A “short sale” occurs when an Owner of a property has to sell it for less money than is owed to the Lender(s). It is sold “short” of the amount that is owed. Quite often the Owner of the property is experiencing financial difficulties and no longer making the mortgage payment and elects to sell the property short rather than allow it to go into foreclosure. Unfortunately, despite the best efforts of thousands of great real estate agents, short sales prove to be extremely frustrating and more often than not fruitless endeavors.
Why? After all, one would think that all parties concerned have a truly vested interest in finding a reasonable solution. The Owner certainly wants to get out from under a mortgage that they can no longer afford, the Lender should want resolution to the matter since it is not receiving a monthly mortgage payment and certainly the real estate agents involved want to sell the asset and earn the commission.
So why are short sales so darn difficult to close?
One of the problems is a lack of communication. In sales, we want to talk to decision makers. We know that if we talk to anyone but decision makers that we are wasting our time. And one of the real problems with short sales is that one rarely talks to a true decision maker.
It is true that the Owner of the property legally is the decision maker as to whether or not he or she sells the property. However, in the case of a short sale the Owner has to get permission from his or her Lender to sell the property for less money than is owed. Often times there is not only a Primary Lender but also a Secondary Lender from whom permission must be obtained. To further complicate matters many times the Lenders are no longer the decision makers because they sold the loan to an Institutional Investor (e.g. a school teacher retirement fund in Norway – hereafter referred to as Investor). So, whomever manages that fund has to agree to allow the Owner of the property to sell it for less money than is owed the fund.
Another problem of course is trust. Why should the Lender or Investor believe that the offer on the table represents the highest and best price possible for the property? After all, the Owner will lose any equity that he or she may have had in the property and they are losing the property itself. It is easy to understand why a Owner “just wants out” of the problem and will sell it to the first buyer who comes along, regardless of how low the offer price might be. A higher price really just benefits the Lender or Investor and doesn’t really benefit the Owner (except for any consequential tax ramifications which we will not address here). Also, in most cases the Lender/Investor has very little knowledge of the property specifically or the condition of the surrounding real estate market in general and has little reason if any to trust that a proposed short sale is in its best interest. For all the Lender/Investor knows it might be best to deny the short sale and force the property into foreclosure.
Finally, in a normal market there is a more equal balance of Buyers and Owners than exists today. In a more normal market both parties stand to benefit to a reasonably comparable degree. The Owner gets to sell his or her home for a profit and the Buyer buys a home that they like with the anticipation that prices will go up (so the sooner they buy the better). Both parties benefit. In today’s market, Owners are losing money to sell their homes and Buyers are trying to buy properties below their market value. A Lender/Investor can easily wonder if now is the best time to take their loss and allow the short sale or is it better to hang onto the asset until the market moves to a more balanced condition.
So there you have it, short sales are extremely hard to put together because 1) the true decision makers, Buyer and Lender/Investor never communicate 2) Owner’s just want out and are willing to “sell” the property for less than market value 3) the Lender/Investor is largely uninformed of the condition of the property and specific market conditions of the immediate area 4) the Lender/Investor has very little to gain from a short sale and MIGHT instead benefit from taking the property back via foreclosure 4) Buyers, rightfully so, are looking for great deals and are hesitant to pay “fair market value” assuming that fair market value can even be ascertained in today’s fluctuating market.
Gang, we strongly suggest that Buyers look at properties that have already been foreclosed upon OR even better, traditional sales (i.e. an Owner selling without being under financial duress) instead of spending time viewing and making offers on short sales. With a foreclosure or a traditional sale you actually know what you are getting into and you can reasonably expect to close the deal AND get a good price. Why go through the brain damage and the emotional trauma of “buying” a short sale when there are equally good or better options? Call the agents at We Know Urban Realty for help finding a great deal that can actually close.
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