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SHORT SALE TRANSACTIONS Only Rarely Successful!

By
Real Estate Agent with Dean's Team - Keller Williams Realty Partners Chicago IL

The latest buzz among real estate investors - and real estate trainers - is Short Sales! 

Investors think they will find a new home for pennies on the dollar.  Distressed homeowners see a solution to their strangling house payments, and a house that now might be worth less than they owe on the mortgage.  It could be a win-win for lenders as well, as selling short generally results in a far lower financial loss than proceeding with foreclosure.

But, very often, short sales are easy to about, but far less successfully closed!  Some agents with short sale experience estimate that less than one in five tendered offers actually close.  A few find the success rate far worse.

Why the rare short sale closing?

In a conventional real estate transaction, only the buyer and seller need agree on price and terms.  These items are rarely renegotiated during the transaction, aside from issues involving property inspection.  Short sales, however, must also be approved by the lender, as well as the loan's investors.   Often,  they reject a potential buyer's offer - and after many weeks of review, consideration, and procedure.

Many times, potential buyers of a short sale property will lose patience in an approval process that can take upwards of two months to complete.   They move on, and walk away from the contract.  Or, they might not want to increase their original offer, which the lender has rejected.

As we all know, many home purchases made over the last few years involved not only one mortgage, but TWO - many borrowers took a large loan covering 80% of the purchase price, to avoid the hefty cost of private mortgage insurance.  They then took an immediate Second Mortgage, sometimes for the full balance of the purchase price - or sometimes slightly more - to make up the difference.

Most Second Mortgage lenders refuse the token pay-off sum offered by the First Mortgage holder in a short sale transaction - typically only $1,000.  They refuse to clear their lien, and the transaction stops dead.

A growing number of mortgage servicers, including Florida-based Ocwen Financial, prefer to create work-out agreements with the distressed borrowers, and will make every attempt at loan forbearance before agreeing to sell short.   Ocwen and others carefully scrutinize a short-sale applicant's complete asset portfolio, and will not approve a short sale if the borrower holds other assets that can be tapped to pay off their mortgage.

In a few situations, lenders refuse short sales because they don't appear to be "arms length" transactions.  Some distressed borrowers attempt to have relatives purchase the home short, and then grant it back, via Quit Claim Deed, to the original owners.

Our Team, here in the West Rogers Park Neighborhood of Chicago, sold a condo in potential short sale last summer.  The buyer cancelled the deal, after a ten-week wait, when the holder of the second mortgage on the property refused to release his lien - the first mortgage holder only offered a $2,000 partial payout to them.  The lender foreclosed on the condo.   It is now owned by the bank, and is listed by another real estate broker for $30,000 less than the offer the owner accepted last year!

Many short sale investors low-ball distressed properties, feeling the lender will consider virtually any offer on a mortgage-delinquent home.  Banks rarely accept these very low offers, however, and usually reject the bid - many weeks later.  The prospective buyer walks. 

To address the low-ball behavior, Fannie Mae is considering guidelines to provide a "floor price" on potential short-sale properties.   Lenders would communicate this bottom-line number to Realtors listing a potential short-sale home, to scare away unrealistic investors.

Short sales accounted for a very small percentage of real estate transactions when the market was strong, rates were low, appreciation potential high, and mortgage money plentiful.  But their numbers are growing in today's real estate market.  The National Association of Realtors estimates that 18% of sales in the last year sold short.

For more information, see our post on BlogChicagoHomes.com from yesterday afternoon.  It links back to a very comprehensive story by Ruth Simon and James R. Hagerty in the April 17th Edition of The Wall Street Journal.

DEAN & DEAN'S TEAM CHICAGO

Comments(3)

Anonymous
Jonathan Rivera

Dean,

  I read this post on Short Sales and I was curious to know if you were actually doing short sales?  Also, I see that you mentioned OCWEN and their new workout program.  Have you had any success working out loans with OCWEN?  Are they really forgiving part of the debt?

Apr 27, 2008 02:24 AM
#1
Dean Moss
Dean's Team - Keller Williams Realty Partners Chicago IL - Chicago, IL
Dean's Team Chicago IL Real Estate Team

Jonathan -

Thanks for your comment!

Within the last twelve months, we had five short sale listings.  Of those, one successfully closed and one is in process.

The problem with those unsuccessful - the second lender would not agree to small offer of primary lender.  Buyers got discouraged by waiting time and moved on. 

Had one encounter with Ocwen - got some forbearance but my seller had no job, no assets.   Selling short was the best option here.

On the buyer side, many of our investor clients feel that there are enough non-short properties out there at a discount, without the wait time and the hassle.  They want to focus on these, unless a good short opportunity comes up.

Write back with further questions.

DEAN & DEAN'S TEAM CHICAGO

Apr 27, 2008 02:55 AM
Daniel J. Brudnok, REALTOR
Berkshire Hathaway Home Services Fox & Roach, REALTORS - Exton - PA License #RS-225179-L / Delaware License #RS-0025038 - Downingtown, PA
SRES, e-PRO,ABR,GREEN,CSP

Dean,

I did one a month ago that went relatively smooth....12 days for approval of the agreement.....45 days to settle.  Great Agent on the listing side.....I kept my Buyer's (very young and A type's) in check and it worked out.  We went in at $170 on a $199k prop...settled at $185k w/a 3% Seller's assist.....Lender was in the property at least $220k.....

Once the Lender gets the Lawyers involved.....they have to consider it a $10-20k hit....and if it goes to foreclosure the property damage that comes with that is on top of that hugh number......

Apr 27, 2008 05:44 AM