Most Short Sales are what I call "FAKE listings." Only 1 in 20 sells. In Arlington only 3 have sold out of 65 attempts.
I briefly went over Short Sales when I defined all SOL Homes including REOs, Bank Owned Etc. But Short Sales need more attention, as they are very tricky and misleading.
A Short Sale is a listing for sale that requires "Third Party Approval." That means that 1, or 2!!, banks are owed MORE than the list price. For example:
Home is bought for $500,000 with 5%, or $25k down.
Home has a $475,000 mortgage.
Value dropped below $475,000
If the seller is facing foreclosure, they slash their price for a quick sale
The Theory Behind Short Sales: Banks would be better off to accept a loss now, versus going through the legal expense of a foreclosure, just to end up selling it for less later. Win win, right? Wrong. Read on. Bank Trick 1: "Sure, we will consider a Short Sale, IF YOU KEEP PAYING US." Yep, a bank sees a desperate seller, and a potential $50,000 loss. They then mislead them into thinking that they might consider taking a bath on the deal IF the owner keeps paying their mortgage. The bank then ignores offers for 2-4 months in order to squeeze out another $2,000 x 4 or $8,000 profit. Brilliant. The bank then takes it over after foreclosure and sells it for $10,000 OVER the Short Sale List price. $18,000 better off, NOT doing a Short Sale. (Let's not forget the banks are losing their shirts too.) Bank Trick 2: Sometimes the bank has mortgage insurance and it is CHEAPER for them to let it foreclose versus allowing a Short Sale, which is NOT insured. For example, I was at an NVAR short sale class and a Realtor asked the speaker, "Why after 60 days, calling 2 times a day (120 calls) with a full price Short Sale offer, did the bank not call us back?" The speaker claimed it was due to an overworked staff.
I asked:
Did they tell you they would consider a Short Sale IF you kept paying $3,000 a month? The answer was Yes.
Was the home bought with Mortgage insurance? The answer was Yes.
Bingo! Why eat $50,000, by accepting the low offer, if the bank a) gets $3,000 a month and b) is insured against a foreclosure and NOT a Short Sale.
She was pissed. She realized that she had been "had." But this goes on ALL THE TIME. It can take MONTHS to hear back.
Another example:
A seller in Clarendon 1021 tries to sell his property and profit $30,000 at $600k. (Yeah right!)
Then he drops it to $570,000. No bites, but the foreclosure is pending!
They SLASH it to $530,000(sidenote, I get flooded with calls from friend that want to pick it up for a steal at $470,000! I said that it was impossible... since I'd buy if that price was a possibility.)
It sits for another month, then the listing disappears after 100 days!
A month later it is "bank owned" and listed for $560,000
It sells for $540,000 in 26 days.
The moral here is banks are not dumb and the market isn't so horrible that they will take all these lowball offers. They sold it for $10,000 OVER the previous list price (which probably had lower offers).
Short Sale Statistics:
Reston homes from $300k to $400k. - 20 Active "Short Sales" in Reston (watch out for "Not a Short Sale" listings) - 73 were Withdrawn, or Expired. - 3 Under Contract (1 under contract since Nov 2007! Many UC do not close.)
Only 3 sold in the last 24 months. 3 closed sales in 100 attempts!
Dropped From $480k to $400k, sold at $400k (Full list)
Dropped from $430k to $400k sold for $380k (5% under list)
Dropped from $380k to $350k sold for $345k (2% under list)
Arlington Short sales. - 25 Actives - 37 Withdrawn Only 3 have sold in ALL price ranges in all of Arlington in the last 2 years.
Listed at $335k, sold for $335
Listed at 700k dropped to $620, sold for $600k
Listed at 480k dropped to $420k sold for $420.
In Alexandria, only 8 have closed in 2 years out of 80 attempts. (most were at list, or 2% under list, some were $20k over list) I show this, so you don't think "Wow, they are desperate, we can now lowball. These 3 were the ONLY successful ones. Probably because they gave the bank a real offer.
Ok, so enough already with the War N Peace, what should I do?
Advice for Regular Sellers
Do NOT blindly compete with a Short Sale. If you get an inexperienced agent, and they see 3 Short Sales in your neighborhood, and they have you compete against these "fake" listings, you can lose $25,000. Hope you "saved a ton" on that agent. (see Realtor Rebates)
Advice for Sellers Facing Foreclosure
Watch out for the bank tricks to "keep paying." Talk to a lawyer that specializes in bankruptcy to help guide you. They MIGHT recommend stopping payments immediately and saving it up for a rental.
Use an agent that has completed (as in CLOSED, not listed) at least 1 Short Sale.
If you have mortgage insurance, be extra careful, the bank might prefer that you foreclose.
Get bank approval for your list price before listing it. Put in the listing remarks "List Price approved." Otherwise you will get lumped into all the other Fake Listings and ignored by smart buyer agents.
Advice for Buyers looking for a "steal" (see "deals" post)
Avoid Short Sales, or expect to wait 2-3 months and expect to put in 5-10 offers on Short Sales before one is accepted. A Short Sale in my building now has 4 offers. He says he is expecting a reply any day now... sorry, but yeah right!
Look for Approved Short Sales. Ask if the bank has been contacted and if a price has been approved. Multiply time estimates by 4. Ie. 3 days= 12 days.
Consider offering near, full or OVER list. What! Over list! Are you nuts! CNN says this is a BUYER's Market! I know it sounds crazy, but if you and your agent see the price is well under your other options... I've said time and time again, I'd rather you pay $10,000 OVER list on a house that is $50,000 under the competition versus "saving" $50,000 on a home that is overpriced by $100,000. Ignore list price, focus on VALUE.
If you get one to close, change the remarks to SHORT SALE, NOT TO BE USED AS A COMP in hopes that the appraiser will take that into consideration and not trash the neighborhood (buyer agents, demand it of the listing agent to try to help your client's "deal" not turn into destroying his own investment).
Side note: A home should NOT go under contract until the BANK signs it, but many agents will make this mistake. The seller signing it means nothing, and it should stay on the market as Active.
Updated Correction 2-29-08I'd like to thank DAAR CEO Jeanette Newton for this correction. I'm excited that she is participating in blogging!
My above sidenote about when to go Under Contract is 100% wrong. So let me explain... IF a seller signs the offer, as written, it is to be listed by default on the MLS as Under Contract with No Kick Out. The problem for the seller is that most MLS websites will remove the listing, so the chance of a better offer (and a higher chance for the bank to accept) is slim to none.
Here are a sellers' options (please comment if you know of more options) :
1) A seller can counter the contract and add in a "Kick Out" so further offers can be reviewed. The listing then can be set to Under Contract with Kick Out (this was suggested by Loudoun Realtor Tony Arko). But only a buyer agent looking on the back end MLS can find UC/KO. (A Kick Out means "there is still a major contingency here, feel free to submit another offer, it still can be considered and the first contract might be kicked out.")
2) Another way to keep it active (like the unit in my building with 4 offers) is for the seller to send the "offers" unsigned to the bank. Why not try and keep your home as "Active" for as long as possible? Some banks will require the seller to sign, so try #3.
3) Or lastly, the seller might add "acceptance of the contract is contingent on lender approval." or "contingent upon review and approval of the lender." That one line can keep it "Active." I am not a lawyer, so please verify any additions you make to a contract with a lawyer.
As a buyer agent I would prefer it to be "Under Contract" if I was the listing agent, I would want it to be Active. So it depends whose side I am on, it is part of the negotiations. You can even counter with "Increase your price $2,000 and we will place it UC/KO."
Conclusion: Short sales suck.
-Written by Frank Borges LL0SA- Broker FranklyRealty.com (please report typos)
Very interesting. My experience with short sales has been that a lot of agents don't know how to deal with them. They don't understand the process and don't allow adequate time for the bank to examine the offer. The other thing is the banks take so long in processing the offers that the seller has no hope in selling the property before it forecloses.
Lot of great info Frank. 1 in 20 is pitiful. My market is saturated with short sales right now. I guess I need to do little research to see how they are faring.
Interesting stats - and I think you might even be light on the 1 in 20. I think the banks are overwhelmed, and have no idea how to manage the situation. I think they have a problem - they need more people, but how do you justify to your stockholders the hiring of more people for an enterprise that you know is going to lose money?
YAY! Someone said it! We have the same dismal statistics (last time I pulled it was something like 1/17). Even if you have a contract on one you have a 1 in 8 chance of it selling. I am dabbling in short sales as listings and can't stand it. Going back to referring it out to those that deal with them in volume!
Frank, in my broker's class that I just finished, an agent that specializes in foreclosure properties stated that the statistics are that only about 7% of short sales ever reach the settlement table in Virginia. Not a promising statistic for working with short sales.
It isn't the banks that overwhelmed. If it is a REO property, the reply is days (maybe a week), but the short sales take 1-4 months. I've outlined above why that is. It isn't staffing.
Renee,
You are crazy! Best of luck. Maybe you can get some preapproved Short Listings.
All,
So now the questions is... do you still SHOW a Short Sale? With a 1 in 20 chance of closing... do you spend your time as a buyer agent on these pipe dreams?
Just a clarification on your side note, Bank never signs the contract. They just agree to a short payoff in a statement that specifies the conditions of short sale that seller signs. I just closed one last thursday & next one is closing on wednesday next week we just got the statement today. Our office has closed at least 8-10 properties in last 6-8 months that were short sales.The key is to price the property with in 5-10% below the most recent comps. If you get an offer whcih is below that chances are bank will go ahead with the foreclosure.
I had done short sales in early 90's too. The key is if you have PMI then you are better off working with the insurance company than with the lender because they are the ones losing money bank will be covered for upto 25% of the loss any way ( It all depends on the numbers). The agent should also be prepared to ask the right questions and get all the details before accepting the listing. Listing agent should also order the title work ahead of time so that unexpected liens don't show up right before the settlement (HOA dues,Tax liens etc.)
It is a tedious work but it pays off. Short sales could be better buys than foreclosures if you do home work ahead of time. In this market I will take any property which has a chance of sellimg than over priced listings.
Wow, lots of info here, Frank. BUt I have to agree with a lot of what you say based on my experience. I feel badly for the sellers who ultimately never are able to get their home short sold and end in with a worse credit record due to foreclosure.
The thing is, we have been saying the banks are overwhelmed for a VERY long time, so when are they going to either hire more staff, or get their act together to deal with these issues - it won't get any easier if they move slowly as the list will just get longer. It's very hard to understand why a bank will only review 1 offer at a time when they have multiple offers on 1 property. Look at all the offers, pick the best one and move on.
We increasingly encourage our home buyers looking for value to look at bank-owned rather than short sale. The banks may have delays, but nothing like the delays that you see when you need lender approval of a short sale.
Frank, I have learned a lot by reading your blog, especially the info on short sales. You are the first person who has explained why the banks drag their feet on these sales. Really appreciate the great info and the fun way you present it. Thanks!
Hi Frank, thanks for a great post about Short Sales! The stats here in S. FL are very similar when it comes to the number that actually sell. I totally agree with your conclusion and I explain the facts to Buyers all the time. Unfortunately, too many persist in thinking that these are really deals when often they would be better off not pursuing these types of listings.
Frank...love this post....it's what I have been telling my clients all along....wrote on a short sale, 6 weeks later..still not answer, the bank was messing around...they are a joke...
Frank, I've done 2 short sales--one representing the seller and one the buyer. They really aren't that difficult, just long-drawn out processes. I'm in Georgia, but I really don't think location is what is important. It's asking the right questions with Loss Mitigation. And Sanjeev is right, the bank signs nothing. You just get this little approval letter outlining what amount must be wired when and to whom for the sale to be approved.
They both took about 65 days.
But, your question was about showing them. Show them only to investors. Only they have the stomach for the waiting game.
You know, I was just feeling fed up with the flood of short sales in the market and wondering if any one else had an opinion. I found this post refreshing and informative! Bookmarking!
I going through a short sale now. I'm a buyer. OLP of the house 200k when it was reduced to 170k I put a contract on this property for 165k. This was ***Nov 7th 2007***. And as of today still no word from the bank. oh yah..when they wanted to void out the home warranty and reduce the agents commission..they got in touch with us. I've had 3 closing dates 12/28/07, 1/15/08 and 2/25/08. Now i found out the offer will be sent to the BPO ???? The only problem i have with this experience is the lack of communication and in my case lack of knowlegde on what i was getting into. I think if the banks take a more professional attitude and have a definate proccess and an occasional update maybe the transaction will go smoother. If the offer is to low they should inform you within 2 weeks not 2 months. I cant amagine having money (an offer)on my desk for 3 to 4 months and complain that i'm not making any money. The kids and i are being strong and paitient and i hope the sale goes...4 months and counting. Lionel B.
ey Frank...there is no future in short sales...there is money to be made in dealing with the homes early in the process. But if the home is too far upside down..then the only way to deal in this market is wait till the bank takes it..At least then you know you can make a deal...I was working with investors, all cash, and the closing rate was not happening..we find better deals on distressed up to date properties, short sales are a waste of time..Our statistics that I can find show that less than 80% of the short sales are closing prior to auction...and most of these have to extend the auction date while the lenders drag it out..
I have stated this before....why waste a good ready to go buyer, or investor on a short sale..With the amount of inventory out there, go make a good offer on something that will close now.
Good post..looks like a lot of work,, good for you
A buddy of mine that deals with REOs was saying that some REOs are competing with these Fake Listings, so maybe you can use a Short Sale to try and get a better deal on an REO or regularly listed home.
That was a VERY good post! Quite a few of the SS we list never close. Our success rate is only 42%. But the time put into them is worth it to get it done for the Sellers we are succesful for!
The problem what I have seen with most short sales is that the agent never gets bank approval before advertising it as a short sale! It has to be done before they start advertising it!
PS If it is under contract, it is under contract...and needs to be placed in the MLS as such. To do it any other way is deceptive and unethical! That is real estate 101 in any state. The reason I am a Realtor is that I believe there is a difference in the way I behave and that is why I strive to play the game correctly!
Most of the banks never approve a short sale prior to having a contract. They start working on it only after you have a contract and they look only one contract at a time. Some banks are very cooperative and will work with you from the begining, We have closed quite a few as long,as the buyer agent understands the process & explains it to buyer the time frame and everyone is kept in the loop. The main criteria is the list price & offer should not be a a ridiculous low, that some newby investors are looking with out working the numbers.
Godd info, you are right there are few that will ever make it to closing but the more presuure and statistics that come out the more pressure the investor markets will put on improving these nmbers.
But 1 small FYI, Short Sales in excess of 10% of value are more costly to a lender than foreclosure. It also effects their write off. Short Sale is a LOss, a foreclosure is a devaluation of earnings that is written off as a pre-tax loss and does not effect Earnings Per Share...
Can you explain what you mean by excess of 10% of value?
Maybe with some examples? And also reexplain how Short Sales vs foreclosures are written off, and in your opinion how much better does a short sale have to be over a foreclosure for the bank to take that route?
Also when it forecloses, it usually becomes a REO, so are you accounting for that in your tax comment?
Love to see it in my comments, or you can blog about it and add a link in the comments.
I think this stuff is fascinating. Only when you truly understand the other side, can you help negotiate to a settlement.
Frank, this is great insight, thank you for sharing. I don't know if "fake" is appropriate, but it's still good to know how many Banks are handling the short sales. I'm closing on 2 this month and didn't run into the problems you mentioned. We didn't low-ball either.. we went in at asking price on the short sale. We didn't play any games and we got to settlement in about 60 days. thanks again
Informative and entertaining post.. our numbers are certainly different concerning short sales as banks have become more responsive to the Las Vegas market for those of us with the systems in place. I love the "Frank" advice you gave concerning dealing with the banks.
Currently, we have now entered the game of playing with the banks auction games in bidding up prices from overzealous buyers on bank owned properties.
My key advice when it comes to dealing with the games is focus on market values and not list prices.
This was a great post. Short sales are just hurting all of us. The listing agent has to reduce the price even lower to get agents to write an offer. Most agents are staying clear of short sales. Having said that, we did just close our first short sale listing this week. The only reason the other agents wrote on it was because they knew us and knew we would have a short sale negotiator involved.
I agree with you. .but sometimes, a short sale is the is the only option some people have to avoid foreclosure. . .and when it your neck on the line. . . you just simply hope
I never said that a seller shouldn't try a short sale. Sure, why not, can;t hurt them. But if they do that route, don't pick a clueless agent, or they will have no chance of closing.
I am the short sale negotiator that works with Matt Yogerst that closes 42% of his short sales. Your post was very informative and entertaining but I have to disagree with a few points.
You can get short sale status prior to getting an offer. When you list a property get all the necessary documentation and submit the listing contract and the authorization along with a request for short sale status. If you really want to move it along have an investor put in a low cash offer so that the entire short sale package can be submitted and the appraisal ordered. The appraisal is the crucial piece for a short sale. The lender negotiates off of the appraisal not the amount owed. Each type of loan has guidelines that the loss mitigation negotiators use. Fanny Mae typically will accept 92% net of the appraisal , Freddie Mac also is a 92% net. FHA is 82% of the appraisal net, VA is 88% net and conventional ranges from 70% on the low end to 82% on the high.
Other bloggers have corrected you an your perception of the signed offer from the sellers lender.
I also disagree with you on the amount of time it takes to do a short sale. The last one Matt and I closed took 30 days from writing the offer to closing. One of the most common causes of slow short sales is an incomplete short sale package. Every lender and servicer requires a slightly different short sale package. When you request short sale status I also suggest you request a list of what documentation that lender requires for a short sale. When a short sale is submitted it doesn't go directly to the loss mitigation negotiator, it is first processed to determine if the package is complete. If it isn't they don't call you, you either find out through multiple calls to the lender or they simply 86 the package and you can start over. That is why I suggest using a short sale negotiator. Between their expertise on what each lender needs and their contacts with loss mitigation negotiators they can be an invaluable asset to Realtors. Just make sure that they are competent. Ask for references, other people they have worked with.
I do agree with you wholeheartedly that the seller shouldn't pick a clueless agent or they won't have a chance of closing. I also agree that you should pull title or get a letter report so you aren't blind sided by liens against the property. That is another area a short sale negotiator is an asset, they negotiate settlements where possible on liens and judgments.
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This is an informative and impressive dissertation. Thank you... frankly, I appreciate your time and generosity.