Short Sales The MAGIC Pill - Are They?
There many real estate agent professionals touting the short sale as the MAGIC pill for property owners as a cure all for any situation from loans based upon dishonest income information (stated income loans – “liar loans”) to real estate investors that are not realizing the profits they anticipated.
People are always looking for the MAGIC pill to solve their problems or shortcomings. We look for the magic pill to lose weight or increase our incomes. Over the past few years the magic pill was finding a property, maybe the wrong one, and finding a loan or mortgage to finance the purchase, maybe the wrong loan program. Now, the MAGIC pill is the short sale.
A short sale historically has been used to assist borrowers with a financial hardship caused by a change in their financial situation. Changes in financial situations involve – loss of job, loss of a spouse’s income, hospitalization, job relocation, etc. A short sale means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales. Banks and lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Real estate investors may not qualify for a short sale, because they were investing. Investing does not guarantee a profit; it has inherent risks associated with it. Hence, banks and lenders may be more reluctant to be receptive to a short sale for a real estate investor.
Two recent cases come to mind immediately and are used to show how the MAGIC pill was used and proved unsuccessful.
Case #1 - A Bonita Springs real estate agent recently expressed on her blog the frustration of the short sale process when representing a buyer and the lender’s lack of cooperation trying to complete a short sale. Major points discussed - settling on a price for the property, needing an additional document, and at the end the bank requesting the seller pay $3,000 in closing costs.
Case #2 - A Naples real estate agent, expressed frustration with the process and the lender’s lack of cooperation in accepting an offer. An offer was presented to the bank for $175,000 on a home with a list price of $180,900. The bank declined to approve the contract. He could not understand why it was not approved since the offer was so close to the list price.
There are others expressing their frustrations as well but these are the most recent within the past few days, coming to my attention.
The short sale process is difficult to maneuver through the maze of research and documentation, in addition to lenders or holders of the mortgage can be hard to deal with. But this does not have to be the case if a buyer or seller has a team composed of qualified professionals in real estate, real estate law, and income taxes. In some situations alternatives to the short sale can be discussed and save the home owner the emotional distress of losing their home. In other cases it might be possible to determine the chances of having a successful short sale for the seller or short sale purchase for the buyer.
Why the short sale MAGIC pill failed in the above cases:
- Listing agent and seller establishing too low of a list price without due consideration towards the bank or lender. Questions – Did the seller and buyer really negotiate or was it just the seller approving the offer and contract? Was a comprehensive Broker’s Price Opinion or Comparative Market Analysis completed prior to listing and included with the package to the bank or lender?
- Inadequate research or counseling to determine if additional resources were available from the sellers.
In Case #1, the seller may not have been making payments on the loan. Did the $3,000 represent the payments not made? Did the seller use the monies for other purposes – paying down credit card or other loan balances?
Case #2, some quick research showed individual was a real estate investor with the possibility of significant equity in other real estate holdings. Does the seller expect the bank or lender to settle for less than owed when there are assets or resources to cover the deficiency?
- In Case #1, a document was not initially furnished to the bank or lender. The document was a preliminary settlement sheet (closing statement or HUD-1); in a real estate transaction it is called a seller’s net sheet. The net sheet is done at time of listing. It is done once again when an offer is presented and through-out the negotiation process.
Short sales can be a win-win-win situation for sellers, buyers and financial institutions if handled by knowledgeable real estate agents, real estate attorneys and income tax advisors.
The challenge for both sellers and buyers is to find the right professional team. The search usually starts with finding a real estate agent, rather than a real estate attorney, due to what is perceived as a cost savings. If you are starting with a real estate agent look for the following characteristics or skill sets:
- Some type of business background – accounting, finance, credit and collection, basic income tax understanding.
- Ability to review and explain the closing documents signed at a closing.
- Can explain without a computer program closing costs for both a buyer and seller.
- Ability to analysis cash inflow and outflow.
- Research techniques to discover important aspects not readily available.
- A list of real estate attorneys and income tax professionals.
In another post it will be explained why these characteristics and skill sets are important to both sellers and buyers when considering entering the area of short sales.
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10 Responses to “Short Sales The MAGIC Pill - Are They?”
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Great article and very well written.
Chris - thank you for your comments.
Glenn there is no question that most agents have no idea how to handle a short sale and can make an already painful process even worse. Consumers need to find agents that has past experience with short sales and has a very firm grip on the way different lenders handle their short sale process.
While not the “magic pill” short sales can be very useful for the right seller.
I love the MAGIC pill analogy and it is true that consumers what a quick easy fix to any problem, home sale, financial crisis and weight loss. Under education ecompanied by the amount of “promotional” blogs are creating mass confusion with options that real estate owners have.
Glen ~ wise words of advice here! When dealing with a short sale there are certainly no guarantees. So many consumers are not aware of how difficult and long the process is. The opportunity for abuse is wide open. I almost feel sorry for the lending institutions…
When dealing with distressed homeowners, agents as a whole tend to be afraid of attorneys. It makes sense though, since the conflict of interest for the agent in these situations is huge. The agent only gets paid with a short sale, but the vast majority of the time, the short sale is not the best option for the property owner.
The first step should not be contacting an agent, but an attorney well versed in real estate law for their specific state, and a CPA or tax attorney. Only on advise of counsel should the property be listed, and even then the agent should understand that the short sale may still not be the best outcome.
Ken - you are right that the ’short sale’ process is emotional draining for sellers. While there has been an explosion in the number of potential short sales, real estate agents with the right skill sets can better move through the maze.
Toby - you are quite right that there is an overwhelming amount of information out there about how to do a short sale. Sellers need a guide on how to sort through the wheat from the chaff.
Kristal - the short sale process is long and hard with no guarantees for the seller. The homeowners are the ones that I feel sorry for and just wish that lenders would be more pro-active with handling the identification of and ways to resolve the issues.
Bob - you are quite right that there is a conflict of interest between real estate agents and attorneys. Real estate agents should have a better understanding the options that are available to homeowners that are financial hardships as a result of rates resetting, etc.
I think most people call a real estate agent first, is the cost of an attorney versus the real estate agent.
Unfortunately, there is so much talk about short sales, that, possibly the public does not truly know that there are other options available to them.