“The ‘Catch’ to a Short Sale”
A novella by
Richard Gayle
Forward: This story is for the prospective buyer of a property being sold as a short sale. This is not for the prospective seller, although there is nothing I wish to keep secret from a prospective short sale seller. It’s just that this is more for the buyer--what they can expect when considering and perhaps pursuing the purchase of a short sale.
In the Beginning:
Mr. Smith didn’t know what lay ahead of him when he bought his home. Or that his heart’s desire would take him away from it….
The term “Short Sale” refers to the sale of a parcel real estate which is in an “upside-down” equity position. “Upside down” means more is owed on the property than what it is worth. Example: Mr. Smith buys a home two years ago for $150,000 and puts down $25,000, financing the other $125,000 with an interest-only loan. Two years later, the property is worth $100,000, but he still owes $125,000. So, he is upside down by $25,000.
Now, for whatever reason, Mr. Smith decides to sell (moving up, moving down, sickness, death, job change/transfer, financial hardship, other miscellaneous reason). To make the story more interesting, let’s say that Mr. Smith is single and has met someone on the Internet who lives on the other side of the country…after a period of long-distance dating which includes telephone calls, emails, texting, IMing, video chat and actual visits by each party to the other’s hometown, Mr. Smith decides to move to his significant other’s neck of the woods.
Now, to sell from that upside down position, he either has to A) Bring $25,000 to the closing table, plus the costs to sell or B) get his bank/mortgage company/or whoever the lienholder is, to agree to a short sale. Put another way, a short sale is when a property is sold for less than what is owed on it and/or the costs to sell. As such, it is “short” of the equity needed to cover the existing liens plus the costs of the sale.
So, Mr. Smith goes to his lienholder(s) and says, “I want to sell. I don’t have enough equity. I would like to sell anyway (because, you know, he has his cross-country romantic love-interest) and so, what do I need to do to satisfy your requirements for a short sale?” What he is doing is asking his lienholder(s) to take the loss when his property is sold. This, if it sells for $100,000, will amount to $25,000 + the costs to sell.
Now, lienholder(s) don’t like to take losses…and thus are resistant to short sales. But market conditions have forced them into a position where they agree to them, grudgingly, as they are less painful than a foreclosure in the areas of time, trouble and money. In so doing, they reserve the right to approve every term, condition and cost of the sale. The seller is virtually powerless in the transaction (I may be using the expression “virtually powerless” a bit loosely, but I am usually of the opinion that the power position of the seller in a short sale is very, very weak).
Now every lienholder will have different ways of going about it. In one situation I handled for a seller recently, she had two liens on her home, from two different lenders. The first lender wanted nothing but for us to put the home on the market and send in the first/highest/best offer we got, AND, to negotiate with the 2nd lender to get their payoff amount down to $1,000 (in this particular instance, the balance on the 2nd was about $90,000 and yes the 1st told me to negotiate the payoff down to $1,000). That was it. The 2nd lender wanted a full “short sale package” from the seller. This included a “hardship letter” which explains the reason the seller needs to do a shortsale. Included also is the seller’s tax returns for the 2 most recent tax years, recent paystubs, bank statements and any other financial documentation the lender may require. It is like gathering the documentation required for a home loan application. The 2nd also wants from me a Competitive Market Analysis (CMA) which is a broker’s research and opinion of fair market value, as well as some 18 or so pages of questions that they have given me to answer and submit with the CMA.
So, I, as the seller’s agent, gathered all these things up and faxed them to the 2nd lender. It takes several working days to “scan them into the system” and I am told to call back in several days to confirm they are received and “entered into the system.”
So, let’s say that on the day I put the home on the market, I get an offer from a buyer. I can tell that buyer that they can reasonably expect to wait approximately 2 months before a response to their offer is rendered by the 1st lender (the 2nd lender does not have to respond as the 2nd agrees to take a flat sum out of the proceeds of the sale). This time frame can vary GREATLY; however, this is the average in my experience.
So let’s say you are the buyer. You want to see Mr. Smith’s property. Not so hard since Mr. Smith is really motivated to get to where he’s going. But let’s say that you want to see a different short sale. It could be harder. Why? Motivation. While Mr. Smith is so very motivated, let’s take the case of the family that is forced to sell thanks to their loan being one of those awful adjustable rate loans that has adjusted to infinity and beyond the point of their ability to pay. They have to sell, they are going through the short sale process, but they really aren’t motivated. Why? Because they have to move. And where are they going to move? Depending on the lienholder and their situation, their credit may be jacked up because of late payments and the short sale itself may show as a delinquency on their credit report. Who will rent to them?
Knowing all this, short sale sellers sometimes don’t make it easy for your agent to get you into the home to look at it. They sometimes don’t allow their agent to put on a lockbox (a device which attaches to the property, usually the front door, that your agent can open and retrieve a key to the home…makes getting in easy), and sometimes will allow it to be shown by “appointment only.” These appointment-only times could be something odd like 10-11:30 on Thursday mornings. Or, they could give you a personal appointment and then not show up. Or when you do show up, there is a family member home that does not speak English and knows nothing of your appointment and won’t even answer the door. If tenants live in the home, it can be worse because it could be that they are in the midst of lease and were certainly not expecting to move any time soon….
Now, your agent has done their job…they called the seller’s agent, cleared it with the seller, shown up at the home, (on time of course) with you in tow, and viola! No one gets in! I mean, is this some exclusive Hollywood nightclub all of a sudden?? It makes your agent look incompetent. I have been in this boat. “The Boat of Perceived Incompetence” (I think I saw this boat in San Diego once). This boat is not a fun boat. When in this boat, I want to row row row my boat fiercely down the stream and merrily merrily merrily get away from this bad dream to the next home and strike this home from the buyer’s want –to-see list. Sometimes, briefly, wishful thoughts of pyrotechnic accidents come to mind…
I digress….
Let’s say you did get into the home to view it and you put in your offer. You are advised by your agent that short sales are typically AS-IS. The lenders for the seller generally will NOT provide the customary niceties that you get with a standard equity sale in Southern California – a termite clearance (includes treatment and repairs as needed), a home warranty, specific repairs that are noted as being need on a home inspection, and in the case of a property governed by an HOA (home owner’s association), the HOA transfer and document fees (approximately $400 worth of stuff). Nevertheless, you submit your offer and you know the wait is on…
What happens during the wait? Well, besides Mrs. Smith getting antsy waiting for his departure to be close to sweetie, this short sale file/package/request is in the queue in the lender(s)’s short sale department. The queue is “the line.” The line is long, sometimes very long. The line is so long that you may have time while in the long long line to sing a song…perhaps a long long song to pass the time that you have to pass while in the long, long line.
So, what happens during the wait is just that….the wait. Oh, the agent for the seller (me in the earlier example) will be in contact as needed to re-fax lost documents, explain my research, answer questions about our local market, etc. But you, the buyer…you just wait. It’s like the military…hurry up and wait. And most sellers’ agents do not give your agent statuses on what’s happening while you wait…you just wait. When I represent the seller, I would email your agent every week to say what I knew, even if it was nothing, just to make sure that you, the buyer, are still there and somewhat paying attention, if nothing else…!
Oh, as the seller’s agent I know what’s going on….the paperwork is collected, the file is assigned to a “negotiator” (because, you know, it is sort of a hostage situation) who “negotiates” the short sale with the seller’s agent, and once the negotiator has the file’s ducks in a row, it has to be signed off by their “team leader” or upper management, and scoured for radiation and any bio-terrorism threat (I am kidding about the radiation and bio-terrorism). I tell the buyer’s agent what is happening but again, often there is nothing happening, just waiting….
Here’s the thing, generally, you have no guaranteed place “in line.” If this short sale’s turn in the queue comes up on the 60th day after submission, and someone else submits an offer slightly better than yours on day 59, you are bumped! On a rare occasion, a seller’s agent will work with offers one at a time until an acceptance is granted and you won’t get bumped…but again, it is a rare occasion…. And this, my friends, is “the catch.” Patience is not rewarded, it is trounced upon! It is because the lienholder(s) are losing money and thus both want and need the most they can get, as well as it being the seller’s agent’s responsibility to get the highest and best price for the seller and lienholder(s).
If, however, you are willing to wait, knowing that on any given short sale this could happen, you could submit multiple offers on multiple short sales. The problem with this approach is emotional. You may like one home better than another and hope and pray that you get THE ONE that you so love and adore…and when you don’t, it is disappointing…sometimes very disappointing… The question then is, how well do you handle disappointment? Can you weather the storm of the lost short sale?
In this market, properties that are decently kept, in decent areas and decently priced will receive multiple offers. And it is not uncommon for the offers to go over the list price because, the pricing strategy of many agents is to price the property artificially low so that a bidding war ensues, pushing the offer prices up, up, up. This strategy does not always work as offers can and do come in at the list price, whatever it may be. And if that is the only offer a seller gets, then obviously it is all they have to work with. The fact is, the market (buyers and sellers) decide at what price a property sells, not the agents. As an agent, I do not control the market; I simply work within it….
So, a short sale is the sale of a parcel of real estate that is short of the equity needed to sell it and pay off all liens. It is not short “time-wise”!! Oh no, not short time-wise at all.
But, in due time, Mr. Smith is able to sell his home (with the lienholder’s cooperation) to you (or another buyer!) and move cross-country to be close to his dear one. And thus may he, and you (or another buyer!) be able to begin a new life in a new home where all is well….
I hope you have both enjoyed and learned from this novella.
©Richard Gayle 2009
Real Estate Broker
Orange County, CA
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