My take on the latest developments in our local market in N King County.

Wednesday, March 10, 2010

Why and How the Short Sale Process is Broken

I enjoy helping my clients find a home they'll love in a great area, and am prepared to put in as much effort as necessary.  For reasons I will outline below, pursuing short sales is highly unlikely to yield success. I'll tell you first how I approach short sales, and then why the process is broken:

What's a short sale:  When a homeowner needs to sell a home worth less than the mortgage balance, he must convince his bank to accept a "short sale" and forgive the loan amount over and above the sale price.  Even if banks are inclined to accept short sales (which they aren't), they lack the resources to evaluate proposed short sales and approve/disapprove in a reasonable timeframe.

My (and most agents') approach to short sales:  We use an addendum to the standard contract that specifies nothing is binding until the lender has approved the sale price.  No earnest money is deposited, the buyer is free (and encouraged) to pursue other properties, and the sellers are free to accept other offers.  In reality, a short sale that's been on the market for awhile usually has several offers on the table, waiting for the lender to choose/approve one.  I research the property as much as possible prior to writing an offer.  Occasionally we'll find a property listed by an agent who specializes in short sales, and has managed to pre-negotiate a price the lender has indicated they'll accept.  We're seeing less of this now, but these are the ones likely to sell.  If an agent has gotten a prenegotiated price, he'll likely shout it from the rooftop (or put it in the comments on the MLS).  In either case, I consult with my clients to craft a competitive offer they're happy with, present the offer, and move on, for the following reasons:

Short Sales can be difficult to finance:  Short sales and foreclosures are usually in a state of disrepair.  The seller will have deferred maintenance and repairs long before missing the first mortgage payment.  An FHA-insured loan (the most common type of loan in this area for purchases below $400,000) requires the home be habitable and in a state of good repair.  In the case of a short sale, the lender will not perform the repairs, nor will the seller, so the loan can not be done as FHA.  [Aside:  Have you discussed financing options with a lender?]

List price is meaningless:  The common tactic right now for agents listing short sales is to price them extremely low in order to generate multiple offers (above list price). The sellers' agent takes the offers to the seller's lender, along with documentation to build a case that the seller can no longer afford to live in the house.  The hope is that the flurry of offers will attract the bank's attention, leading the bank to approve the best offer, accept the "short pay" amount, forgive the unpaid balance of the loan, and release the seller to go on his merry way.  Unfortunately...   


Lenders do not respond: Lenders are currently overwhelmed with foreclosure activity, of which short sales are a part.  The people and resources are simply not available to evaluate every case.  Their 2 highest priorities are:  1) the accounts far enough behind to actually foreclose, and 2) The new laws in some states (NOT WA) requiring lenders to respond to a short sale request within 30 days or face a penalty.  Big banks diverting its resources to MA and the other states enforcing these laws at the expense of WA and the majority of states who don't.  A newly listed short sale, in which the seller may yet to have missed his first payment, is the equivalent of going to the emergency room with a slight fever--be prepared to wait.  Consequently...

Short Sales almost never sell:  Most attempts at short sales fail, because the seller declares bankruptcy or the bank forecloses before getting around to approving the sale.  The process takes  9+ months, and often the buyer who wrote the "approved" offer has already bought something else.

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