Why Buyers Should Avoid Short Sales

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I've been saying this for a long time: Short sales are poison for buyers. I don't know why people encourage buyers to look at short sales, because there is no advantage for buyers that I am aware of. In fact, there are several decided disadvantages. I'd much rather make offers on lender owned property, or anything else for that matter. Short sales are the absolute bottom of the barrel as far as buyer desirability.

For those sellers who desperately need to sell, which is pretty much every short sale, I really am sorry. But I have a fiduciary responsibility to my buyer clients, who come to me wanting a better property for less money, and less hassle. The facts of life in short sales work against getting a bargain, while sabotaging our (mine and my clients) ability to control the transaction. Therefore, I advise against. Much better for buyers to look for lender-owned or other property.

The main issues lie with the lenders, who are in denial of the situation. I've never come across anyone in any lender's short sale department who didn't have their head stuck in cloud-cuckoo land. Instead of making a prompt approval or disapproval of an offer, they sit and delay and hope for a better one. When I originally wrote this, I would usually have the purchase financing ready to go in about two and a half weeks from the date of the purchase contract. For any other property, it's pretty trivial for the listing agent to be ready to close by then. We're done, and my client is happy.

For short sales, we usually won't get word as to what the lender is going to do for at least a month after that. I've literally never had an approval from a short sale lender within what used to be a normal escrow period of thirty days. This has implications for the buyer's loan. Mortgage Loan Rate Locks are more expensive for longer periods. Pulling a rate sheet at random, a 45 day rate lock adds a sixth of a point to the costs for a thirty day lock, while a sixty day lock adds four tenths of a point. On a $400,000 loan, this works out to roughly $667 and $1600, respectively. If you need an extension, a tenth of a point (roughly $400) buys five calendar days. Some lenders aren't extending locks at all for loans above the conforming limits. Or buyers can float the rate, leaving themselves at the mercy of the financial markets as to the loan they might eventually get. None of these is an optimal situation from a buyer's point of view.

When they do respond, the short sale lender will always try to squeeze more money out of the transaction. They're in denial about their loss, with the practical effect of making that loss worse. The property is only worth what it's worth. The first few days on the market are the best time to get the highest offer. If you didn't get an offer then, you're not likely to get more money later, as I said in How to Sell Your Home Quickly and For The Best Possible Price. But loss mitigation departments are congenitally clueless about this - and they will forget whatever you manage to teach them within 4.3 nanoseconds. They are structured towards shaking the most possible money out of the transaction, and seem completely unable to learn that all this does is result in a failed transaction, no matter how many times it happens. What's that definition of insanity again?

So what usually happens (after 45 to 60 days - weeks after my buyer clients could be living in any other property) is that the lender wants two things: A higher price out of my buyers, and a commission reduction on my part. I'm not going to say that I'm in love with commission reductions, but I'll agree in order to make clients happy. But the deal-killer is that they want the buyer to make a higher offer. Ladies and gentlemen, I went out and negotiated a good deal that my client is willing to accept with the seller, despite all of the delays and problems in short sales, and here's this third party essentially vetoing the purchase contract. If I did get a heck of a deal, it's now gone. In any case, my clients are going to be unhappy, being presented with what amounts to an ultimatum: Pay more money or lose the property. Show of hands, please: Is there anybody reading this that would be happy to get such an ultimatum? Unilaterally attempting to alter the purchase contract is forbidden with any other transaction. Why in the world would a rational buyer want to subject themselves to that? Why would any but the most clueless of agents not discourage them from doing so? I'm not going to say it's impossible to get a great bargain on a short sale, but it is highly unlikely.

I do consider my clients being willing to deal with a short sale to be worth some serious concessions in the purchase contract, as does every other buyer's agent with any experience in dealing with them. So it's not difficult to negotiate a pretty good bargain initially - but it's extremely difficult to keep that contract intact when the short sale lender gets involved, because their priority, the only thing that's on their radar screen, is shaking as much money as possible out of all the participants.

Nor is there anything I can do as a buyer's agent that's going to make the transaction fly faster, or prevent the short sale lender from sabotaging it. I can argue until I'm blue in the face. They're not going to listen to me. They might listen to the listing agent, but not the buyer's agent. I can help the other agent with what to say, but I'm still relying upon someone else to convince that short sale lender. Whatever they do, they're going to take their own sweet time responding, hoping for a better offer.

The cold hard statistics is over eighty percent of all short sales fall apart, and most often it doesn't even get as far as whether the buyer is qualified. The short sale lender wants more out of the buyer, wants the seller to come up with more money than they've got, the buyer gets tired of waiting and moves on - something. No matter what is is, my buyer isn't going to be happy. Quite often, I get the blame, at least in my client's mind, for the transaction failing - even after I warned them as to why this was a bad idea in the first place.

If you do get an approval from a short sale lender, quite often they're written on a ridiculously short deadline. Given all of the facts above, I'm not going to advise my buyer clients to spend their money on appraisal, inspector, etcetera until we do have an approval. That's just money thrown away if the short sale lender doesn't approve it. But waiting on them means it's likely to take more than a week to get the loan done once we do have an approval - and dealing with a one week deadline was an actual experience I had once. Not to mention the effects of waiting for such an approval on the buyer's due diligence period, and possible exposure to loss of my client's deposit (at the very least, it's sitting there tied up in escrow while everything gets sorted out).

Seller paid closing costs, integral to most transactions currently, are also extremely difficult to get approved. These are money out of the lender's pocket, and they're going to require a higher than what they consider "market" price in order to compensate them. This is intelligent and reasonable, but if you're looking for a bargain due to them not understanding their bottom line, it's not going to happen, and in fact, when one or both of these things are part of most transactions, the "market" is priced to include them. Result: The buyer who needs one or both of these is likely to have to pay more for a short sale than any other property they might fix their eye upon. And those buyers are wanting me to find them a better property, cheaper. Are you still in doubt as to why I advise buyers against short sales?

Since I originally wrote this article, another category of problems has become endemic as well. Listing agents are playing "bait and switch" on the price - advertising prices far lower than any offer the lender will likely accept. Such a sale isn't going to happen, and the agent knows it - but that's sure a good way to get prospective buyer clients to call, giving the listing agent an opportunity to gain a new client! Furthermore, because there are so many of them and they are time intensive, many brokerages are delegating the negotiations with the lender and asking prospective buyers to pay for it.

It is far more fruitful for most buyers to focus on properties in other categories. For this particular property, better to wait until is is lender owned, at which point the bank is on the hook, paying money out of their pocket, and usually the money tied up in this non-performing asset costs that lender heavily in leverage on their working capital. Lender owned properties get turned over to different employees, with different performance incentives, with the instruction of getting that property off the lender's books! The money this costs the lender is their own management's fault.

For any lenders reading this and not liking it: The responsible party is you. If you don't want them to become lender owned and cost you much more money, get real about your short sales! Publicize your criteria so buyers and their agents will know they're not getting into a "black hole" situation, and respond in a timely and reasonable fashion without trying to leave people who weren't involved (the prospective buyer and both agents) holding the bag for your mistake. It will save you money by dealing with the situation before it goes to Trustee's Sale.

As far as writing this article goes, the only one I have any sympathy for is the current owner, who really does need to sell. No matter what past sins they may or may not have committed, that owner is currently trying to face reality and deal with it. As the buyer, however, unless you believe that seller's plight is worth wasting several tens of thousands of your dollars, there's nothing you can do. Buyers should avoid short sales. They're not likely to end up happy.

Caveat Emptor

Original article here

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3 Comments

Shirley Dale said:

Hi Dan - really great articles. We looked at 1 short sale and the listing agent did what you described above (re-listing the house significantly lower than what they knew the lender would accept to generate offers). My question for you is what incentive do lenders have to accept an offer when they often have their losses covered by the Mortgage Insurance, premiums for which have been paid by the homeowner?

Dan Melson Author Profile Page said:

Well, they have less disincentive to approve it. Let's be very clear here - the lender is never going to approve a short sale unless the alternative is going through foreclosure. But if there's mortgage insurance, at least some of their losses are covered. Mortgage insurance is never full coverage - but it means they lose less.

RON said:

awsum article , sssssoooooooo true , after waiting 2 months now ( and firing my realtor because he thought i was impatient for asking for updates ) the bank came back with a counter offer of 15 grand more !!! it was listed at 65 k with NO offers , i offered 60k all cash no inspections , they countered at 75k . yeah , like that's going to happen , my first and last short sale offer !!!

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About this Entry

This page contains a single entry by Dan Melson published on July 17, 2014 7:00 AM.

Real Estate: Giving Someone a Monopoly Does Not Encourage Top Performance was the previous entry in this blog.

Sixty Second Public Service Announcement About Selling Real Estate is the next entry in this blog.

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