First of all, corrections: I referred to the owners of the property in my last post as “former owners” which is not the case; they were owners of a property that had a lien on it that they needed to satisfy at sale, and they had negotiated that their pay-off would be accepted, even though it would be short of the full amount. We don’t really think of them as full owners in a short sale, since the sale is subject to their lender’s approval of the contract, but technically that’s what they are. Secondly, since I last looked (note:I haven’t to date listed a property where the owner has negotiated a reduced payoff to his mortgage servicer at settlement) our local MLS on the peninsula is apparently requiring that listings disclose that contracts are subject to the seller’s lender’s approval. This doesn’t change the fact that sellers still have to give their permission for this financial information to be disclosed, which they do, as part of the listing.

So now, the answer: is a short sale worth the pain, in terms of financial benefits to the buyer? As usual, “that depends” is the answer. It depends in large part on the buyer itself, i.e., how much the buyer resembles the typical buyer of, say, a foreclosure. If the buyer can pay cash if necessary (so that rate lock-in expiration is not a continuing threat); if the buyer can pay its own closing costs (so the lender is not in a quandary about the appraised value vs. his lower bottom line); if the buyer can assess the property up front, forgo repairs and get all concessions in the form of a price reduction (again, the short lender has mitigated its loss with the least risk)—then, the answer is “yes.” Probably if these favorable conditions exist, the pain is worth going through. However, if the buyer has all these characteristics, is there really that much pain involved? Probably not. My observation has been that most pain, for most buyers, in the average real estate purchase, stems from their relatively high need for predictability even while undergoing what is essentially and unpredictable process.

The short sale is, more than any other sale, by nature unpredictable. The successful buyer must have what might be called patience, but is in fact tremendous flexibility. In order to successfully purchase a property subject to the seller’s lender’s approval, one must have options. Obviously the contract should be written with this in mind, although to be appealing to the seller/seller’s lender, there cannot be too many outs for the buyer. The buyer’s options should mostly devolve upon the buyer’s financial and logistical resiliency, i.e., being able to cope with loss (of agreed-upon concessions taken off seller’s side of the HUD) and delay (60 days of review before a response is not unusual) and even, in the end, a complete fall-thru based on rather arbitrary factors (such as a previous appraisal that shows a higher value than the contract price). A buyer who can do all that may sometimes purchase for a sizeable discount, and acquire a property with instant equity. In other words, this is about the worst environment in which to purchase, for the average buyer.

This is not to say it can’t be done, and that seller-paid closing costs can’t be obtained for the buyer. But the stakes are high. By the time the “short” lender gets around to approving (or not approving!) the sale, and this could be as late as the HUD, the buyer has typically spent $250 and up for a home inspection, $60 for a credit report, and $450 and up for an appraisal. Repairs, and even closing cost benefits, may ultimately be refused. This is far too much hardship to put up with unless the rewards are great.
Copyright Melissa Mason Hoffman, 2009. All content original unless otherwise noted. Note: do not make real estate, financial, legal, or tax decisions without specific advice from the professional of your choice.

About a year ago, I attended several short training sessions, at various locations within the broker universe, on short sales. Soon after, I was working with an investor who needed another rental property, he told me, in order to reduce his income tax bill (this guy is an insurance broker; need I say more!). Long story short (I know, I keep making these puns! Sorry!), after identifying one property and focusing on it, it became apparent that there was competition—LOTS of it!!!—for the property. Worse yet, no clear path to resolution was in sight. Basically, we could compete for an indefinite time, limited only by our interest, and completely undefined by the third party in the transaction, i.e., the lender who would have to agree to a payoff at settlement that was short the full amount owed by the mortgagor, the former buyer.

My client’s reaction to this development was to back off in horror (characteristically, his property manager at another brokerage became involved at that point, so he could make the process as efficient as possible, and I have no idea how his particular story ended). What?! In this market!? (note: this phrase might as well be abbreviated ITM, since it is in seemingly constant use in my profession!). ITM, why should anyone compete? ITM, why would a lender facing an even greater loss if the property went to foreclosure, bother to pick and choose? Do they really want to sell these properties?

Obviously he knew the poor former owners didn’t really want to sell; but his assumption had been that the “short” lender would be a desperate seller, trying to cut his losses and effect some damage control. Certainly, in light of everything I had learned in my training sessions, his reasoning made sense to me. I was unprepared for this development and couldn’t account for the behavior in terms of simple supply and demand. This market episode occurred in the days that short sales were routinely disclosed in MLS (perfectly legal to list them without reference to the situation; in fact an agent can’t disclose the matter in an ad without the seller’s permission!). Things have changed quite a bit since; but at the time there were a ton of them out there, and I had a search entered with over a hundred active properties coming up that had listing remarks that mentioned any or all of the terms used about this kind of situation. So why would these “short” lenders, the third parties to the potential sale, not snap up the first buyer who came along? Why would they be gambling with any opportunity that seemed likely to go to settlement? It was not until my recent experience, helping a client who persevered in buying a property that was going to “go short,” that I fully appreciated the dynamics of the short sale and its implications for a buyer. Next time: Confessions of a Short Sale Virgin Part 2: Is the Pain Worth the Gain?

Copyright Melissa Mason Hoffman, 2009. All content original unless otherwise noted. Note: do not make real estate, financial, legal, or tax decisions without specific advice from the professional of your choice.