Friday, June 7, 2013

Short Sales, The Good the Bad and the Ugly

Short sales are still a real part of the real estate scene.  There are many opinions about them some good some poor and others filled with language I won't post on this blog.

First of all a question lingers; What is a short sale?  A short sale occurs when the property has a market value less than the amount owed and the seller is unable to cover the difference.  In this case the seller must get the lien holder(s) (usually a bank) to agree to sell the house and accept less than the amount owed to clear title.

The seller may need to move or may simply be squatting in the house and not making payments.  This is an important differential.  If the seller is in the latter position he may not be cooperative with the process since the free rent is too enticing.  Getting involved in a short sale like this could be very frustrating for the buyer.  The former scenario however is much better.  The seller may be eager to move and eager to cooperate because he wishes to have a minimal negative impact on his credit profile.  This is the better type of short sale to consider.

Short sales are always going to have additional challenges associated with them and as such the reason a buyer might be willing to engage in one is that often the price can be negotiated below local market value.  There are many listing agents that advertise prices that are well below any realistic price the bank might accept and buyers should consult their favorite Realtor for opinions on whether the advertised price is within reason.  The seller is trying to get an offer, often almost any offer will do because the seller wants to get the bank engaged.  The bank will rarely do anything at all until a signed around offer is on the table.  The seller has little to lose by accepting a low price since there is no equity for the seller to receive at closing.  The bank is a third party to the transaction and they seem to relish the role of commander of the universe in these transactions, making demands on the seller and buyer as if they were a third world dictator.

It is very unusual to close a short sale in less than ninety days and often they drag on longer than that.  The problem is that there are too many cooks in the kitchen and the listing agent has to be constantly on the ball in dealing with the endless stream of demands from the bank.  The buyers agent is at the mercy of the listing team.  If that listing team has it together the short sale may go fairly smooth, if not, then it can be a big waste of time.  Some listing agents and sellers hire professionals to negotiate the short sale.  Sometimes these are law firms and often they do a good job of keeping the transaction moving forward.  

The biggest concern I have right now regarding short sales is the interest rate volatility.  Rates drive the purchasing power of buyers and we have been in a long cycle of low rates.  They have been on the rise lately.  A buyer that is offering on a short sale that is near the top of his price range could be priced out of the sale during the long wait of bank approval if rates continue their upward movement.  Meanwhile the prices in most markets are on the rise as well and that means if the short sale fails, prices may have risen enough that the buyer must settle for less house than he could have right now in a traditional sale.

The buyer's agent can be invaluable by providing an analysis of the listing team and the specific situation before suggesting the buyer make an offer.  If you really love the house or if you think you can "steal it" then enduring the process may well be worth it.  If not, then look for a bank owned or traditional sale that you can close promptly.

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