Are Short Sales Fake Listings? Part 2
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Are Short Sales Fake Listings? Part 1
Why Short Sales Don’t Sell
Imagine a banker foreclosing on people. Did you picture in your mind a damsel tied to railroad tracks and a guy in a black hat twirling his moustache?
That’s just about right.
The Lender’s Stake in a Short Sale
Frank Llosa brilliantly documents two games that lenders will play when asked to accept a short sale.
Game #1 - Drag Your Feet and Continue Making Money
Tell the owner that you’ll accept their short sale, as long as they keep making payments. This way you continue to get paid whatever the mortgage was or whatever you allow the buyer to negotiate. The longer you drag your feet, the longer you get paid.
Game #2 - Drag Your Feet, Continue Making Money, and Foreclose Anyway
Another reason the lender may not want to accept a short sale is that if there is Private Mortgage Insurance on the loan, they’ll be able to get the loan paid off if they foreclose. Expecting the bank to “cut its losses” only works if it’s not the case that they can have the loss covered in full if they foreclose and have to cover the loss themselves if they don’t.
While we’re on the subject of foreclosing anyway, don’t think the fact that you (as the buyer of the home) are in contract with the seller will deter the bank from foreclosing. We even had one buyer who got to the end and had a loan ready to fund, (and yes, this buyer had paid for home inspections and an appraisal out of pocket) when at the last minute the bank decided they’d foreclose anyway.
Buying a Fake Listing? Then You’ll Need A Fake Agreement.
Do you feel uncomfortable with short sales yet? Take a look at the following language from the California Association of Realtors® Short Sale Addendum:
“Buyer, Seller, and Brokers do not have any control over whether Short-Sale Lenders will consent to a short sale, or any act, omission, or decision by any Short-Sale Lender in the short-sale process.” In the next paragraph on buyer and seller costs, this addendum goes on: “Such costs will be the sole responsibility of the party incurring them, if Short-Sale Lenders do not consent to the transaction or either party cancels pursuant to this agreement.” [My emphasis both times].
Nice, huh? You are on the hook for your costs if either party cancels “pursuant to this agreement”, but you just got done “agreeing” that nobody who has anything to do with the agreement can control what the bank’s going to do.
More About Lenders
Even if they don’t play the games we talked about above, think about the position the lender is in, and you’ll realize that lenders are not chomping at the bit to make your short sale work.
In the long run, the threat of foreclosure is the main stick that lenders wield. It keeps everyone from doing a short sale when they get in trouble or just want to move and can’t afford it. (It’s not called a MORT-gage for nothing). Making the short sale process easy and convenient flies directly in the face of the lender’s overall financial interest.
In the short term, if they have short sales and foreclosures on the books, the bank is paying the taxes and other carrying costs on the foreclosures, while the seller is still paying those costs on short sales. To be sure, maybe in many cases the seller isn’t keeping up on these payments either - but at least in this case the costs are deferred to the future. Foreclosures are bleeding bank funds now, so it stands to reason the bank will spend most if its resources on those.
Not only is a foreclosure a present liability and a short sale a future liability, but there’s still a chance that the lender won’t end up owning the home on a short sale. The only reason a bank will accept a short sale is that the bank is convinced that the buyer will go through the whole foreclosure process if they don’t and the bank will lose. Documenting this means spending further resources, but there’s a cheaper way to find out who’ll cure the default and who won’t. Send everything to foreclosure and only take a bath on the sellers who don’t cure the default. No wonder that we met with one major lender who told us that their policy was simply not to do short sales and go forward with the foreclosure process.
If Short Sales Are This Bad, Why Do Agents List Them?
There are several reasons that listing agents accept short sales, even though the success rate for such listings is dismal at best.
- Altruism
Listing agents naturally want to help sellers if they can. Even though the number of short sales that get approved and close escrow is dismally low, sellers who need to do a short sale may in some cases receive some benefit from the sale in the unlikely event that they’re successful. It’s hard to say no when a seller is in trouble and asks you for help. - Business Benefit to the Listing Agent
Most agents meet buyers primarily through their own listings. (Elite Properties is a bit of an exception, since so many buyers find us through our web sites). The traditional approach to a successful real estate career is to have well priced listings, because such listings attract buyers. Having a sign in front of an attractively priced short sale will bring many calls, and there’s a benefit to meeting those buyers even if they end up buying another property from you down the street. In other words, from a listing agent’s perspective, whether a given listing sells is less important than whether a given listing can generate other business.
To add insult to injury, listing agents know that other buyers and other agents are familiar with how bad short sales are. So in order to tease buyers into viewing their listings, prices are often dropped below anything that’s at all reasonable for the area, to a point where there’s no chance at all the lender will accept the offer. We know of one case where a Broker Price Opinion (essentially an appraisal on the basis of which the lender will accept or reject the short sale) was done and the home was worth $350,000. Nevertheless, it was listed at $330,000, and the agent told us that it was listed that way because she wasn’t getting any showings at $350,000.
Welcome to the world of short sale logic!
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(Please note that I hope this information is intended to be used before you’re in contract, and should not be taken as any sort of inducement to cancel an existing purchase agreement, listing agreement, or other contract you may have.)
May 30th, 2008 at 4:46 am
The key fact that is missing in the discussion is the way a bank handles a loan in default. While the bank facing a foreclosure is not paying the property taxes and other running costs the defaulted loan has to show up in the loan loss reserves. This significantly impacts the bank’s working capital and it greatly reduces the ability for the bank to make new loans.
The cost for a default loan in terms of capital is approximately 6x the cost of a performing loan. Yes, a performing loan still has to have capital set aside in reserve (fractional reserve banking).
There are many reasons why a short sale will not be accepted. Some of the time it can be nothing more than the right person did not see the file in time. What a bank will take at various points also changes just because there can be more than one department involves. The REO folks have different targets than the people dealing with the loans in default prior to a foreclosure auction.
May 30th, 2008 at 2:02 pm
Hi John,
Thanks for a good addition to the discussion. Admittedly I didn’t cover every aspect of this discussion, and I agree with most of what you say. However, if banks are showing the loss and it counts against their reserves as soon as the notice of default is filed, then that’s even more reason why short sales shouldn’t have the abysmal failure rate that they do.
But the fact remains that they do.
“There are many reasons why a short sale will not be accepted. Some of the time it can be nothing more than the right person did not see the file in time.” In time? You mean like within four months??? How much time do these people need?
I don’t think we need to posit agents failing to present files for this. REOs close just fine. Moreover non-distressed sales, which are priced tens of thousands higher, are outselling short sales in our area by four to one. At the agent level, it’s the same licensees working on all of them.
“Different targets?” Once again, I agree with you, since that’s what I was documenting. The target for the REO folks are to get the loans off the book ASAP, while for the short sale folks the target is to drag their feet, stick their fingers in their ears, hope the problem goes away, and make everyone else fail. I think “different targets” is correct, but by itself minimizes the extent of the problem.