Anatomy of a Short Sale

I was watching an interview today and there was a gentleman talking about his new book, “Architects of Ruin.” It’s a study of our current economic crisis. His thesis, simply put, is that we’re in the trouble we’re in because of the liberalization of lending guidelines. Although he made some valid points I was struck with the sense that, as interesting as it was, it was a misplaced focus. Does it matter if the cause of the crisis is irresponsible lending, or irresponsible borrowing or an eroding manufacturing base and outsourced jobs or any number of blame based theories? My focus is what is happening right now and how we move forward. There is an Italian proverb that states, “When a ship has sunk everyone knows how she might have been saved.” Will understanding the journey to the train wreck make the wreck disappear? I don’t think so.

This brings us to the wonderful real estate climate we have today. And, as strange as it is, we are fortunate to have a climate at all in Portland. A good part of the state and the country is seeing almost not activity at all. We have very good movement in the three hundred thousand and below range and a surge in purchases by first time buyers.

The challenge that we face in our market is the flood of foreclosures and short sale properties. I’ve had only three sales all year that were not bank-owned homes or short sales. The bank-owned sales are fairly simple and straightforward. The borrower has defaulted on the loan and the bank is now the outright owner of the home. Offers are submitted and realize a fairly prompt response accompanied by countless addenda. They close within a reasonable period of time. And then, there is the short sale.

To understand the short sale we need to understand what this unique animal is. In a short sale the home owner remains in possession of the property and places it on the market for sale. The issue is that this person owes more on the loan than the house is worth. The home owner hasn’t enough equity in the home to pay off the loan. Sadly, while the home is on the market the mortgage, if not being paid, increases and late fess and penalties accrue. It’s a mess. Remember, this process is happening at the same time that the home may be heading for foreclosure. It’s a race to the finish line.

Now, the process is fairly standard with the exception of the seller trying to dodge the foreclosure bullet. The confusion arises when an offer is made on the property. The seller invariably accepts the offer. The offer is then presented to the lender(s) for the lender or lenders’ approval. Quite often there is a first and a second mortgage in place. You need approval by both the first and the second mortgage holders before the property can be conveyed to a new party. The first is in the best position and has first rights to what equity there is. Often the second position is looking at nothing or next to nothing from the proceeds of the sale. It is usually the second that holds things up and makes the close of the transaction difficult or impossible. They have nothing to gain by approving the offer.

For simplicity’s sake let’s assume that there is only one lender. The process can be long and frustrating. I have a sale that I’m involved in right now that was accepted by the seller, (my client), on the 23rd of July. The sale had to be faxed to the lender. It remained in the fax receiving department for two to three weeks before it was sent to the short sale department. It was not assigned to anyone when it got there. Every time I call for a status update I speak with a different person. Eventually a Broker’s Price Opinion (BPO) is ordered and a local realtor does an analysis of the property and the market and comes up with an opinion of what the sales prices should be. The price opinion is not disclosed to the listing or selling agents at this time. Since my seller has a Fannie Mae loan a second BPO must be ordered. That will not happen until a negotiator is assigned to the file. It is now November 15th and we are still waiting for the negotiator. The buyer and seller are still committed to the transaction but no one is happy. The buyer may withdraw at any time with no penalty. My representation to both sides that we are moving at a standard pace does little to make the situation more palatable. Not only does the seller know that the buyer can evaporate but the buyer knows that my seller has the right to entertain and accept another offer at anytime that can supercede his offer. The lender is always hoping for another, better, offer to come along. Once the negotiator is assigned and the second BPO is done things start to move more quickly. Bear in mind that the negotiator may counter the original offer on any part of the offer. There can be a counter on price, closing costs or possession. It’s entirely possible that the deal can fall apart at this stage.

What makes all of this interesting is that every transaction has it’s own structure or process. The listing agent on one short sale this year had a prioritizing system. The first offer presented was in the primary position and all others numbered accordingly. Second was second, third was third, etc. Our offer was accepted by the seller but wasn’t even presented to the lender until the primary position withdrew and we were moved up the ladder. That sale, from start to finish, took only six weeks. In addition, I was allowed to speak with the lender directly and was able to negotiate a credit for repairs; both very uncommon opportunities. In another transaction there was open competition and any offer could replace the first. We waited for a response for three months only to be told that one of the other offers was approved. There was no ordering. An agent in my company worked on a short sale for six months only to have the lender withhold approval and foreclose on the property. She had to wait for a couple of weeks for it to be listed with another agent at a higher price and write a new offer with the same buyer.

The usual reaction from everyone involved is frustration at the very least. They point to the lender’s incompetence and indifference as the reasons for the protracted close. The sentiment is that the lenders don’t care about a situation that they helped to create. Don’t forget our blame-based theories. I was sympathetic to that point-of-view myself until last week. I was making my weekly call to track our progress and had a frank discussion with one of the processors. I asked him if there was anything that I should be doing that I wasn’t doing to help my client. He explained that the system is overloaded. Every processor is carrying an average of 600 files! They are instructed to prioritize the files according to proximity to foreclosure. Those files are processed first and the others not in imminent danger are pushed back.

The final thought? Patience is the key. The processor I spoke with the other day made it quite clear that a demanding and impolite agent gets nothing accomplished. Also, be sure that you understand that it may take longer that what seems necessary or reasonable. Be prepared for a long involved process. The short sale is not for the squeamish.

Thanks for coming to our site and reading our blog. As always, we welcome your input and/or questions. Next week we’ll be talking about the structured sale.

Until then the information has been … On the House