Friday, October 31, 2008
Short sales (real estate)
I thought I was on top of what was happening in the real estate market, but yesterday I learned I was ignorant of what is probably one of the most significant trends sweeping the real estate market in the past year: the short sale. Instead of foreclosure, homeowners who find themselves under water on their mortgage (i.e., they owe more than their home is worth) may be able to convince their bank to agree to a short sale. The bank agrees to accept the proceeds of the sale and may then consider the debt to be satisfied. This avoids the messiness of foreclosures or evictions, and may allow the borrower to avoid a blotch on his or her credit history. If done right, it can be a win-win for all concerned, mitigating the misfortune of losing one's home. Another benefit is that these sales are going on all over the place, and they don't require any government bailout money. It's the private sector's answer to the problem of falling home prices.
Scott, as the broker of a multi-office real estate company, I need to clarify a couple points on short sales.
ReplyDeleteFirst, lenders are not accepting most requests for short sales. The number I keep hearing is that between 15-20% requests for a short sale (ie. when a sales offer has been presented to the lender which requires their forbearance of some of the debt) are being accepted.
Second, most lenders seem to be requiring a substantial hardship on the part of the seller: a death, divorce, job loss, illness, etc. Just being upside down on a home is not enough.
Third, short sale requests are taking lenders 60-120 days to respond with virtually no communication in the interim. Many buyers get fed up and walk away from the deal.
Fourth, most lender loss mitigation departments are staffed by hourly employees who are inefficient, often hostile, and just plain incompetent. My agents relate stories of being asked over and over again for the same document.
Fifth, many potential buyers unrealistically think lenders are giving away homes so they are making lowball offers on such properties. Lenders always get an appraisal or broker price opinions and just walk away from such offers.
Sixth, many loans are insured by mortgage insurance. Lenders often find that the insurance money + the proceeds from a foreclosure is more profitable than a short sale.
Short sales can help. But, the current process is seriously flawed. Lenders need to hire more loss mitigators. There is a crying need for quick responses (ie. like within 14 days). And, lenders need to provide some guidelines on what is an acceptable level of forbearance.
P.S. - A fantastic blog!
Staggart: Thanks VERY much for adding this valuable information. My level of understanding of short sales is growing by leaps and bounds, and I hope this is helping others too.
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