Rosen Properties Real Estate Blog
Why Short Sales Suck – Smoke and Mirrors
February 15th, 2010
I couldn’t agree more with my friend Duncan so I had to re-post.
From Duncan at http://www.duncanwierman.com/blog/
Many real estate information gurus today are touting the benefits of short sale investing. In a short sale, the investor is taught to submit an offer far below its current value. It’s up to the investor to influence the agent doing the BPO through documentation showing why his offer should be accepted. Virtually always, there is an impending foreclosure against the home and it’s alleged that it’s in the lender’s best interests to sell it off asap in order to cut losses. The home owner’s financial hardship and the difficulty with selling off the property without a deeply discounted price are also argued for.
Many gurus are promoting the short sale investing method as a way to create fast cash. Wrong. A short sale deal can take anywhere from 90 to 180 days. This is because of, and the exact time frame is dependent upon, the need for negotiations between the lender and the investor . The quality of the documentation also comes into play, reviewing the HUD , etc. Nevertheless, as already stated, we have been hearing a lot about the beauty of the short sale. It is supposed to be a quick and easy way to make a lot of money even if you have very little skill in real estate selling. But the truth of the matter is a far cry from that often-sold fantasy.
Real estate short sales suck. They suck for many reasons, and those who tout them often know this. There is a whole industry of fraud that has emerged around the real estate short sale. This fraud is used to get a lot of publicity and attention for a real estate agent who needs to find new business. The agent will deliberately list a price so low that the lender, who was not even consulted, will never agree to it, and it is probably inaccurate anyway; and the home will not sell. The listing agent knows the home will not sell for that price, but she gets all kinds of new contacts in the process of people finding that out.
But another reason that real estate short sales suck is because they are made out to be easy when in fact they require specialized knowledge to do right. Only a relative few real estate agents really understand how to do them. If you are trying to break into the real estate flipping industry, you will need the help of area real estate agents. Many of them, hungry for your business, will insist that short sales are pretty easy, that they have good relationships with the lenders and appraisers concerned, that they know exactly what they are doing, and other all-too-typical slick salesman’s lies.
If a real estate agent is not highly experienced in or specially trained in REO properties and short selling, and if they cannot prove it, you want to stay away from them, if you still insist upon getting into short sales. Then there is the fact that many agents will never tell you that most short sales don’t close–for anyone. Agents who know this but who tout short sales as a road to riches often engage in another sly trick. They use short sale listings to start a bidding war.
The initial low price attracts many interested buyers, but there will be a clause in the contract that says either party may pull out of the agreement right up to the minute before closing, for any reason and without any notification. Allegedly, this is to protect the buyer from the lender suddenly changing their mind, an unexpectedly high final appraisal, etc. But a sly agent will use this to his advantage and tell the current buyer and their agent that a “new, better deal” has just been offered and the lender wants to see a new bid from the buyer who thought they were about to close the deal. Wise, honest real estate agents will pull their clients out of the deal entirely and not let them get involved in a bidding war. A short sale bidding war is a fool’s game because not only do you suddenly start spending much more money than you initially thought you would and prepared yourself for, but you also are at the mercy of the lender. In a short sale, it is the lender, not the seller, who has the final word on any deal!
There are, however, some great short sale deals that get closed. What characterizes these deals? First, a specialized agent who knows precisely how to do that documentation and make a convincing argument, based on real evidence, that the lender should short sell the property for such and such a price. This agent will also list a short sale price that the lender has said they will accept beforehand. Furthermore, it’s even better if the property in question is a bank-owned property. If this gets listed, it means the lender really is interested in selling the property.
All in all, getting involved in real estate short sales will require you to go through hundreds of leads to make just a few deals, and those deals might fall through at the last minute. It’s simply not worth the time and effort for most people.
There are so many points of contention in this poorly written article that I hardly know where to begin. The author obviously knows next to nothing about the real estate industry, or even the correct terminology of very basic components of a transaction.
Duncan said: ” It’s up to the agent doing the short sale to justify this price (BP0) through documentation showing that the home’s value is really lower than its current market value…”
The fact is: the current market value IS the home’s value. Lenders know this, consumers know this, Realtors know this. Why doesn’t Duncan know this?
Duncan said: ” The home owner’s or mortgage holder’s financial hardship and the difficulty with selling off the property without a deeply discounted price are also argued for.” The fact is: The home owner and the mortgage holder are two completely different parties. The mortgage holder is the lender. The home owner is the mortgagor-having given the lender a mortgage. Who is this Duncan guy and why doesn’t he know the elementary basics? You have to at least be able to accurately identify the players, D.
Duncan said: “A short sale deal can take anywhere from 60 to 180 days…”
No kidding-I’ll kiss a toad if you show me a short sale that was completed in 60 days, start to finish. Let’s continue.
“A short sale deal can take anywhere from 60 to 180 days. This is because of, and the exact time frame dependent upon, the need for negotiations between the lender and the agent.”
The fact is: The lender and the listing agent are not ‘negotiating’ during this process. The lender is reviewing the offer and the HUD-1 settlement statement, ordering an appraisal and/or a broker price opinion, translating the numbers into their own spreadsheet and making a determination on the borrower’s ability to continue to pay their mortgage every month. Lenders know their numbers and no agent, no matter how skilled or convincing, is going to ‘negotiate’ a lender into a bad deal.
I’m skipping over a lot of the misinformation and garbage in the middle where Duncan calls Realtors liars and “slick salesmen” who engage in “trickery”. Not only because it’s late and I’m tired, but also because it’s just childish, ignorant and absurd. Okay….Duncan said: “The initial low price attracts many interested buyers, but there will be a clause in the contract that says either party may pull out of the agreement right up to the minute before closing, for any reason and without any notification.”
Really, Duncan? There’s no way you actually believe that, is there? What clause would that be? What page and line number(s) contain this imaginary and idiotic ‘clause’ of which you type? Are these contracts written on colored construction paper with finger paints? There is no such clause unless someone were to write that in and it wouldn’t be binding unless all parties agreed to it-in writing-and why would all parties agree, in a written contract, that there was no binding contract? That’s just silly. I can’t even give you points for effort on that one.
Skipping over a bunch more stuff because Duncan started rambling on in incoherent babble peppered with trigger words like “lies” and “slick-salesman” and “trickery” again-while saying nothing that made any sense.
One last point before I sign off:
Duncan said: “Furthermore, it’s even better if the property in question is a bank-owned property. If this gets listed, it means the lender really is interested in selling the property.”
It’s even better for whom? The previous home owner who lost their home to the bank, destroyed their credit, and went through one of the most emotionally devastating events of their lifetime? Or better for the lender, who spent on average, an extra $82,000 in the foreclosure process,who now owns a property they never wanted to own and has to hire out contractors to change locks, winterize, plow snow, mow grass, pay utilities, etc? Or is it better for the rest of the home owners in the neighborhood whose property values decline as the number of vacant, bank-owned properties climbs? Please clarify who this actually helps, for whom is this better?
The state of the real estate market is a reality. Short-sales are a win-win solution to a big part of that reality. I don’t know a single agent who does short-sale transactions who isn’t passionate about helping people, and who doesn’t feel a sense of duty to help improve our industry, and these short-sale agents work at LEAST as hard as anyone else in the business. There is a ton of extra work and extra headache involved, for the same or often less monetary pay. The reward comes in knowing you’ve helped a fellow human being-or a family, you’ve faced a daunting task and you’ve tackled a great challenge & been successful.
Yep, a Realtor can make a living helping folks negotiate short sales. Pediatricians make a living doing what they do, also.
Just about everything you wrote is inaccurate or made up. The agents I know who are doing short sales really are coming from a place of contribution and they are doing a great service to communities and to the future of our real estate market in this country.
~Lana Belcourt
Real Estate Consultant with Keller Williams Integrity Realty, Eagan Market Center
Lana
ROFL .. I think you need to RE READ the article. I hope the audience can see that your view point is of a Realtor, and not an investor.
I said ” In a short sale, the asking price many of a home is considerably lower than the obligations against it” – READ.. “People owe more than its worth” What don’t YOU understand..
Ask any investor where short sales are falling apart or how helpful the real estate agents are in the process? Sure, there are Realtors who have good intentions, and are trying to help, but that does mean they understand the process or what is required. You show you dont when you remark against the BPO.
The BPO has to be “influenced” lower by the investor/agent for a profit to be made!
Again, I cant believe you even make the comment, NO negotiation, the bank takes so long because they are simply reviewing the HUD? What ? Come on now …. Maybe you need to review what is being taught in the short sales seminars ( from an owner of KW franchises) before you make your comments about clauses.
No , A short sale is NOT a win win situation. It is only one solution. In the end, the homeowner still lose their home, they still get dinged on their credit, they also have the deficiency judgment against them and get 1099 for the loss.
A better solution is a Loan Modification. But do you offer that first, or do you take the listing in your quest to do the right thing?
Loan modification is always the first discussion. Thank you for asking.
Also-you changed your original article after I left that first comment. Why would you do that? I thought perhaps you would delete my response, but it never crossed my mind that you would alter the original posting. That’s not right. Why did you change it? I know why, I was just hoping you would be willing to explain yourself ‘in print’.
The whole point of doing a short sale is to negotiate down the deficiency judgment and represent the seller’s best interests. You can’t deny that “Paid as Agreed” on a credit report looks better than “Foreclosure.” Usually lenders will work out a payment schedule that seller can afford for the negotiated down deficiency IF they are not solvent. If the seller lets it go to foreclosure, the seller can be hit with a judgment deficiency years later, the bank can garnish wages, put a lien on any subsequent home they purchase, etc.
And we always opt for loan modification and offer our services to help, for which we are not paid, but the bank is not going to modify a loan if the sellers don’t have an income.
I am also a Keller Williams agent, and thank you, Lana, for taking the time to educate the author!!