With the recent events in the mortgage industry & in most of the markets around the country, many homeowners are left upside down on their homes, and unable to sell. This is one of the real dangers of homeownership. While we (real estate professionals) all tout the many advantages of owning a home, and primarily that “real estate historically appreciates,” getting stuck upside down on a home is a scary proposition…because you’re stuck in your home.
In markets like these, real estate agents & brokers also get a little scared. Fewer homes are selling, and fewer commissions are earned. Many get out of the business, and many begin marketing “creative solutions,” & “creative opportunities,” which includes the short sale. Short sales as a subject really started popping up a few months ago, and it’s really increased – it looks like we’re on the left hand side of the bell curve.
Everyone knows that some Realtors love to puff the advantages of anything that will help them earn – let’s analyze some of the myths that are now being touted, and that we’ll see more of in the future.
Myth #1
“Short Sales Are a Great Investment“
A short sale, by definition, is a situation where the bank is cutting their losses in order to avoid the costly foreclosure process. The bank is getting screwed, and they will try to cut their losses as close as possible – which means they ask for multiple BPO’s before they’ll agree to a sales price. Multiple agents/brokers, who are all vying for listings from the bank, have given their expert valuation of the property. The chance that the listing price will come in 20% below market or lower (which is the minimum to make a decent profit) is pretty slim.
Myth #2
“The Bank Will Cooperate With My Short Sale”
When trying to work out a short sale, you’re dealing with the bank’s loss mitigation department. Loss mitigation will typically not talk to you unless you’re 60 days past due or more. After you’ve crossed this bridge, they will discuss a short sale, but you’ll sit on hold for hours before getting anywhere. However, the real problems begin when you finally have an offer to present to the bank. While many banks’ loss mitigations departments will respond to an offer in a timely fashion, many don’t. Horror stories of 1 month plus responses from LM abound.
Myth #3
“A Short Sale Will Save My Credit“
Selling short to save your credit is the biggest myth of all. While a short sale is slightly better than a foreclosure, it’s like the difference between getting hit by a train or getting hit by a bus (thanks Saodavi.)
Since you have to wait until you’re 60 days late to speak with loss mitigation, your score will have already dropped ~50-100 points. When the property does sell, it still reflects as a short sale on your credit – your credit report will read “settled for less than amount due.” This is a huge red flag for any future lender, and most lenders treat short sales exactly the same as a foreclosure, i.e. they won’t lend you money until a certain # of years has passed. So…you’re chance of bouncing back from a short sale to buy a new house a year down the road is extremely slim.
With that said, there are agents who do specialize in short sales & are experts at dealing w/ LM, and there are instances where you can take advantage of a short sale to make a profit. However, the chances for profit are few & far between (once they hit the MLS, forget about it,) & there are just as many (or more) agents claiming seller short sale assistance who don’t know their something-hole from their elbow.
Brian Brady says:
Edward:
A few thoughts:
1- Short sales are negotiated for current lienholders. Loss mitigation departments will allow for the sellers to retain the debt as an unsecured loan and pay it off. I’ve negotiated many short sales where that lien is “transferred” to a new home.
2- Short sales with a written off balance can be detrimental to credit nut nowhere near the derogatory item a deed in lieu of actual foreclosure gives you.
3- Lenders are sometimes better communicators with loss mitigation departments- we speak the language.
If a borrower wants to “walk away” from the balance, Scott-free, then they will have a negative mark. They can’ however, repay the balance.
November 26, 2007 — 3:50 pm
Ken Smith says:
#3 – If a homeowner is faced with a short sale or a foreclosure most of the time they are much better off with the short sale. Yes the seller will have a negative mark on their credit with a short sale, but it’s not as big of a hit as a foreclosure.
November 26, 2007 — 4:50 pm
Bob in San Diego says:
Myth #2
“The Bank Will Cooperate With My Short Sale”
Like politics, real estate is local. In my market, this is not a myth.
I have a few sellers who want to walk and have approached the bank about a deed in lieu on their non recourse loans. Each lender asked the seller to consider a short sale first.
Chase has been contacting agents who have listings where the sellers are late and offering help in structuring short sales.
CW counts short sales as loan workouts. It aids their PR to show more workouts and less REOs. Anything that reduces their eventual losses will be considered.
More and more lenders are dealing with proactive sellers who have not yet defaulted.
If you want a timely response, then how you approach the lender is important. Give them the choice of cooperating with a short sale or a deed in lieu and time frames get sped up.
November 26, 2007 — 6:15 pm
Glenn in Naples says:
Myth #1 should be a short sale does not exist until the lender approves the sales contract – so potential or possible short sale is a better term.
Myth #2 borrower uses stated income (or recommended by a mortgage broker) to purchase a property – income stated is twice what is actually report on income tax returns. Borrower has lied to start with – financial situation has not changed – but now a financial hardship – will not fly with a Loss Mitigation Department.
Myth #3 credit scores will not be impacted – yes, they are affected, especially if the lender decides to pursue borrower in the form of a deficiency judgement. As a public record, it does appear on one’s credit report and is damaging.
December 19, 2007 — 6:56 am
Wayne Long says:
Bob – I am glad lenders are being more proactive in your area. They are not very proactive here and it is a job to get them moving on a Short Sale or any other form of help for the owners facing foreclosure. For this reason many houses go into foreclosure that could have been worked out.
December 22, 2007 — 5:56 am
Jim says:
I have never heard of short selling, thanks very much
June 5, 2008 — 11:11 pm