Part 5: The Long and Short of a Short Sale: Failures and Successes
This is Part 5 of a Series on Short Sales reprinted with permission from TheRealEstateWhisperer. In this post, we discuss examples of failures and successes I've witnessed or been part of in the short sale arena.
Disclosure/Disclaimer: In this post I often talk of the listing agent or buyers agent and their practices, as if the agents were the sole deciding factor in taking these actions. In reality, the agents should be acting only as agents, at the direction of their clients. However, in short sales, because most consumers have never dealt with such an unusual type of transaction, it is my experience that consumers on both sides of the transaction rely very heavily on their agents to guide their decisions. This happens with short sale situations far more than your typical transaction. But, at any time, a principal (buyer or seller) who understands what they are doing (or doesn't) can direct their agent differently, should they choose to do so. In this post, I am assuming the agents are driving the transactions, but that is not always the case.
Failures or set backs (usually due to poor communication or bad timing, or both):
* I often see sellers that wait too late to list their property, and find themselves in a situation where their home is foreclosed prior to the opportunity to get a short sale approved. I've seen this very often. I once saw a situation where the short sale closed and the next morning the title company called the seller's agent to tell her that when they went to the courthouse to record the new deed, they learned the seller's bank had foreclosed the day before. I don't know how it played itself out, but at least at that moment, the new owners were moving into a home they didn't even know they didn't own. Sellers: don't make your agents race against the clock - be proactive. (Please, see this post: Help! My Home Was Foreclosed. I Have Five Days..."
* I often see listing agents that fail to communicate to the buyer side what the status of things is. I am dealing with an agent like that right now. He won't return my emails or calls. It's hard to keep the buyers emotionally vested in this transaction. If they don't stay emotionally tied, it is common that buyers will walk away from the contract at their earliest opportunity. Sellers can avoid this by choosing a proactive listing agent with strong communication skills. Buyers, if they really want the house, are stuck with whatever agent the sellers chose; and are generally powerless if things aren't working well. This is why I encourage you to build in contingencies as a buyer so you can walk at any time, and I encourage my buyers to keep home shopping until we have approval.
* Although declining in popularity, listing agents used to refuse to ratify a contract. They would take multiple offers and just submit them to the seller's bank, often with the defense that "that's what the bank wants". I often wondered, did these same agents recognize that the bank was not their client, and without ratifying a contract, again, the buyers would not be vested in the transaction, emotionally or financially, so it was almost certainly doomed to failure.
* Similarly, there is a school of thought that agents should ratify and send multiple (RATIFIED) contracts to the bank, with the defense that the bank would only accept one of them. Although I am totally against this, it is being preached by Lem Marshall, counsel for the Virginia Association of REALTORS. Now that Lem is preaching this, in addition to other aspects, I will build into my (buy side) contracts that the sellers will NOT do that and will only submit one contract to the bank - mine....unless of course, I am trying to get my contract to the bank when there's another (presumably lower) contract that's already been sent to the seller's bank for approval.
* I'm aware of buyer agents (and listing agents) who ratify a contract but then do not deposit escrow funds as per the contract. In Virginia, to have a contract, you must have consideration (usually a cash deposit). Consideration can also be a note payable, which is what I use if I am a buyers agent, and if the listing agent/seller will permit it. As a listing agent, I insist the escrow funds be desposited, and force the buyers to be tied to the contract and financially vested.
* Some agents tell clients that in a short sale situation buyers can walk away from the contract at any time during the process. This is not standard in any of our regional association forms, so read carefully. What the contract says is the agreement, no matter what your agent tells you. I've had buyers walk away from contracts on my listings and lose their deposits of thousands of dollars. And, yes, the deposits go to my clients, the sellers... not the brokerages and not the seller's bank.
Successes:
* Once the bank approves (or even counters) the terms of a short sale, it's easy to find a replacement buyer and get the sale "re-approved" in short order. Sometimes, the sale doesn't even need to be re-approved. Instead of waiting months, the buyer may only have weeks to get to closing. A cash buyer or a buyer with a great lender who can close quickly puts themselves in a position to jump on these opportunities when they arise... and they can be big wins for the buyers.
* At present, we're in an appreciating market... even so, when a seller/listing agent is looking to replace a prior buyer, the listing agent is not usually looking to get a higher price from the new buyer, but instead wants the strongest terms and most flexibility. Remember, the listing agent represents the seller. If the seller's bank has agreed to accept $200K (for example) and forgive $100K in remaining debt, then the seller gets no additional benefit by selling the home for $250K. Instead, the seller needs a $200K non contingent contract and wants with a high deposit to guarrantee performance. In these cases, the seller and the buyer can win big. A recent buyer of mine closed on a property (as a replacement buyer on a short sale) for nearly $90K less than the highest offer the seller received on the property.
* If, as a buyer, you put yourself in a situation to be patient and wait for a bank approval, and you are also ready to jump when the right thing comes along and you can close quickly, then you can luck your way into a great deal - your dream home for a steal. The trick here is being able to be patient and ever ready... and then actually being patient and ever ready Anxiety will not serve you well during the waiting game. I strongly encourage that you not get into this if you NEED to move by a deadline (i.e. relocation). You must be willing to risk changing interest rates and loan availability, and maintain your solvency and credit while waiting. And, I encourage you to keep an eye on the market - the sale may not get approval. Will you buy another home or stay where you are? Have "plan B" solidly in place before deciding to wait on a short sale approval.
* As a seller, just about anytime a short sale gets approved, and closes, it's a huge win for the seller. Often, the short sale approval accompanies debt forgiveness, and thanks to the debt forgiveness act, most people won't even owe taxes on that debt forgiveness (which by the way, is usually treated as income for tax purposes, in case you didn't know that). It is much easier to recover from a short sale than a foreclosure, most anyone who's been through it will assure you that's true.
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As you can see, there are many potential pitfalls, and many potential benefits, in the short sale arena. Choosing the RIGHT agent to represent you has NEVER been more critical than it is now.
It probably goes without saying, but, if you are thinking of buying or selling in Northern Virginia, I hope you'll call ME first to see if I can assist you.
Also, no matter where you are in the country, feel free to contact me. While I can not give real estate advice outside of Virginia, I can connect you with a proven professional in your area. I belong to many networks, including REO and short sale expert networks, and we have members throughout the country.
I can be reached at:
http://www.vickychrisner.com/
703-669-3142
VChrisner@KW.com
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