The Pros and cons of Short Sales
The Pro’s and Con’s of Contracting “SHORT SALES”
If you contract and close on a property that is in SHORT SALE status, you are probably buying a property that is probably 15% to 20% below the fair market value of the comparable properties in the same area.
If you are contracting a property that is in SHORT SALE status, there is a 1% (or LESS) chance that you will close on that property at that contracted price. Short Sales are (for lack of a better term) a legal form of “BAIT AND SWITCH” for Banks and Lending institutions.
The “BAIT” is a property offered at a very low price, well below the fair market value. The price is generally determined by the current owner and the listings real estate agent. There is generally speaking, nothing scientific about this process. The agent and owner ascertain what is the lowest priced property in the neighborhood and than place a price on the short sale listing at a percentage below that. The lender holding the lien (the same entity that must agree to and sign off on the contract) will not offer their opinion, other than to say “Bring us a contract and we will let you know!” They NEVER put this in writing.
While it is a fact that all Short Sales need 3rd party approval (the bank holding the mortgage) to approve and close the transaction. There is nothing from the bank that determines what the price of a Short Sales list price should be. If you consult with an attorney on this, they will tell you that the bank should be telling the owner and the listing agent what the list price should be. They do NOT and will NOT put anything in writing at this stage of the process. What they will say (VERBALLY, never in writing). “Bring us a contract and we will get back to you in 8 to 12 weeks”
In bank terms 8 to 12 weeks really means 4 to 6 months (If your lucky). Once a contract is submitted, it has to go to the “Lost Litigations Dept”. In this dept it will be assigned to a negotiator. I am aware of one bank that hired a number of credit card collections people to act as negotiators. In most cases it is unnerving how little these people know about real estate. It generally takes up to 2 months for the contract to be assigned. Please remember that these negotiators are all overwhelmed. They all have 8 to 10 times the number of cases that they can handle effectively. Once it is assigned the negotiator comes back with the same answer. “Leave the listing active and we will get back to you.” This is Unethical and against a major Realtor’s creed , which is TO PROTECT THE PUBLIC!
In Horry and Georgetown counties (Myrtle Beach area) I do not know how many thousands of “Short Sales” were listed for the past 7 months. I do know that only 45 of them actually closed. I do know that it is a safe bet that for every short sale listed there are at least 5 to 7 contracts written on it. (In some cases as many as 20 plus contracts). So if there were only 2000 short sales for that 7 month period. It may be safe to say that there were10,000 to 14,000 contracts written, and only 45 of them actually closed.
Before a property goes to “ Short Sale” status there should be a “hardship package” sent to the mortgagee” In this package there should be a minimum of, the prior 2 years tax returns, 2 months of bank statements, a hardship letter requesting the short sale status, 6 months of pay stubs, a copy of all of the mortgagors monthly bills. A letter of authorization form the mortgagor for the real estate agents handling the listing and a list of all of the others liens on the property. I.e. a second mortgage unpaid HOA fees etc.
The simple fact is most people do not do this before they tell their realtor to upload their listing Short Sale. Since the banks will not put anything in writing to verify the short sale status there is no way to confirm the authenticity of the banks intent.
“EXAMPLES OF WHAT COULD HAPPEN WITH SHORT SALES”
1. A listing comes on the market for $129,900. A client, knowing that there will be multiple offer submitted on this property offers $131,000. ($1100. Over the list price). Two weeks after submitting the contract the listing is still on the MLS as active. A call to the listing agent lets us know that there were 8 contracts submitted on this property. 3 ½ weeks after submitting the contract the listing is pulled from the MLS and put back on with a new list price of $144,900. “BAIT AND SWITCH” Those clients moved on to contract another property and they are still unclear as to why their broker was unable to get a straight answer from the bank. In the mean time they have lost out on the properties that did come on the market during that month.
2. A listing comes on the MLS at $250,000. Again, there are multiple offers. Again, the clients are given a long talk about the PRO’s and CONs of short sales but they feel they have the time and it is worth the wait. So they offer $220,000 on the property. After 2 months of waiting the clients want some confirmation from the bank that they have seen their contract (No confirmation can or will come). So they offer an additional $30,000 to make it a full price offer. This on the condition that they hear something within 10 days. The response from the listing agent is that the bank received the addendum with the offer of the additional $30,000, but they will not get back to the client for another month. In the mean time if another contract comes in that is $1.00 (One Dollar) more than their contract the clients have wasted 3 to 4 months and they still will not get the property. Some 3 plus months later, the listing agent calls the buyers agent to say it’s a done deal but they have to close within 28 days or they will be assessed a penalty for each day that it goes beyond that. The client rushes to secure lending (The program they had locked in no longer exists because it took to long.) They secure insurance. They schedule airline tickets, hotel and a rental car. The day after all of these things had been secured. The listing agent called to inform the buyers agent that the second lien holder had changed their policies a month earlier and as such the deal was not going thru. They listing agent then informed the buyers agent if they came to the table with an additional $8,772.44 to satisfy the second lien holder then the closing can happen. Another first hand case of BAIT AND SWITCH where the buyer has no recourse because none of the lien holders signed the listing agreement.
3) I recently had a listing in Short Sale Status. I received a very good cash off of $185,000 on a 3 bed 2 bath ocean view condo, that was listed for $199,000 for well over a year. The contract came in the first part of June. We (The owner and I) were told rather quickly that a negotiator had been assigned and they were just waiting for the appraisal to come in. Through all of June, July and the beginning of Aug. we were told the same thing repeatedly “That they were just waiting for the appraisal to come in.” In the last week of Aug we (the owner and I ) learned that the appraisal had been completed TWO MONTHS earlier but the bank felt they were being over charged for said appraisal and they refused to pay it. In the last week of Aug. they contracted another appraisal company who was only give 1 day to complete the appraisal (I know because the appraiser called me). On Sept 10th I received and email from the negotiator requesting four additional bank addendums and a final HUD 1 statement and I was to “complete it ASAP” . On Sept 12th (The agreed date to have all documents in by). I sent the complete package in. On Sept 13th I received an email from the negotiator informing me that she had stopped all of the proceedings and sent the entire package to the REO dept. She did this because she said the property was sold on Sept. 8th at a foreclosure sale. In truth the property never sold at the foreclosure sale no bids were high enough. The fact is the bank in question purchased it back from themselves. The emotions of both the buyer and seller were beyond explanation.
4. The most recent development catching may agents off guard of late, is what appears to be a shift in attitude by the banks regarding short sales. I have spoken with a number of agents and lender’s who are putting a deal together for a short sale purchase, and finding that there are a number of purchases and sales agreements that are going south at the 11th hour. Understand that 99.9% of all properties in short sale status are owned by investors. Therefore the individual or group that the agents are negotiating with have nothing vested in the negotiation of the short sale. In fact it is more advantageous for the negotiator if the property in question goes to foreclosure. Many of these are bought back by the same entity that already holds the mortgage. (In many cases for less than the contracted price). The property is then sold at a foreclosure sale. In the mean time the Federal government is pay the bank for their loss. It is not double dipping, but in most cases the holder of the mortgage does far better financially if the property goes to foreclosure rather than through the short sale process.
I can go on with over 100 stories of “Short Sales” that I have heard over that past couple of years and not one of them is in the favor of the buyer. Please give some very hard consideration before you contract a short sale. There is a 99.99% chance that you will not buy a short sale property for what you contract it for because there is a 99.99% that that property will never sell while it is in short sale status. It will not matter who your real estate agent or broker is. They have no control in this process. This is just a way for banks to string it along until it goes to foreclosure. NOTE: Foreclosures are generally a good deal in most cases and they are listed on the MLS.
1. Most Short Sales will have on average 5 to 7 contracts on them. The ones that are at the list price or lower will more than likely never be considered by the bank.
2. Real estate agents and broker’s DO NOT have control over this process. When you submit a contract and you do not receive an answer on that contract for 6 months, know that it is not the realtors fault. They do not have control.
3. The banks negotiator is likely inexperienced, extremely over worked and does not care if your contract goes through or not. They do not work on commission and are not motivated.
4. The bank has never put anything in writing authorizing the “short sale” and because of that they do not recognize any obligation to honor anything in any contract submitted. They are the third party needed to agree to ratify a contract but not one has ever signed off agreeing to the listing contract that was created to offer the property for sale in the first place.
5. A bank can remove the listing from the MLS for no reason and with no warning.
6. A bank can change the list price on the MLS for no reason and with no warning.
7. A bank is not required to acknowledge that they have received a contract.
8. A bank is not required to have the short sale listing uploaded on the MLS as pending or any other designation. In fact they insist that the listing be kept active even when there are multiple contract already submitted on the property. It’s like their own private auction where only they can win.
9. In South Carolina (as in most states) one is required to have marketable title to a property before they can list it on the MLS. Short Sales appear to be the one exception to this rule. If a contract requires 3rd party approval to sign off to ratify a contract, than that same 3rd party should have signed the listing agreement before that property is listed. They DID NOT and WILL NOT sign it.
10. In South Carolina, the Statute of Frauds states “All contracts for the sale of real estate must be in writing to be enforceable”. Since the banks put nothing in writing, then legally the contract that is submitted on a “Short Sale” is unenforceable!
11. In South Carolina (as in most states) The Four essential elements are needed to have a valid contract are,
A) An offer and Acceptance. It is not a contract until everyone (all parties) agrees to exactly what the terms of the contract are. An offer can be Accepted, Rejected or Countered. They do none of this with a short sale!
B) Legally Competent Parties. Both parties must be of legal competent age and have
Sufficient mental capacity to enter into a contract.
C) There must be consideration. i.e. money offered for the property would be
D) Legality of Object. Since a contract is a legal document we cannot enter into it to
do something illegal.
With Short Sales, Section “A” Offer and Acceptance, is not acknowledged. The bank does not acknowledge that they have received your contract. Therefore, technically, you do not even have a contract when you submit one on most short sales.
Section “D” Legality of Object. Since state law states that one must have marketable title to sign a listing agreement. The law further states that while oral contract for real estate are legal. A contract for the sale of real estate must be in writing to be enforceable. It further states that all Listing agreements must be in writing and signed by the parties holding title. If a “SHORT SALE” requires 3rd party approval to authorize the short sale. Why is this same 3rd party required not also required to sign the listing agreement.
An example of this. Assume that you have two brothers who have inherited their mothers home. One brother lives in the home, the other does not. They both have equitable title to the property. The brother that lives in the home decides that he wants to sell and move to another area. A realtor is called and a listing agreement is signed with the brother that lives in the home. A week later the listing agent learns of the second brother. The agent approaches the second brother who refuses to sign the listing agreement but says to the agent “Bring me a contract and then I’ll decide if I am going to sell”
This is unacceptable and if the listing agent does not remove the listing from the MLS then they would be disciplined. First because they MISLEAD THE PUBLIC. Second because not all of the owners of the property in question agreed to the listing and did not sign the listing, Third, all realtor are taught to PROTECT THE PUBLIC. This is not protecting the public.
This is exactly what is happening with ALL SHORT SALES. If you have any question of this ask the listing agent of a short sale to show you the listing agreement where the 3rd party has agreed to all criteria of the listing and then signed it. I am not aware of one example of this in the entire country.
Please understand that I am not an attorney but I do have a 4 year college degree and I am a licensed, active real estate broker that takes his education very seriously. The motivation of this letter is because clients of mine have been victims of Short Sales. I am aware of many others who are and have been victims of short sales and I believe that the public needs to hear this side of the story.
Please understand that their is a great deal of emphasis placed on all real estate agents and brokers in the state of South Carolina to “PROTECT THE PUBLIC” and to always conduct ourselves in an “ETHICAL MANNER”. Where “Short Sales” are concerned we are powerless to do either.
PLEASE RECONSIDER BEFORE CONTRACTING A SHORT SALE!