The first connotation of a home listed as a short sale was an unwanted, big-bargain problem house that was either a neighborhood eyesore abandoned by an investor or an over-hyped mansion that a high-tech wannabe had to flee because he suddenly discovered his stock options were worthless.
Instead of going through a lengthy and costly foreclosure, lenders offered to sell the places - hopefully quickly - for an amount less than what was owed on the place. In the banker's mind, why would the bank hold the property for six months, pay a manager to maintain and repair it, pay current and back taxes, homeowner association fees and salesperson commission's only to go to the foreclosure sale knowing that nobody would be willing to bid the amount remaining on the mortgage?
Candidly, there were no real experts - including lenders and real estate salespersons - in dispersing short-sale properties because the process was relatively new. After a 20-year run-up in housing prices, few homes were ever worth less than the owner paid for them, and very few loans went into default because runaway inflation floated all boats.
Appreciation was consistent and expected and made up for losses brought by paying too much, job loss, divorce or serious illness. When a home went up in value, it was easy to tap its new equity and pull it out via a home equity loan or line of credit.
In the past four years, the number of distressed properties has risen significantly. Lenders were slow to adapt and take a cut on price. More and more home shoppers shunned short sales altogether, preferring a more reliable sales process to a reduction in price. Getting all parties to agree to a short-sale price was problematic, compounded by the fact that some lenders were known to change their minds when more bidders surfaced.
Eventually, in a move to save time and money on the foreclosure process, lenders dedicated more personnel to negotiating settlements for short-sale buyers. At the same time, more real estate agents began specializing in short sales, not surprising given the number of short sale properties on the horizon.
"You wouldn't go to a bankruptcy lawyer to get help with a personal injury claim," said Wes Jones of HomeHelper Consultants, a Bellevue-based company specializing in short sales and aligned with Keller Williams Realty. "The same way you wouldn't go to your general doctor if you needed help with your heart. The same is true in real estate. So many people end up picking an agent who is a generalist or someone to whom they feel a personal obligation over what is the right business decision for them."
According to Jones and other short-sale specialists, one of the biggest mistakes buyers make is that they still expect huge discounts - similar to foreclosure auction prices - even though inventories are extremely low in many Puget Sound neighborhoods.
"The banks aren't just writing this debt off," Jones said. "They do short sales for one reason, and one reason only: The process mitigates loss over a foreclosure. They will recover more of a loan via a short sale than they would by proceeding with the foreclosure process and all the costs incurred by doing so."
Lenders do send out a representative to set a benchmark price via a mini appraisal, called a broker's price opinion, or BPO. If a buyer's short-sale offer is not in line with the BPO, the lender most likely will reject the offer and proceed to foreclosure.
Other mistakes consumers make in a short sale:
- Unrealistic conditions on the offer. Short sales take time, and only giving a listing agent or negotiator 30 days will not help.
- Failing to "pre-qualify" the listing agent and or short-sale negotiator. What is their track record? A good short sale-agent should have completed 60-100 short sales by now. If they have not, they may lack the true experience to get it done in this market.
- Expecting a bank to do repairs or pay for repairs.
- Sellers not paying certain bills. Water and sewer need to be paid off by closing. Past due HOA dues must also be paid, and they can turn into liens or judgments.
- Not returning paperwork in a timely manner. Files get closed or denied because the seller has not provided updated financial information.
If you are a short-sale seller or buyer, make sure you choose someone with experience to represent you in the process. Your deal might not be the best place to break in a hard-working, well-intentioned agent.
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