, promissory notes or both.
You do bring up a good point that we should always ask if the seller has the funds to make up the difference. Just because they are underwater on the mortgage doesn't necessarily mean the lender has to take the lost. Some sellers will just bring the difference. I know because I did it on three of my own properties in 2008.
Lenn: As you know, I am not one to shy away from short sales. I was shocked to have 6 offers on a Bank of America short sale that was just put on the market.
Hi Lenn! EXCELLENT post and one that I'm taking to heart! It is sometimes difficult to balance the time for those buyers in your car, regular listings and short sales. I had a conversation with a certain Tutas Town owner about that very thing today. One suggestion is to have someone specifically to just make those follow-up bank calls for you; that could take a good amount of 'hold time' off our plates.
As you noted, chances are you're going to have to deal with one or a dozen of these short sales, sooner or later--may as well become very familiar with the process NOW!
Very thorough post. Nice work. Thanks for sharing.
Hi Lenn,
Great topic! One point that is missing here is that the difference now is, except for the "strategic defaulters", like your example of someone who makes a million bucks in a year then wants a short sale, is that as far as banks are concerned short sales are supposed to be for people with hardships, who cannot bring money to the table. That is why they take so long to approve by the banks. Our economy has been pummled with a perfect storm of job losses, stock losses, overextended debt, and then bloated upside down mortgages. If you've lost your job, you can't pay your bills, and then have to relocate to get a new job (if you are lucky enough to get one), you probably have to sell your house. If you have no money in the bank and a ton of debt and even your 401K is low - what are you to do? You can't rent it out if you are low on cash and your rent won't cover your now heavy mortgage payment now that the "teaser period" is over.
Hardships are and should continue to be part of this "bank approval short sale" process, that is unless the seller has money. And then, yes it's a short sale, but doesn't require third party approval.
Short sales are now apart of my business plan. Wonder how many folks feel this way?
I do lots of short sales. The one thing that doesn't change is the banks' inefficiency in processing them. One thing I that is easier is that they have become a part of the vernacular and even consumers understand them now, whereas 3 years ago most agents didn't get them.
J. Philip. True. Many telephone inquiries show an understanding, albeit limited, of the short sale transaction on the part of buyers.
Tony. Short sales are, for me and agents in my network, simply inventory.
#13. "HARDSHIP", in my experience is a fungible requirement, depending on the type and bottom line to the bank.
Cameron. Thanks. I try.
Debe. Thanks. I believe that a short sale is just inventory. Agents who limit showings to "non-short sales" could just as easily avoid Ramblers or properties on busy streets. It all depends on location and price.
Chris Ann. Don't be surprised. If the location and price is attractive, the buyers are there.
Bryant. I'm often surprised at how little some listing agents understand about the owners of the homes they have listed.
Fabulous description of a short sale and well thought out. I do short sales and the more knowledge we have the better we are at serving our clients.
Lenn:
Short sales are a significant part of the current housing market and we all have to learn to be able to handle them. You have made some excellent points here about the short sale process.
Well, after I saw three people reblog this, I had to take a look. You are an excellent writer. This is exceptionally well done. I believe it should be required reading for anyone about to embark on the short sale ship.
Clason. Thanks. We learn on each sale we close, or do not close.
Claudette. They are here to stay, that's for sure.
Don. Thanks for taking a look. We can't have too much knowledge about this complicated transaction.
Michigan is a deficiency state. That means that up to 6 years they can persue you for the deficiency between the sale price and the amount owed. I didn't see it at first but am more and more.
They can't 1099 you and do a deficiency here so if the sellers have good income or had to relocate they are keeping that option open.
We have started adding in our Purchase Agreements, the short sale terms must be acceptable to the seller.
Lenn,
The cost to the taxpayer is something that needs more press, so thanks for your post.
You're right on the money: "Serious declines...eventually cost the banks, the home owners and the taxing income of local municipalities."
Mike in Tucson
Lenn, I really don't understand why many people don't think it will or even SHOULD affect their credit. The owners signed a promissory note agreeing to pay the bank a certain amount of money. Should that money not be paid back for whatever reason, that is not just the bank's problem, it is the person who agreed to pay that money back's problem as well, whether it be paid back over time or a hit on their credit.
Great great great post, Lenn. Thank you!
I see so many banks foreclosing without giving the seller a chance to do a short sale. If they would insist the seller try a short sale before foreclosing, the taxpayers wouldn't lose as much money.
See, this is why Active Rain is so powerful. Even people as smart as Lenn keep learning! LOL. For me, I learned today that Oklahoma is NOT a deficiency state. I checked after reading Missy's comment. In essence, home owners can walk away and not be pursued for the outstanding balance by the bank or mortgage company. Interesting!
Thank you for this post. Short Sales is a subject I have especially been studing lately. I'm signed up to get a desigagation on short sales and foreclosures in a couple of weeks. I hope to be competent in this subject soon.
Great post with timely information. I to remember when a seller was "short" they brought the short to the table. Now there seems to be lack of responsibility and many people feel someone else should take up the slack
Great post Lynn! I've taken on my first short sale and need advice from experts like you in this area!
Lynn, I agree with the other member comments. It is a great post and thank you for taking the time to research and write. I am concerned that there is also a general consumer lack of understanding "out there". Such as a recent seller contact through AR wanting a short sale and telling me it would not affect his credit...
Lenn- I recently went to a listing appointment prepared to talk about a short sale for the seller. I was so pleasantly surprised when the owner said he was going to bring the difference amount to closing.
Lenn, I have steered clear of short sales but I'm starting to think I might need to learn more about these bad boys.
To correct Bob above, I have over 20 short sales in progress right now, and I can tell you that Oklahoma is a deficiency state. Not only can the mortgage company sue for deficiency on a foreclosure, they can send a 1099 to the IRS for the loss. For those who want to do a strategic default because of loss of equity, think hard about it. How would you like a $150,000 tax liability with the IRS, and a deficiency judgement. Short sales are for the true hardships. In Oklahoma I have rescued laid off workers, people with cancer, and after divorce spouses trying to maintain a house with the loss of the other person's help which I admit makes me mad. I did my first one about 15 years ago, but lately it is more than a trend. I work hard for these people to help them start rebuilding their future. I can't imagine being in Nevada or Florida. I would be overwhelmed.
I've just posted a blog here on this same topic, but from the viewpoint of the potential legal pitfalls that Realtors face when they get involved in this whole loss mitigation area of real estate. I had been avoiding it because of the business practices ofmany of the listing agents and the banks involved. Now I have a whole new set of concerns about the legal liabilities involved and whether the real estate business is even set up to handle the issues and ptifalls that are there. See my post on "Coming soon to Court TV near you." It's one thing for very expereinced agents to become involved in these services and quite another for the majority of inexperienced, part-timers who make up the bulk of the profession.
If you think that short sales will do anything for public relations for the banks, I would have to disagree. They have stained their reputations with black ink. Short sales are only for the benefit of the banks as they don't have to take possession of the property which would cost them more...and the public knows it. They've disgraced the institutions of savings in this country.
No money down, no income check, credit score of 580. They gave loans to these individuals. Shame on them!
Frank. I believe that if the banking industry had established guidelines for short sales 3 years ago and serviced qualifying home owners, they'd have a far better image than the stonewalling they've done.
Norm. I agree with you 100% and will take a look at your post.
Lenn, we had an interesting reply from a bank Thursday. A elderly lady is terminally ill and cannot make her payments. She won't walk away from the home and go live with relatives because it is not the right thing to do. So she called my partner about doing a short sale because she felt that was better for the bank than a foreclosure.
We got a buyer and went through the normal short sale paperwork. We have someone in house that handles the short sale packages for our clients. That person got an e-mail Thursday from the negotiator saying they approved everything. Great.
Surprise: He said because the lady was doing the best she could for the bank to not lose money they were going to pay her 1% of the value of the sale at closing. The lady was ecstatic.
You're preaching to the choir. But, I could not have said it better myself!
Lenn,
What a great post. I've been conducting short sales here in San Francisco and apparently am one of the first in our company to successfully list, receive offers, communicate with the lender, deal with the paperwork, negotiate with the short sale department, keeping the buyer's agent and their client in contract and thereby CLOSING THE ESCROW.
I've now represented many more than I ever thought both on sell and buy side transactions. Each short sale listing has a backend story. These sales are not part of my business plan, but rather an act of compassion in dealing with people whose lives have been turned upside down. Every sale takes months of hardwork, herculean efforts and real leadership. They are not for the faint of heart. Thank you for sharing. }:-)
Ted T. Refreshing. Hopefully it will close in time for the buyer to get their home.
Melissa. Thanks. We do have some good experience in ActiveRain, don't we.
Michael. Not for the faint of heart indeed. Agents who eschew short sales simply leave them for us.
Missy. Good greif. It would appear that bankruptcy may be the only solution for some owners, but that's not as easy as it once was either. The consumer just can't get a break in this mess.
Mike. Indeed. The fall out from the mortgage mess just keeps widening.
Marney. Right you are. The home owners is going to pay one way or another.
Kay. True. However, some properties just aren't viable short sales.
Bob. Amazing what we learn every day. I'm always learning.
Amy. Experience will be your best teacher. There are often unexpected nuances to getting through a transaction. Good for you for getting training.
Scott. Right, but the banks are making it more difficult for owners with assets.
Tracy. ActiveRain posts will help, but relying on your broker is probably safer.
Suzi. He's probably just plain wrong. He probably read that some where and it sounded good.
Kristi. I'll bet the buyer and their agent will be surprised too. I believe I would verify his funds.
David. As they gain more market share in some areas, it's a matter of cash flow.
Joe P. There are many with serious hardships and more with "case by case" hardships. The matter of deficiency varies from state to state. I recommend that each state be researched indificually. .
I listed a short sale last year that has subsequently gone to foreclosure in the past month. We had 6 offers submitted. The BPO was at the listed price. Bank refused to take an offer.
Reason. House was purchased in 2006 for $375,000. Current value is $330,000. In 2007 owners did a substancial cash out re-fi for $435,000. Investor refused to accept anything less than $420,000.
I wonder what it will be listed at now after being ravaged by weather and abandoned for the past year?
Ellie. Sad isn't it? And another consumer has been taken out of the economy for about 5 years while they try to reestablish their credit. Forget their dignity. They'll never completely get that back.
Excellent! So many great quotes you left us here. And the comments you elicited are equally some of the best I have seen. Very good stuff!
Unfortunately in this economic climate many (and I mean almost all) sellers don't have the means to come to the table with cash in hand to make up the difference. And it most of the short sales we've experienced the seller's are $100,000 or more upside. Very few people have that amount of cash available, if they did they probably wouldn't be going through the short sale process. That being said, we've realized that short sales are going to BE the market here for the next 3-5 years. If an agent shies away from them they're not going to be doing much business. Hopefully the process will become a bit more expedient as time wears on. Thanks for the poignant post Lenn (as always) and best of luck to you.
Unfortunately in this economic climate many (and I mean almost all) sellers don't have the means to come to the table with cash in hand to make up the difference. And in most of the short sales we've experienced the seller's are $100,000 or more upside down. Very few people have that amount of cash available, if they did they probably wouldn't be going through the short sale process. That being said, we've realized that short sales are going to BE the market here for the next 3-5 years. If an agent shies away from them they're not going to be doing much business. Hopefully the process will become a bit more expedient as time wears on. Thanks for the poignant post Lenn (as always) and best of luck to you.
Unfortunately in this economic climate many (and I mean almost all) sellers don't have the means to come to the table with cash in hand to make up the difference. And in most of the short sales we've experienced the seller's are $100,000 or more upside down. Very few people have that amount of cash available, if they did they probably wouldn't be going through the short sale process. That being said, we've realized that short sales are going to BE the market here for the next 3-5 years. If an agent shies away from them they're not going to be doing much business. Hopefully the process will become a bit more expedient as time wears on. Thanks for the poignant post Lenn (as always) and best of luck to you.
Banks are so short-sighted when they won't take bona fida short-sale offer. What are they thinking? That they will make more money if they foreclose? Well, let's think about that for a minute. If they foreclose, do they get a bigger tax break because they write off the whole loan amount, then the property becomes REO, and they get to sell it. Hmmm. Let's do some arithmetic.
Foreclose Scenario: Seller owes $500,000. Bank forecloses and takes $500,000 loss plus legal fees, etc (but let's keep the math simple for a minute). Then six months to a year later the bank sells the foreclosure property for $250,000. The swing is $750,000!!! Sounds like a windfall (pronounced "ka-ching") to me.
Short-sale Scenario: Sellers owes $500,000. Short-sale offer is $400,000. The bank accepts tge short-sale offer and loses $100,000 but is paid $400,000 at the time of settlement. The swing is only $100,000. Doesn't sound like a windfall to me.
I wonder if this isn't the banks' accountants' dirty little secret that they haven't told us about and could explain why they're rather take a seller to foreclosure than accept a short-sale.
Let's face it, banks made plenty of money when they made the loan, collected interest along the way, and will make plenty of money again in the future. They helped create this problem with crazy "no doc" loans and other loans requiring little if any qualification by the buyer. Now the banks need to help solve this problem. I whole heartedly believe that foreclosures hurt the community and the marketplace as much if not more than they punish the distressed sellers while short-sales minimize the impact.
Ken. Thanks. I value your opinion.
Jerry. Indeed. Over the years, folks who have come to the table with money, it came from their retirement accounts. Folks retirement accounts have diminished over the past few years.
It's almost impossible for families to save these days. Which is why it infuriates me to see HUD making it so hard and harder for folks to buy a home.
Stephen. Right on your accounts. However, it misses the point that banks make money when they foreclose.
Great post Lenn, too bad there is not a one size fits all short sale, would make things easier here in Phoenix. Arizona is an Anti-Deficiency state, something many are taking advantage of. It will be interesting to see if there are any repercussions from all these short sales 5 years from now.
Big business wins again. Banks won when prices were over-inflated and they were lending recklessly. They win when they assess deficiency judgements. They win when they file for foreclosure, get the writeoff then re-market the property and profit from multiple offers. They win again when we get stuck with the bill for it all. And this is just what we know about.
Lenn - This is an excellent post. I would love this to be a "public commentary". Let me know if you would give me permission to print this out and distribute this to my office/agents. I am bookmarking this and going to read over this again and again. I really like the comment by Debe (#11) as this may be the only way I could add more and more S/S to my workload. I prefer the happy buyers in my car and regular/re-sale listings...but the times they are a changing....
Stephen. That's good for upside down home owners, many of which will go to foreclosure.
Lisa. Right, right, right, right and right.
Christine. You're welcome to print and distribute. Just don't copy and paste to the Internet, but I'm sure you know that.
Lenn, great blog. I reblogged. Thanks
Damon. Thanks goes to you.
Lenn, this is a great post. Maybe if we keep hammering this point home the banks will finally get it!
Kim. Doubt it. The banks with the defaulting loans are doing just fine.
Short sales are a huge portion of our market here in Orange County, CA, and we've had to learn how to deal with them.
I've had short sales where the bank took the loss without promissory notes or payments to the banks, others where the seller made up the deficiencey entirely and others where the sellers brought some, but not all money owed to closing.
California's a non-recourse state for purchase money, and that can make a big difference.
Lenn, I NEVER thought of short sale terminology years ago when sellers brought the deficient dollars to closing- they were just out of luck, and requesting that the bank pay it was unthinkable. Exactly as you've stated, it was NEVER (in my limited experience with unlucky, often relocating families) the sums required today. Interesting times right now, but after much hemming and hawing, we've taken the plunge- too many sellers in need of the "opportunity"- but absent the willingness to spend the huge number of hours required to make it happen, and knowing that partial engagement WON'T cut it, the decision was a tough one that wasn't taken lightly.
*except, must add: there is a large part of me that would have enormous difficulty, were a potential seller to wonder if their $100k in a retirement fund should go to a check at closing....suggesting that it makes any kind of sense. What a mess we're in.
Yes it is the taxpayers that ultimately PAY for the short sales.
Wow, I never knew the disticntion, Lenn. But it does make sense.
My mentor has a listing like this, where the seller owes more than what the house will sell for, but is bringing cash to the closing to make up the difference. Curious, though, my mentor didn't qualify it as a "short sale". Hmmm...
Christine. Indeed. Recourse or non-recourse makes a big difference. Most home owners nor agents do not know the difference. Which is why we advise sellers to work with attorney consultation.
Laurie. It is confusing. One mistake that I'll never make is putting the interest of the sanctimonious nay-sayers ahead of the wwelfare of families who have been victims of negative equity.
Erica. I believe that the tax payers usually pay for governmental perfidy. That said, I'm not willing to sacrifice individual home owners to the bottom line of banks.
William. Of course, it's a short sale. The only difference is that the owner is paying the deficiency rather than the bank absorbing it and writing it off.
From the desk of David Dee,
Lenn, it's amazing sometimes the actions banks take. Some would rather foreclose than to approve a shortsale. One of the agents I know experienced this last year.
David. Banks weigh the tax benefits between short sales and foreclosure and foreclosure will win almost every time.
Lenn - I have had short sales where the seller has paid the shortage at closing rather than the bank. My listings. Yes, not every seller qualifies for financial hardship. Recently I have started to see that everybody assumes it's the bank that should take the loss, even when the seller has money in the bank. How is that fair? In the long run it effects other consumers and will it lead to more bail-outs to come?
Carol. BINGO. Sellers who have cash to close do not have the same hardship as one who does not.