Why do short sales fail?

Real Estate Agent with Alain Pinel BRE 01367196

Last year, I showed a large house which was offered as a short sale at the time. This property was in contract at least twice, but just came back on the market as a foreclosure. My clients were surprised and wanted to know what happened?

What happened, indeed? Why did the short sale end up as a foreclosure?

In California, 3 out of 5 short sales close escrow, or 60% of total. It could be a number and/or a combination of several things.

Property owner couldn't prove or didn't qualify for a real hardship. For short sale purposes, hardship could be one or a combination of several difficulties that include:

  • Loss of or reduction in income
  • Death or illness
  • Divorce or separation
  • Job relocation or transfer
  • Military service
  • Increased expenses
  • Drop in market value (this plays a part most especially if someone were relocating for a job)

More than one loan, more than one lender, and there's no cooperation.

Short sales are challenging enough as it is. When dealing with more than one lender, and having junior liens refuse to accept a payout offered by the primariy lien holder, then the file isn't moving anywhere.

Offer is much lower than the bank's investors are willing to approve.

Setting artificially low prices in order to get buyers attracted to stick it out during a short sale, is a popular tactic. The premise is when the lender comes back with an approval letter for a higher price, the buyer would be asked to raise his offer. This doesn't always work and may actually cause the buyer to walk away.

Seller rents out the place, the tenant is uncooperative and won't allow viewings of the property.

Sometimes, it's better to keep the property vacant than to rent it out because a tenant can kill all possible chances to sell the property. The tenant isn't motivated to move, and may hold out for "cash for keys" instead.

Seller won't respond to requests for documents in a timely and complete manner.

Short sales involve a ton of paperwork. And the seller is well advised to comply. The seller is asking for the bank to forgive his loan, and he is hardly in a position to dictate to the bank how he will comply with requests.

Property is in a distressed area and is competing with many distressed properties

These include bank-owned properties where offers won't take as long to process as one for a short sale. Buyers are more inclined to go for properties with the shortest time period to close with the least amount of hassle.

Short sale had buyers who backed out because the process took so long.

This is quite common. The normal process is, when a buyer backs out, it starts all over again with the next buyer.

Last week, Bank of America announced that if this happens, the next buyer may be able to pick up where the other one left off. I'll believe this when it actually happen

Inexperience and lack of skill and knowledge on the part of the agent.

Sad but true. The process is time-consuiming and energy-zapping. A knowledgeable and experienced agent makes all the difference in guiding the client through the process.

For anyone interested in buying. selling or representing buyers and sellers in a short sale, the most important qualities to have are: patience, perseverance, and know-how.

"Fasten your seat belts...it's going to be a bumpy night!"



Comments (68)

Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Sandy --- I have a BOA short sale going through AMS due to HAFA. At one point, I could hardly  contain my rage and frustration at the set up specialist at AMS. Who trains those people to think? They were so quick on the draw in terms of declining. When called to explain, they resort to closing the file and reopening it again. I had to go to BOA Twitter for help.

Pamela -- more short sales are sure to hit us. Gotta prepare for the next tsunami.

Las Vegas --- when sellers don't respond in a timely and complete manner, or don't seem to care, watch out. They're probably thinking bankrjuptcy, foreclosure, or cash for keys.

Margaret --- for smaller banks, there's hope to deal direclty with the negotiators. But once they went to Equator -- we became just numbers.

Kim -- good luck with your short sale.

Jul 20, 2011 10:39 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Annie -- gotta use the RIGHT 3rd party negotiators. I used one who had a very good success ratio. But they they gave up and told me they can't do any more on one account. I dug in my heels, and did it myself and closed escrow when they said I couldn't. I haven't found this to be any less stressful or easier going through a 3rd party negotiator.

Bob -- I have a buyer who hung in there... after 60 days, we finally got approval. We're rushing to close by the approval date. Everyone, including me, was in tears. We are over the moon. This is a terrific deal for the family!

Tara --- thanks for the compliment.

Richard -- the arms length affidavit is part of the short sale package.

Al -- thanks for the compliment.



Jul 20, 2011 10:44 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Jirius --- I don't know that we'll ever know what % of the reasons above cause a short sale to fail. I just wish they'd streamlilne the process!

Hillary --- unfortunately, not all short sales will pass the bank's negotiators' criteria. When that happens, who loses? The owner could walk away, and destroy his credit. The house lies vacant for a while and is vandalized. Bank sells it for less than how much they foreclose.

Antonio -- the buyer's agent hired the 3rd party negotiator? And they received authorization to do that? And the seller and the buyer are willing to pay for the fee? Hmmm....but what if the seller doesn't agree, and what if the short sale lender thinks if the seller has money to pay, then why are they doing the short sale?

Jul 20, 2011 10:49 AM
Ron Marshall
Marshall Enterprises - Saint Michael, MN
Birdhouse Builder Extraordinaire

Pacita, Congratulations on the feature.  I knew this would be a winner.  And, the comments are terrific. too!

Jul 20, 2011 11:11 AM
Karl Falk
Summit Mitigation Services - Monument, CO
Summit Mitigation Services

Pacita, it can be pretty frustrating especially when the seller fights the process.  great post.

Jul 20, 2011 03:38 PM
Karen Steed
Tallapoosa, Bremen, Waco, Buchanan, Temple, Carrollton - Tallapoosa, GA
Associate Broker Haralson Realty

Pacita, congrats on the feature.  Short sales can be frustrating, but that just makes the closing sweeter.

Jul 20, 2011 05:26 PM
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

I have a copywriting client in San Diego who maintains a 98% close rate on short sales. How? By being a specialist.

Short sales are what he does. As a result, he knows what buttons to push with each bank and how to present the paperwork the way they want it. He's also got a degree in negotiation.

On top of that, I believe he screens his clients well and passes on listings that just can't work.

Jul 20, 2011 05:55 PM
Patricia Beck
RE/MAX Properties, Inc., ABR, GRI, SRES - Colorado Springs, CO
Colorado Springs Realty

All of the documents the bank requests can be a grueling process for home sellers in a hardship situation.  Especially when they need updated docs every 30 days.  I can't believe how many banks are still in the stone ages and only allow us to fax all of these documents.

Jul 20, 2011 07:23 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Ron -- thanks...much appreciated

Karl -- it can be frustrating when we the agents want the short sale to succeed more than the sellers do

Karen -- we just received approval on a short sale. The buyers and I were so happy we were in tears of joy!

Marte -- screening prospective clients is an extremely important step.

Patricia -- I think the bank's fax number actually is for an efax account where their set up specialisits pull and sort through the paperwork.


Jul 20, 2011 08:07 PM
Anne Richards
Short Sale Buyers and Negotiators - Los Angeles, CA

Pacita:  My partners and I negotiate only our OWN purchases.  We actually do not charge a fee to anybody.  The seller and listing agent sgn a form authorizing us to negotiate.  There are several different models of how to work with 3rd party negotiators.  My team works hard to negotiate our purchases because we don't make money if we don't close.

BTW: Yes, it is legal for a buyer to negotiator on their own behalf, or on behalf of their company. We are not agents, and we do not receive compensation (a fee).  Even the DRE has acknowledged that this is legal.

Jul 21, 2011 07:55 AM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

I am actually surprised to hear it is as high as 60% of them.  If I look at pending short sales compared to the actual number closed it month it would seem much smaller.

Jul 21, 2011 12:17 PM
Kathy Sheehan
Bay Equity, LLC 770-634-4021 - Atlanta, GA
Senior Loan Officer

I truly cringe when a buyer tells me they just made an offer on a short sale.  I know this is never an easy process and first time home buyers tend to get impatient after more than a couple of weeks.

Jul 21, 2011 12:27 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Anne -- as long as the buyer or buyer's agent is authorized to negotiate with the lender, and if that someone is willing to tackle the headache of negotiations, that should be fine

Gene -- I've closed several short sales. The only two I couldn't close is the one where the tenant absolutely refused to let us show the property, and the other was when the second lien holder refused to accept the first lien holder's offer for a payout. But these were more than 3 years ago. Everyone has gotten better. Me, too, in terms of qualifying the seller, his motivation, and the chances of getting approval.

Kathy --- I try to prepare my buyers about short sales....they don't remember everything I tell them the first time...until we're neck deep in it. But fortunately, my buyers hang/and hung in there. We're now about to close escrow on a $1M short sale!

Jul 21, 2011 08:37 PM
John Davison
Coldwell Banker - Cary, NC
Raleigh-Cary-Triangle NC

Good post.  Having dealth with so many of these in Florida in the past, I know how frusterating they can be.  The biggest problems I ran into were obtaining lien releases on second mortgages (usually the negotiation between the two lenders killed the deal) and buyers who walked because they weren't willing to wait out the process.  In the end, as competent as we can be, these things are still a crap-shoot.  Too many moving parts and not enough guidelines regarding timeliness.

Jul 23, 2011 08:34 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

John -- so many hurdles in a short sale. But we do it because we truly want to help. After all, realtors helped get them in their house. At their moment of distress, we should try to help them get out, too.

Jul 23, 2011 11:36 AM
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert


Every one of your stated reasons is a home run. I have found that lack of seller motivation is a greater obstacle than lender inefficiency.

Jul 23, 2011 11:39 AM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Dave -- thanks for your validation.

Aug 07, 2011 06:12 PM
Gerard Gilbers
Higher Authority Markeing - Asheboro, NC
Your Marketing Master

I am surprised that it is that high, based on what I have heard. I am glad there are more getting approved than I thought. Most of the ones I have heard of drag on and then end up in foreclosure.

Aug 08, 2011 03:30 PM
Kasey & John Boles
Jon Gosche Real Estate, LLC - BoiseMeridianRealEstate.com - Boise, ID
Boise & Meridian, ID Ada/Canyon/Gem/Boise Counties

I'm also surprised it is that high.  I don't think if I looked up our MLS it would be that high here.  Although my husbands ratio is waaayy better than that :-) - Kasey

Aug 08, 2011 05:26 PM
Pacita Dimacali
Alain Pinel - Oakland, CA
Alameda/Contra Costa Counties CA

Gerard, John and Kasey

I was actually surprised it's that low!

I've only had two short sales fail in 2008. The first one was because the second lender wouldn't agree to what the first was offering. I even hired a short sale negotiation company who gave up and told me there's nothing more they can do. The second one was when the seller rented it to a tenant from hell who did everything he could to prevent the property from being seen, and such, sold. It was foreclosed.

I am so hopeful....ever so hopeful that more short sales would be approved.

The work hasn't changed...the length of time to complete the sale hasn't changed. Regarless of Equator system, it's still a huge pain. The success is hugely dependent on the luck of the draw if sone gets a responsive, knowledgeable and empathetic negotiator.


Aug 08, 2011 05:43 PM