Friday, November 25, 2011

Short Sales in Northern SLO County --
  Short Sales are listings where the asking price is less then the amount owed on the property and any sale is subject to the lender(s) agreeing to take less then the unpaid balance on the existing loan.  So far this year, in 2011, 17% of the closed escrows in the Northern SLO county have been short sales.   However, as I reported last week,  only 56% of the short sales that went into escrow in the past 11 months successfully closed.  Now, although that means there is a 44% failure rate in short sale escrows, that is an improvement over the last few years.   Banks have realized that they have a better return and less costs in a short sale then they do after foreclosing on a property and have become more realistic.   Why then is there still a 44% failure rate?   Here are some of the reasons: 

1) Long Escrows due to slow processing by lenders:  After a buyer and the property owner have agreed to the short sale, you still have the time frame for lender approval and there may be more then one lender.   The time periods for that to take place can normally be anywhere from 30 days to 120 days or longer depending on the lenders involved.  Then after that you still have your normal 30 to 60 day escrow closing period after the approval is given.  Buyers get impatient waiting for the short sale approval and other properties they may like become available during that time.  Too long a time wait can equal a cancellation.  The solution:  Although we have been doing short sales for 5 years, lenders are still not up to speed in being able to efficiently process them in a lot of cases and that needs to be rectified.  Buyers also have to take a little risk and get some of the inspections done they normally would do after approval by the lenders in case there is something else about the home that will not be acceptable. 
2) Unrealistic Sales Price - Since the short sale seller (the property owner) will not be getting any money out of the sale, many just want it over as soon as possible and do not care what it sells for so they put a low asking price on the property or accept a "low ball" offer.   However, the short sales lender(s) really care what the price may be.   If the price the seller and the buyer have agreed to is way below market value, the lender may likely not accept it.  When the sale is submitted to them for approval they will order an appraisal or a "BPO" (broker price opinion} to see what the actual market value may be.   They are going to measure what that their return on the short sale is vs. foreclosing on the property and selling it themselves.   If you are a buyer in a short sale at a very low price, you may have to be prepared to either pay closer to market value when the lender comes back with what they will accept, be prepared for a let down or do not waste your time.   If you are a seller, remember that lenders can file foreclosures and keep them running during short sales so you may not have enough time to get another buyer after your submitted one is not approved and then have a foreclosure on your credit record.   Buyers can normally get a "good deal" on a short sale but it is also going have to be what the lender feels is their best option.  
3) Sellers Hardship Not Approved - Just as the purchase price has to be approved, so does the seller.   The seller, who is the borrower on the loan, has to show that they really cannot any longer make the payments on the loan or have other significant hardships such as a job transfer.  If they just are tired of the property or making the payment on a house that is "under water" but can afford it, the lender may not approve the sale.   The criteria for this varies a lot from lender to lender but as a buyer be sure and ask your agent to find out from the seller’s agent what the premise for the sale may be.  Unfortunately, most lenders today still will not approve the seller's hardship prior to the offer from a buyer being submitted and this also needs to be changed.  
4) Pilot Error-- Short sales are difficult transactions.   The seller's agent has to be proficient in short sales and be able to deliver well put together and concise packages to the lender and effectively work with the bank and their negotiator.   It is a very time consuming plus sometimes frustrating process and you have to be on top of things at all times.  Although experienced short sale agents will normally have a success ratio higher then average, it is still a risk, so only the most the most diligent, persuasive, focused and tenacious need apply.   Those of us who have done enough of them and have taken specialized training on short sales apply ourselves to the task and are careful to not take listings where there is a high probability of failure or with an unrealistic asking price just to get an offer.   The short sale process has also been quite dynamic so the way they were done 3 years ago is different from today as lenders change their individual procedures and so it is constantly a learning and adaptation process. 

5) Seller and Buyer Frustration - Sellers have to submit lengthy documentation to lenders and keep the property maintained even though they are not getting any money out of the sale.  Coupled with having to lose their home and everything else that goes with it, sometimes it is just too much.  There are critical things that come up in a short sale that the seller may have to do with the lender that their agent cannot and if they do not stay committed to the process, the sale can implode and their credit score will take the hit they were trying to evade in the first place.    Buyers have the anxiety of not knowing how long it will take to get approvals and give up in frustration as things stretch out and just move on.    Patience is a virtue but sometimes elusive. 
   All of the above being said, things are improving.   Pre-approved short sales, where the lender stipulates up front what they will accept for a payoff and have approved the seller's hardship are starting to increase.  Lenders are also improving their systems, their employees are becoming more experienced and their policies are become more realistic.   Realtors are learning the process better and are adapting.   No one likes a short sale in comparison to a standard transaction but they are going to be a major part of the playing field in the real estate market for some time.   Sellers can avoid foreclosure through the short sale process, buyers can obtain some excellent buys and lenders can avoid having unsold properties on their balance sheets.  

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