With the housing crisis behind us, the real estate market in America is experiencing fewer short sales and foreclosures. Short sales, or distressed sales, happen when the seller is upside down on their mortgage and negotiates with their lender(s) to sell the home for “short” of what is owed. We should expect to see short sales for next few years, even as the economy recovers.
We also expect more defaults as the homes that are underwater are many. Banks are getting better at dealing with short sales than they were a few years ago, with new standards and practices to streamline and normalize the process. And, thankfully, real estate professionals are getting smarter and more experienced.
I’ve heard many myths circulating about short sales, so here are some basics on the subject. It is true that distressed sales take longer than traditional sales to complete. The offer must be agreed upon by the lender(s) in what is called a “third-party approval”. The original mortgage has usually been sold on the secondary market to investors, who must be contacted for approval. Imagine if the investor is a retirement fund based in another country. This is what takes time.
In all short sales, the offer must be “packaged” correctly for the bank to even look at it. The knowledge of the correct packaging has been the learning curve for the real estate industry. After several years of experience, several certifications offered by various organizations including the National Association of Realtors, and hundreds of training sessions from lenders and brokers, the industry is figuring it out. Distressed sales aren’t so distressing as they used to be.
Common Mistakes with Short Sales
- Incorrect pricing strategy is the most common mistake that Realtors and homeowners make when it comes to selling the home short. The home must begin at market value to prove to the bank that an honest effort was made to sell the home at that price. Of course, the market price is a little volatile at present, especially for anything other than a traditional sale. The home must be lowered in price until it reaches a point that a buyer will pay, all within the amount of time the seller has before the foreclosure date. This takes a strategy and it takes experience.
- The second most common error made with short sales is not having the proper package of documents the bank requires. Banks are overwhelmed with mortgages in default. The person at the bank receiving the package has a checklist. If things are missing from the package, it usually goes in the trash, instead of on the pile of 3,000 other packages that came in that week. An agent with experience and training will know how to put together the right package.
- The timeline of the foreclosure is critical in the selling strategy. One of the problems that occur with distress sales happens when the foreclosure laws of the state are not understood by the Realtor. Having an offer in time can stall the foreclosure in most cases.
- One of the misunderstandings about short sales comes from buyers who think they will get the home at foreclosure prices. This simply won’t happen. Banks have appraisers who will get a number as close to market value as they can. Low ball offers will be put in the trash alongside the unacceptable packages previously mentioned.
- The other mistake that can be made concerning short sales happens when the seller has not proven they really have a hardship, and the short sale is denied. There are three must-have criteria for a seller to be approved for a short sale: 1. Financial hardship, 2. A monthly shortfall, and 3. Insolvency.
Financial Hardship: The seller must be able to document that they have a financial hardship that makes them unable to pay their mortgage. This could include a mortgage payment adjustment, a job loss, unmanageable debt, divorce, or business failure, or other things. The definition of financial hardship is “A material change in-between the day the mortgage was signed and today that has affected your ability to pay.”
A Monthly shortfall: The lender will want to see proof that you cannot pay your monthly payment on a financial worksheet. Total monthly income less total monthly expense = monthly shortfall.
Insolvency: You must not have the means to make up the shortfall. You don’t have to be completely broke, you just can’t have enough to pay what you owe.
The documentation can be tedious, but you can see why it’s necessary. Without all the right documentation, the sale can be derailed after weeks or months of waiting.
In our Frederick real estate market, less than 10% of the listings are foreclosures or short sales. This has come down from the high of 30% that we saw a couple of years ago. There is one thing that is sure about a distressed sale, eventually it will reach a price that is irresistible to a buyer. It will sell. Having correct information will help the sale go as smoothly as possible.
Chris Highland is an experienced short sale agent. CDPE – Certified Distressed Property Expert. Contact us for a discreet conversation to see if you qualify for a short sale.
Contact Us for buyer representation if you are considering purchasing a short sale.
Associates at eXp Realty, Broker – 888-860-7369