Q: I’ve been reading a lot of your columns about short sales. Why do short sales take so long to complete? How can I make the short-sale process go faster?
A: Short sales occur when the owner of a home owes more to the lender than the home is worth and wants to sell, but the buyer’s offer won’t cover the repayment of the loan and all the other costs of the sale. When the lender agrees to take less than is owed, the value of the property is short (or less than) the amount owed, hence the term “short sale.”
For the short sale to close, the buyer either has to pay the difference between the net sales price (after broker’s commissions and costs) and the payoff amount of the mortgage out of pocket, or the lender has to agree to take less than what is owed according to the terms of the loan agreement.
Here's the short answer to why it takes so long to go through a short sale: There's little incentive for lenders to take a loss on the books until they absolutely have to do so, and lenders will want to make sure the borrower absolutely can't pay what he or she is supposed to pay.
Lenders hope that by pushing off the decision, prices will rise or the owner or buyer of the home will find the money necessary to make the deal and pay off the lender in full. It was an irrational business decision during the Great Recession, in which home prices were flat for years. But now that prices are rising fast in much of the country, it seems like a smarter strategy for getting more money out of the property.
However, a short sale will generally hurt a seller’s credit history and credit score. The buyer may end up getting the home and, in some cases, may end up getting a good deal, but not always — especially if the property has a lot of deferred maintenance. The real estate agents often end up getting less commission than they are entitled to, the lender requires the attorneys in the transaction to limit what they can charge, and certain fees and expenses will not be allowed by the lender. You can see how everyone involved has to kick in cash to get the deal done, so frequently, few people come out happy after a short sale.
During the Great Recession there were a huge number of short sales, but in the last several years, the number has dropped significantly. In those parts of the country where real estate values have rebounded nicely, we’d be surprised to see a short sale today. You’d have to have bought your property at the pinnacle of prices just before the housing market crashed.
On the other hand, there are still areas of the country where real estate home prices have not improved or have improved just a bit, including vast swaths of the Midwest and rural America. In those areas, sellers may not be facing a true short sale, but many of them are selling at prices that still require them to pay out of pocket for closing costs, such as the commission. In these scenarios, the lender gets paid in full, but the home seller is functionally underwater, meaning that there is not enough cash in the deal to cover everything and allow the seller to walk away even. Typically, there is little or no equity, and the sellers lose everything they put into the home to buy it and improve it.
But back to your question. When an owner applies for a short sale, the lender will ask for a ton of paperwork. Sometimes it seems that the lender asks for more paperwork in a short sale than when the borrower took out the loan. Once the lender gets the paperwork, the lender will put a huge amount of time verifying the details of the short sale, often a lot more time than when the borrower applied for the loan.
In some ways, that makes sense. When the lender gives a borrower a loan, the lender expects to make money on the loan. Now that the lender needs to approve the short sale and wants to minimize that loss, the lender will comb through the paperwork looking at where the borrower might be hiding money, trying to determine whether this borrower can pay for the shortage out of the borrower’s own funds. Doing all that takes time, and the lender may have different layers of people looking at documents and then approving everything.
If the lender has turnover, you may find that there are different people with whom to deal at every stage in the short-sale process. As new people filter in, they have to get up to speed on the deal, and that can take even more time.
The system isn’t perfect, and it eats up time. And the more money the lender will lose, the more time it may take to process and approve the short sale. At the end of the day, just when you think you’re almost done, the lender may consider whether foreclosure could end up giving the lender a better result.
The only advice we can give you is to keep pushing the lender to make a decision. And, hopefully, your short sale will close.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.