A "short sale" is a real estate term for when a seller accepts an offer on their property for less than they owe on the mortgage. The bank must then agree to accept that amount to release their claim on the title in order for the property to be transfered to the buyer.
What could be wrong with this? The seller gets out from an "underwater" property, the buyer gets a house for less than the seller owed, and the agent gets a commission.
Let's consider it from each viewpoint, and dig a little deeper:
As a buyer - It's often better to wait and let the bank foreclose - then the bank is a motivated seller, rather than a third party who's only interest is to extract as much as they can from the seller. Mortgage departments do not like to lose money, and they will play hardball to get every dime they can from the seller, while you wait, at the mercy of what the bank decides. On the other hand, once the bank owns the property, the real estate department of that bank wants to get rid of property as quickly as possible, and will make significant price reductions on a continuing basis until the property sells.
As a seller - with an "underwater" property, you have a bad hand no matter how you play it. To qualify for a short sale, the bank will only be interested if you are behind on your mortgage (why would they take less than they are owed otherwise?), and once you are behind on your mortgage, your credit will be nearly as bad as from a foreclosure. To make matters worse, the bank will require full disclosure of whatever assets you have, and if they decide to sue you for a deficiency later, you have no way to protect what assets you have left. If they do in fact forgive the debt, then you risk having a gain reported to the IRS on the amount they forgave.
Sellers and homeowners - if you are significantly under water, find an attorney, and go from there. Don't wait, whether you are selling or not. If you own any other property, a visit with a good attorney may be the only way to save what assets you have left.
As an agent - you stand a good chance of losing a perfectly good buyer if the bank decides to play hard ball. They will be stuck in a waiting game, and you will suffer if they end up frustrated, waiting for a property that may or may not be approved for a short sale by the bank. What are the chances that buyer will continue with you if the sale falls through and they've wasted months of effort?
If you are listing a property where the mortgage exceeds your recommended price... counting on a bank to approve a short sale in the future puts you at risk of wasting marketing resources, and puts your seller at risk for the aforementioned reasons. If your seller is unable to convey clear title at the current market price... they should be talking to an attorney, not you.
When I first started in real estate, 15 years ago after the last boom and bust, some of my first listings were bank owned properties. They were not in good shape, and it took buyers that could literally hold their noses... but they sold at significant discounts to the already depressed market. I still think about that double lot on Va. Dare Trail with a huge house that sold for $110,000 back in '95...
I'm sure there are many agents out there who will disagree with me considering the short sale hype and training programs I've heard about... so please, share your thoughts in case I'm missing something.
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Every Realtor I've heard from hates short sales. Unfortunately that's where buyers think they are going to get a great deal, so we are dealing with them whether we want to or not. One agent submitted an offer on a short sale listing and had not heard from the bank FOUR MONTHS later. I think the training is being offered so both listing and selling agents know what they are getting into if they do find themselves dealin with a short sale.
ReplyDeleteI could not agree with you more. Unfortunately, sellers somehow think they are saving their credit, and buyers feel their offer will surely be accepted by the bank with no wait. I advise my clients looking at short sales & foreclosures with their agent to stick with foreclosures only. It is a cut and dry closing, allowing the client to lock in on interest rates with no fear of of 6 month closing.
ReplyDeleteThanks guys for helping explain why there is all this short sale hype. If there's anyone who's had a GOOD experience with a short sale, please share! Keep the bad ones coming too...
ReplyDeleteOK, the other side! Of the 1,235 sales in the OBX MLS to date, 85 or 7% have been marked as a short sale. That also equals $35,419,900 in sales which is 8.5% of the total sales of $414,389,655 year to date. This should have generated about $1,800,000 in commission dollars. And.......not all of the properties were marked correctly as a Short Sale or they became one during the negotations. So....although I haven't had a successful short sale yet..., call me a sucker!
ReplyDeleteOh yeah, I forgot to inlude that of the 240 Under Contracts right now, 22 are Short Sales, $8,500,000 in list price total.
ReplyDeleteOf course a lot of them will never close but with the Option ARM's still aging out, these numbers unfortunately will be going up.
David-
ReplyDeleteInteresting point.
It makes sense - after all, the attorney I talked to noted "the only ones who benefit are the agents" when referring to short sales - or, more specifically, short sales that close.
I guess I just have a hard time thinking about putting all the work into a transaction, only to have the bank end up with final say over what happens. Will they go after commissions? Will they reserve the right to sue the seller in the future? Will they report the forgiven debt to the IRS?
Do you think agents have a duty to inform buyers and sellers of potential short sale pitfalls? Or are they beyond the scope of an agent's responsibilities?
I understand the push by RE/MAX to get ahead of the game when it comes to short sales, but I also fear what consequences we may be missing.
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ReplyDeleteI think obx Realtors, including Realtors with certification in short sales and foreclosures, should educate their seller. However, first and foremost, brokers should have sellers talk to an attorney that specializes in short sales and foreclosures. Call me or ask your real estate agent for a referral.
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ReplyDeleteOne more thing.... this is pretty good if it truly passes! With a short sale you could actually get a loan within 2 years, however the case is a little different with foreclosures. David Perrot shared this with me.... check it out
ReplyDeletehttp://www.youtube.com/watch?v=fkuXvFBYXVU