In the commercial world of asset management, we call short sales "discounted pay-offs". Oftentimes, the short sale preserves the condition of the property thereby avoiding any unforeseen repairs occurring after the borrower vacates. Houses show better while they are lived in and typically are in better condition as compared to being empty, dark and unventilated.
The challenge in the single family industry is the number of properties that are involved (even the RTC days of commercial properties didn't see as many properties come through the decision process of the mortgage servicers). So, the streamlining of the short sale process has been one of the most challenging, and frustrating, aspects of this situation over the past 5 years.
Many of the foreclosures result from borrowers simply giving up and walking away from the property and/or not being well educated on their options when financial hardships occur. Sometimes, borrowers are trying to sell short of their loan balance but can't find a qualified buyer before the servicer has provided the maximum number of months of delinquency (known as "forbearance"). They won't wait forever as the borrower attempts to short sale. The decision to ultimately foreclose may also refer back to the assumptions and the timing of the original decision to allow a short sale. So, it is imperative as a short sale listing agent to stay in constant contact with the servicer especially when the asset managers change, which happens frequently. Asset management in the context of residential mortgages is far from a glamorous job. Long hours, little pay and no real recognition. Oh yeah, and typically, many of the agents try to tell them how to do their job. My success with short sales has been a result of understanding their processes and the respect for the position that these people and their investors/employers/certificateholders, are in. They are losing money and simply attempting to recover as much as possible. That being said, for us as Realtors, there is a tremendous opportunity to educate homeowner's about the benefits of a short sale.
For that matter, if any of you know of a short sale situation, I'll be glad to pay a referral to you if you prefer to avoid the process all together. Send me details and homeowner contact info along with a referral agreement.
Brent Rice, Top Recommended Broker
The Rice Group, Inc.
A short sale is typically a more assured sale than the possibility of a sale after foreclosure. So the net received from the short sale is weighed against the possible net if foreclosure is allowed to proceed.
Yes, the foreclosure does entail higher costs upfront for the attorneys and while the REO is maintained in inventory, but the value of a REO can be higher than the price offered as a short sale.
Usually, this condition occurs when the foreclosure occurs during the market lulls (in December-January in Texas). In spring, the house might fetch more as a REO than a reluctant buyer in November would offer as a short sale.
The bank's preference is to minimize loss but with a sharp eye on the risk.
Short sale buyers are often required to qualify with the bank, even if they get a loan from someone else. This assures the bank that the short sale buyer can in fact buy the property, lowering their risk.
A REO on the other hand might have 1-2% carrying cost per month. The listing brokerage or property management services aren't free. Someone has to turn on heat in winter and possibly other utilities, besides secure the vacant property. There's risk in those things plus additional costs.
Usually, but not always short sales turn out to offer lower risk and lower cost than foreclosure, making the choice favor short sales for its minimization of risk.
Suppose, on the other hand, nobody went out from Thanksgiving til New Year's - which is an overstatement of reality. The only short sale offer to come in might be an investor trying to buy it for 50 cents on the dollar. Should the bank simply wait until mid-January to foreclose? Or should it accept the low-ball? If occupied, wait and foreclose when the market is ready. If unoccupied, it makes little difference.
Also, sellers of short sale houses usually remain in the houses until escrow closes and, generally, keep them in livable condition. Good condition means the house sells for more and mitigates the lenderâ€™s loss. Foreclosure houses often deteriorate from lack of care and/or become the targets of vandals and/or squatters. Poor condition depresses the value of the asset increasing the lenderâ€™s loss.
Typically, banks will consider short sales than foreclosures because foreclosures can entail huge carrying costs such as legal fees, asset property management costs, etc.
The quicker they can convert the properties into liquid assets, the better.
Do the math if a bank does a short sale they eat the loss.........
Forclosure may sell for less then the short sale ...............
Bank may not take a loss at all if the loan was goverment insured...................