Short Sales and Avoiding Foreclosure

Otherwise titled: “If you you don’t know what you’re doing, get out of the way!

Here in the Louisville, Kentucky real estate market, I’ve heard rumors that as many as 1 in 4 listings for sale is a short sale. A scary scenario in any market, but worsened by the fact that most REALTORS don’t know how to market, negotiate and get a short sale closed. Unfortunately, as I work with investors, I’m seeing bank owned properties that were listed for months before the foreclosure auction without selling.

As a REALTOR, we have always been taught to get the highest and best offer possible for our clients. This approach is absolutely the correct one with a regular home seller. In fact, our real estate laws and regulations, as well as the National Association of REALTORS Code of Ethics, require that we always work in the best interest of our client. Thus, in a normal situation, getting the best offer usually is in the best interest of the client.

However, when we have a client that is “upside down” or “under water” with their mortgage, and is, or is about to be behind in payments, then their best interest may be something else entirely. Think of your credit rating as a car wreck, a few dings are not nearly as problematic as having the car totaled. A short sale is like some dings, if it is done properly. The seller will have some late or missed payments in their credit report, but with the help of a real estate attorney who actually understand short sales, there won’t be a deficiency judgement and the loan will be noted as paid. The missed payments will affect the credit score to some extent for 1-2 years, but won’t usually be devestating. However, if the home proceeds into foreclosure, then the credit is effectively “totaled” and it will be at least 7 years before recovery.

What I’m finding is that many REALTORS listing properties that are pre-foreclosure, don’t understand that the key is to get an offer and let the bank decide whether or not to accept the short sale. All to often, the listing REALTOR is still trying to get the best price for their client, not realizing that you have to get an offer to attempt a short sale, and a short sale is ALWAYS better than a foreclosure for everyone involved. Some REALTORS even recommend a seller reject an offer and never even present it to the lender for approval. Let the lender determine what is reasonable to their bottom line, they can always reject it or counter back.

Many agents forget that the seller cannot get any funds at closing, so holding out for a higher offer rarely benefits them. The keys to a successful short sale are: persistence- it’s never easy locating the person with the authority to approve the short sale, patience- banks move at their own pace and it has nothing to do with any time frame written in a contract, preparation- make sure the sellers and the buyers understand this process is slower than normal, and pricing- if you never get an offer you can’t have a sale!

Are we upside down yet? Short sales revisited.

As a REALTOR here specializing in homes sales in Louisville, Kentucky, I am seeing more and more home sellers “upside down”. Upside down means that the homeowner owes more than the property will sell for. This creates a problem when trying to sell the home since most owners aren’t able to bring cash to the closing table.

While there are several solutions, many more sellers are now looking at short sales. These are homeowners that have been struggling to make payments but just can’t keep it up. While it used to be that lenders would not consider a short sale until the owner was at least 90 days past due for payments, we are seeing some of the lenders are now approving short sales when the payment is current or only 30 days late. This situation requires a lot of paperwork and proof of hardship and is a time consuming process so many REALTORS shy away from them.

When you have a homeowner that has developed a hardship (loss of job, illness, divorce) that decreases the family income, they will often try to stay current and maintain good credit for as long as possible. When they realize they can’t keep up, they often try to sell their home only to find that the sales price won’t cover expenses. This means they’ll have to negotiate for a short sale or let it go to foreclosure.

Negotiating a short sale is tedious and time consuming. It usually requires a team approach involving the sellers, the lender, the REALTOR and a really knowledgeable real estate attorney. It is very difficult for sellers and REALTORS to find the appropriate department, much more so the actual person, with the authority to approve a short sale. I have found that the attorney gets a much quicker and better response from the lender.