Wall Street Journal today has published a piece that will have Real Estate Agents, Loan Officers, and home buyers who’ve been through the short sale meat-grinder clapping their hands in agreement.
For the unfamiliar, a short-sale is a funky sort of pre-foreclosure action where a lender decides that they are better off accepting a payoff of less than full balance than pursuing an expensive and time consuming foreclosure.
If it works, it is a win-win: The seller avoids foreclosure, the buyer may get a deal, and the lender stands to lose less.
At least that is the theory. The reality of attempting to sell or buy short often works out differently, with some estimating that as many as 80% of short sale offers (where the buyer and seller agree upon a price) fail. From the article:
- Lenders average 4.5 WEEKS to respond to offers. Not everybody can wait that long.
- The offers are often absurdly low, and are rejected by the lender/servicer.
- There are often two lenders who must approve, not just one.
- The seller cannot demonstrate that they are in enough financial distress to justify a short sale (
The last bullet contains an important point, and a key to understanding why short sales can be so tough to pull off.
Before entertaining a short sale, the lender wants to be assured that they are going to have to foreclose anyway. So what happens? The borrowers requesting a short sale (the "sellers") are asked to submit to a full financial analysis. Income, credit, and assets are all reviewed. It’s literally like underwriting the borrowers all over again, except in reverse, because now the lender is trying to establish the owners can’t reasonably afford the property.
It’s also a fact that sellers sometimes attempt a "non-arms length" sale – selling to someone they know under some other arrangement, then buying or renting the property back at a better price. This scam happens often enough that the lender spends significant time and energy vetting the buyer to determine that there is no pre-existing relationship.
A key take away, if you are out there considering a short sale, modification, or similar alternative: The only party who can truly approve the short sale is the lender, so deal directly with them.
Why Lenders Are Leery of Short Sales [WSJ - Sub]