I had a conversation today with a past client that wants me to help her find a home this Spring and by the end of the call it was clear to me that there is no topic more important for buyers and sellers in today’s market to thoroughly understand than what a “short pay” listing is compared to a foreclosure listing. First lets start with the basics.
A “short pay” or “short sale” listing is one in which the seller will get no money. They owe more than the home is worth. They want to sell but in order to do so they have to ask their lender-or lenders-to take less than what is owed. As such, they have little concern in most cases at what price the property ultimately sells, because they see no proceeds either way. Enter the Real Estate agent, anxious to make a sale. They suggest to the seller, ‘lets price this well below the others to guarantee you get an offer, which we will then submit to the lender(s), to see if they will approve you for a short sale”. Seems innocent enough, but this is how the problems start.
I call short sales “maybe” listings. I have also called them frustrating, time consuming, impossible to predict and a waste of time. Here is what you need to know:
1. The whole process can take anywhere from 2-9 months to get a final answer from the lender if you make an offer. There are often multiple decision makers involved that will determine;
a. Does the seller even QUALIFY for a short sale? Do they have hardship? True inability to pay? Any possibility to re-finance and keep them in the home? Etc.
b. Does the offer price reflect a fair price for the property? Lenders aren’t stupid. They may be willing to accept an offer that is close to market value but they aren’t going to accept something WAY under it-why would they?
c. Who are the real decision makers and what is their agenda? Back in the 1990’s most short sales were processes that took about 6-8 weeks. In almost all cases the agent dealt directly with a person skilled in evaluating what they call “loss mitigation”. In cases where there was a second trust deed (which was the majority), we dealt directly with a Private Mortgage Insurance Representative. They were motivated to get what
they could to minimize their loss. Because the majority of todays defaulted loans do not involve PMI (the defaulting seller usually got an 80/20 piggyback loan or some type of loan specifically designed to avoid PMI) we now try to communicate and negotiate with 2nd Trust Deed holders that represent pools of investors that bought the Security on Wall Street. Sound complicated? It is. We often don’t know who the real decision
makers are and how to negotiate with them, hence the huge increase in time frames for an answer.
And then the anser is “NO”. “No” we won’t approve the seller, “no” we won’t accept that price, “no” we can’t get the other investors to sign off. And it only took 3, 4, 5, 6 months of hard work to get to that. How many buyers are going to be excited about going through that??
2. Another problem with “Short Sales” is how poor many agents are at handling them, especially with respect to pricing. I mean it isn’t for me to say how they and their client should price it, but when it is obviously so low the bank will never approve the price, something is wrong. I can look at virtually any list of homes for sale in Santa Clarita and tell which ones are short sales solely by the prices. Now 10 years ago this wasn’t too big of a problem because the buyers didn’t even know about them. Today, with the Internet, all buyers see these homes and think they are “normal” listings that they can buy today. They aren’t and they can’t. Agents are not required to disclose to the public that a listing is a short sale-they only have to disclose it to other agents.
As such, agents have gotten creative calling these listings “pre-foreclosures” on realtor.com as an attempt to draw calls from buyers hungry for “deals”. I’m not going to say “short sales” don’t sell-they do. Sometimes they are good deals. But boy are they a headache for the 80% of the time they don’t go through, and in the
process of marketing them the public sure can get confused-and frustrated.
A foreclosure on the other hand is completely different. This is a home owned by a Bank or lending institution. They want to sell it, they have an established price based on an appraisal and can give a buyer an answer in a matter of days-not months. These are fantatstic opportunities for buyers in today’s market as they represent highly motivated sellers with prices that now are almost always are the lowest in tract. Whenever you see “bank owned”, “foreclosure” or “REO” that is a property to investigate. There are dangers-they are always sold “as-is” and often need repairs, but at least there isn’t the painful process of the “short sale” to go through in attempting to buy one. Many times foreclosures are properties that were short sales that didn’t get approved and went to trustee sale. For the patient buyer, sometimes they can then buy it as a foreclosure if the short sale process didn’t pan out.