When I first got into the real estate business over 10 years ago, I never thought that I would have to deal with Short Sales or Foreclosures, but then greed, unregulated lending and very questionable lending practices that were deemed acceptable by banks and mortgage brokers became the norm and the result was the housing crisis that we are still experiencing today.
Not surprisingly, few banks and real estate agents had any expertise in dealing with Short Sales so the early days were a challenge to say the least. Eventually, with input from the California Association of Realtors, real estate attorneys and others, those of us who took the trouble to investigate and understand the practical, financial and legal implications of these transactions got to grips with the situation and as a result, many of us have been able to help people in distressed situations to deal with them in an informed manner.
Short Sales Are Still Being Mishandled
Despite appeals from the government, it will take a long time before Short Sales are being processed in a uniformly efficient basis by lenders. Some of them are getting better and one or two are handling them well but the majority still make it very difficult to get a Short Sale approved.
I have to say that many real estate agents are no better. Those of us who really understand the process (and there is plenty of good training available for those who will take it) are closing Short Sales very successfully. Unfortunately, there are many agents who, desperate for business, take a Short Sale listing without having the knowledge needed to bring a sale to fruition. And this is becoming increasingly common.
The Short Sale Process
Every bank now has a clearly defined set of rules that determines if a Short Sale will be considered and there is a set procedure that an agent must follow in order to maximize the chance of success.
Nothing can happen until the seller has accepted an offer, so the listing and offer review process is just like a regular sale. Once the seller has a accepted an offer (subject to lender approval) the listing agent should submit it to the lender with a "Hardship Package" that shows why the lender should approve a Short Sale.
Short Sales Take Time
Having submitted the offer and the package, the waiting begins. These lenders are very understaffed and it may be weeks before anybody looks at the request. If anything is missing it gets kicked out and the listing agent and seller are back to square one. If the package is complete and the hardship is deemed to be real, the lender orders a valuation to be carried out and when that comes back, they determine if the agreed offer is acceptable or the negotiations begin.
What Can Go Wrong?
Many times the buyer has lost interest by the time the lender approves the sale. Often, the lender approves it at a price the buyer won't pay and they can't agree a price. In either case, at least the agent knows what the lender will accept and the home can be re-marketed for sale at a meaningful price.
The inexperienced agent will often submit a number of offers to the lender on the assumption that they will choose the one they prefer. This approach is doomed to failure and is not acting in the seller's best interests. The lender will only consider one offer at a time.
Is It Worth The Effort?
Why not just accept Foreclosure if the situation is so bad? Well for some people, that may be a good solution, but for most, a Short Sale is far preferable.
Early on in the housing crisis, many thought that a Short Sale would have worse tax implications than Foreclosure. Now we know that this is not the case, and the Mortgage Debt Forgiveness Relief Act of 2007 was important in that respect. This only applied to Federal income taxes but was soon followed by most states, including California, passing similar legislation.
Some of the other considerations are the negative impact on your credit which can be substantially worse with a Foreclosure and the fact that a Short Sale can frequently be helpful in delaying Foreclosure.
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