By Elizabeth Razzi
Sunday, June 15, 2008
Here's what's really happening with short sales: All too often, they fall short of the finish line.
A short sale means a sale that falls short of the amount owed on the mortgage. They happen only when the seller can't come up with the cash to pay off the difference. Most important, though, is that they can happen only when the lender agrees to accept the shrunken payoff.
Desperate sellers pursue them to avoid a foreclosure, which would be even more damaging to their credit history. Buyers pursue them in hope of snagging a home at a deep discount.
Before you waste your time, and possibly your money, on a short sale that stands little chance of getting the bank's approval, gather some intelligence about the sellers, their financial situation and the real estate agent they have hired. You will save a lot of frustration by focusing only on deals the bank is willing to make.
Lenders aren't in the business of accepting less than they are owed, and their paperwork machinery isn't even set up to work that way efficiently. Their approval of a short sale is always slow in coming -- if it ever comes at all. You need to find out if the bank even has a clue that the seller is trying for such a deal.
Too often, sellers and their agents are calling a listing a "short sale" or saying that "offers are subject to third-party review" without even having talked with the lender. They plan to get a live fish on the hook before they try to tempt the lender.
Do you want to be that fish?
It's important to distinguish between "upside-down" sellers and short sales. If sellers are upside-down on their loan, owing more than the home is worth, they are still expected to make monthly payments. Even if they would like to move, most upside-down owners are stuck until prices recover enough to make a sale profitable.
If an upside-down owner must sell, even at the reduced price, he's expected to take money out of savings, cash in the 401(k), borrow from the in-laws or otherwise pay off the mortgage.
But what happens when the homeowner simply cannot come up with the cash? At this point, the homeowner's pain becomes the lender's problem. The lender's options are either to agree to a short sale and forgive the unpaid debt, or to foreclose on the home and re-sell it. Remember, the lender gets to make that choice, not the seller.
There are lots of things that can derail a short sale. For example, although lenders lose a lot of money when they foreclose, the payout from private mortgage insurance could reduce that loss enough to make the lender choose foreclosure.
Lenders holding second mortgages, such as home-equity lines of credit, can also kill the sale. Second-mortgage lenders are supposed to be at the back of the line to collect loan payoffs, but they can nix a proposed short sale if they don't think they're getting enough out of it.
Frank Borges LLosawho owns the FranklyRealty.com brokerage in Arlington, has analyzed multiple-listing service data for Northern Virginia and estimates that of every 20 short-sale listings that draw a contract from a buyer, only one actually makes it to closing. "I call them fake listings," he said.
Before he will submit a buyer's purchase offer, LLosa sends the listing agent an e-mail questionnaire to measure the prospects for a successful deal. Mostly, he wants to know whether the sellers and their agent have already started the approval process with the lender.
LLosa asks whether the sellers and their agent have submitted a "short-sale package" to the bank. That includes a letter explaining why the sellers face a financial hardship, such as a job loss, and cannot pay what is owed. It also includes details of their finances to demonstrate that they don't have savings or investments that could be liquidated to pay the debt.
Glenn Kelman, chief executive of Redfin, an Internet-based brokerage, cited a number of indicators that a listing advertised as a short sale will really make it to closing. You might be a wasting your time unless you see these signs:
· Only one bank has to approve the sale. "If two banks have to approve the deal, one will get the short end of it, and approval is unlikely," Kelman said. You also don't want to see that there are other lien holders, such as unpaid contractors.
· The seller has stopped paying the mortgage and has already received a notice of default. If the lender is still collecting monthly payments, that lender has no incentive to approve a short sale.
· The bank is ready to deal. Someone at the bank has already approved a short sale, or has at least confirmed receipt of that short-sale package, including a document showing the lender what it would net after taxes and fees, and a market analysis or appraisal that demonstrates that the home is being sold for a reasonable price. "Ask the listing agent who his contact at the bank is, by name and title, and confirm that the paperwork is complete," Kelman said. "Many won't even know what you are talking about."
· The listing agent has experience completing short sales and responds to your inquiries. "To make a deal happen, you need a listing agent pounding on the table with the bank," Kelman said. "But many banks pay the listing agent peanuts, so the agent may be busy with better-paying work."
· And, finally, foreclosure is at least six weeks away. Kelman said it takes at least that long to get a short sale approved, so a foreclosure any time sooner could sweep your deal away.
Unfortunately, foreclosure dates aren't always easy to nail down. Several troubled borrowers I have spoken with over the years have told me they couldn't find out exactly when the foreclosure would happen. And buyers who have succeeded at a short sale have told me they could only guess at the looming foreclosure date.
If you try to buy a home through a short sale, be prepared for the deal to fall apart. Don't spend money on appraisals or inspections until you have received some sort of commitment from the bank. You certainly don't want to give notice to your landlord too early. And keep looking for other, easier deals, just in case.
E-mail Elizabeth Razzi firstname.lastname@example.org.