The whirlwind of events over the last few years have created changes in the housing market. Industry insiders, like real estate agents, mortgage brokers, appraisers, etc., use a language to describe what is going on that may appear "user friendly" but in reality confuses the public at large.
In recent group presentations that I have given, it has become apparent that there is an air of mystery regarding the housing market. The media picks up on trends, reports conditions and offers affirmations of their position with short sound bites from hand picked experts. They "educate" the public in thirty second stories. The newsprint crowd attempts to go a little deeper, but again, the stories represent a snapshot and the one's that see the light of day had to pass muster with an editor seeking to please advertisers that are far more interested in the number of papers sold than the amount of truth coming hot off the press.
Sometimes it seems that those of us on the inside, enjoy some sort of perverse pleasure in understanding what is going on, while the rest of the public is in the dark. It may be the result of the ongoing evolution we are experiencing while moving from "keeper of all the knowledge" (i.e. the in-house multiple listing book) to a more transparent transactional management system.
I firmly believe that the public has a right to know. Everyone of our future clients can be found out there in everyday life. A well informed public is in a position to make a better decision about whom they choose to represent them. This particular article is about short sales. I won't begin to explain why they are handled differently in one market than another. I won't begin to explain why inconsistencies abound.
A "short sale" occurs when the owner of a piece of property or home sells the property for less money than is owed to the lender or lenders. The sale can only occur with the agreement of the lender or lenders as to how the "shortfall" in funds will be handled.
There are a few options.
- The property owner or home owner can make up the difference with their own funds.
- The property owner or home owner can sign a new note with the lender/lenders for the difference in funds.
- The lender/lenders can agree to accept less than the money owed and forgive the debt of the difference in funds.
- A third party may step in and agree to pay the difference.
Now, it is widely reported that if a property owner or home owner can not pay their mortgage(s), they should contact their lender(s) and attempt to work out a solution. There are agencies both governmental and private that stand ready to assist those in need. In a perfect world, short sales would be avoided. Of course, in a perfect world "American Idol" would not be the number one show on television.
It is only fair to point out that property and homes that are put on the market for less than is owed appear to be bringing down market values. The subsequent sale of these properties and homes seem to bring down the average price in every market across the country. If you remove the amount of money owed from the equation, you will realize that any market is impacted by supply and demand. If there is a surge in inventory, it does not matter how much is owed, prices will begin to fall.
The press and those that feed the press are enamoured with numbers and statistics. Numbers and statistics are like the bible. You can twist them to suit your needs. I think it is fair to say that if the number of buyers in the market remains constant and the amount of inventory goes up, demand has not changed..no, the amount of available choices has increased. Any slowdown in sales will be the result of consumers expanding their selection process and sampling a larger volumn before making a decision.
The large increase in "short sales" has created a lengthier buying process. To understand why that has occured will require yet another peek behind the curtain.
A property owner or home owner that is faced with an inability to continue paying their mortgage(s) has to make a decision. How they choose to deal with their problem will impact how the home will change ownership. The owner can :
- Stop paying and continue living in the home until the sheriff arrives to evict them after a foreclosure proceeding.
- Contact the lender(s) and attempt to work out a new loan or alternate payment plan.
- Contact the lender(s) and provide the necessary information to begin a "short sale".
- Contact a government sponsered or private agency that assists those in difficulty.
- Contact the primary lender and execute a "voluntary foreclosure".
Choices 1, 2, 4 and 5 are always on the table. If choice number 3 is chosen, the property owner or home owner has to follow the steps of their lender(s). There are no hard and fast rules. There is only the fact that the incredible increase in short sale request has most lenders short staffed, overworked and unable to move quickly.
In general, the property owner or home owner will have to provide the lender(s) with copies of bank statements, proof of income, a complete financial sheet and a letter defining their circumstances. Once the lender(s) have this information, they will review it and make their own objective decision regarding whether or not they will entertain an offer for less than is owed.
There are no guarantees. There are no timelines. There is only the facts and each lender is free to deal with each individual as they choose. If they refuse to agree to an offer, the sale can not proceed unless the owner has come up with another way to cover the short fall.
An offer on "short sale" properties or homes may take as long as three months to be approved. In the period that the offer is being evaluated, the bank is ready, willing and able to review more offers. It is the lender(s) that determine which offer is approved. If you think this opens the door to powerful insider knowledge regarding property, you are correct. If you think that buyers will soon realize that working with the listing agent will give them a very unfair advantage, you are correct. If you see through the smoke and mirrors and realize that "short sales" are really mini-auctions where there are no rules, you are correct.
If you now understand, there is no mystery in the term "short sale", well, then I have accomplished my mission.
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John, An astute and thorough tutorial on the bemoaned short sale. Readily understandable for a larger audience. One stimulus for debate: Is the short sale not a legitimate listing? Doesn't the short sale truly add to the inventory, for what really characterizes a house for sale?
I read more and more how the real estate industry would like to filter out short sales to arrive at the 'actual' inventory. Um, huh? Although short sales are different and require more time, they represent an indication (or conflicted interests) to sell.
Are they the 'normal' listing? No. But a sign out front, a signed listing agreement, an "open" channel to a conscious seller to submit a qualified offer. Sounds like an asset for sale to me.