Short-Sale Transactions - The Current "Buzz" in Real Estate - Very Difficult to Pull Off!
SOME EXPERTS ESTIMATE LESS THAN ONE IN FIVE SHORT-SALES ACTUALLY CLOSE!
Here in Chicago, and elsewhere across the country, there has been a lot of press coverage, and more than a few seminars, about how a real estate investor can make money, or a distressed home seller can eliminate his mortgage debt, by selling short in today's housing market. The process of short selling in real estate - where the home is sold for less than the balance owed on the mortgage loan - is rarely a slam-dunk, however, and often not successful.
On the surface, a short sale transaction would best serve the interests of all parties concerned. The seller gets out from under oppressive mortgage debt - often higher than the house is worth in today's market. The lender avoids the costs, litigation, and hassle of completing a foreclosure, and the new buyer gets a good deal on a home.
A couple of years ago, short sales were rare - property was appreciating, loans and refinances at attractive interest rates were common, and loan payments were generally affordable. Today, however, as the polar opposite is usually true, many distressed homeowners are exploring the short sale option. According to National Association of Realtors estimates, short sales account for roughly 18% of all real estate transactions today.
In the usual real estate transaction, agreement need only be reached between buyers and sellers. With a short sale, however, the bank, and the loan's mortgage investors, have to approve the short transaction. This review by the lender often takes up to two months to complete. Understaffed lender Loss Mitigation Departments - few were expecting the current mortgage meltdown as recently as mid-2007 - exasperate the problem, and add to the delays.
In many cases, the lender counter-offers the buyer's price, or rejects the offer outright, without opportunity for counter-offer.
Home purchases made over the last few years, in the heart of the boom market, generally involved TWO mortgage loans - one for 80% of the original purchase price, plus a second mortgage for between 10 and 20 percent of the total home price.
Often times, this second lender wants a greater percentage of the indebtedness than the first mortgage holder is willing to offer them. The subordinate second lender refuses to negotiate enough on their smaller loan, and the deal fails on this basis.
Some mortgage servicers reject short sales because they feel a work-out arrangement is possible with the seller, especially if the seller holds other assets or property. In a few occasions, the lender becomes concerned the transaction is not "clean," and the "buyer" is really another family member looking to bail his relative out from a tough situation.
Indeed, the success rate for short sale transactions is very low! One Coldwell Banker Real Estate Agent in Las Vegas NV estimates only 20% of short sales actually go to the closing table. The rate for conventional sales usually exceeds 85%. One online real estate broker serving the Seattle WA market, Redfin Real Estate, represented 65 potential short sale buyers last quarter, but only 3 of these transactions actually closed.
The majority of short-sale buyers do not truly have the patience it takes to complete a short transaction. Some lenders take 6 weeks or more to review each short sale file, and may reject the buyer's offer price even after this long wait. The second mortgages that most homeowners now have only add to the wait. Frustrated buyers often walk away at this point.
Here in Chicago, in the West Rogers Park Neighborhood on the North Side of the city, our Team sold a condo short last summer, only to have the buyer cancel the sale after a 10 week wait, and an inconclusive response. The condo went into foreclosure, reverting to the bank. Today, the condo, now owned by the bank, is on the market for $30,000 less than the previously-accepted offer!
Often, after it becomes known among potential buyers that the property is selling short, buyers write low-ball offers, since they know the bank will consider their offer, not the more emotional homeowner himself. It is unlikely that the lender, however, will take an offer too much lower than the current market price, as they estimate it.
National Mortgage Investor Fannie Mae is currently considering guidelines to provide a "floor price" on short-sale properties, before they go to market. This could increase the chances for eventual success, by scaring away buyers thinking unrealistically.
Please review a very thorough article in The Wall Street Journal from April 17th, by reporters Ruth Simon and James R. Hagerty, for more detail and relevant links.
DEAN MOSS & DEAN'S TEAM CHICAGO
