Buyers get excited about the listed price of short sales when they see them online, but that excitement fades over the months--as they wait to hear back from the bank on their offer. Many, if not most, short sales end in buyer disappointment. RealtyTrac (R) reported last year that "Pre-foreclosure short sales took an average of 245 days to sell...". That's 8 months. Compared to a normal 30 day close--8 months is a lifetime. What is worse than that is that buyers can very often wait 4-6 months before the bank even considers a short sale offer in the first place. So, it's not the closing process that holds things up as much as it is the first engagement by the bank that takes the longest period of time. Buyers can wait for months and months with no definitive answer on an offer from the bank.
Why do banks not want to address short sales? Why does it take so long? Well, first you have to understand what a short is to understand why a bank makes this their lowest priority of business decision. A short sale is essentially a request to a bank to take a loss on a property loan, where the home owner is still paying their monthly mortgage and has not gone into default or foreclosure. The home owner is usually still paying their home mortgage, but the home owner needs to sell their home. The problem is, they owe more money to the bank than the home is worth to a new buyer (i.e., they owe more than the home's current "market value").
Here is an example of a potential short sale:
- George bought a house in 2006 for $200,000.
- George has been paying his mortgage payments every month.
- George decided he needs to sell his house now.
- George discovers that all the houses like his house, same size, same age and condition, are now worth only $150,000.
- Buyers are buying houses like George's house all around him for $150,000.
- George has a problem.
- George owes $180,000 to the bank on his home.
- George is "Up-side-down". He owes more than his house is worth.
- To sell his house, he will also have to pay Realtor fees and closing fees, totaling about $11,000.
- So, George and his Realtor start asking the bank to cover the difference between what he owes and what a buyer may be willing to offer to him on his house.
- Here are the numbers:
- House is worth $150,000 to a new buyer.
- George owes the bank $180,000.
- That is a $30,000 "short" fall.
- Plus the cost to sell is another $11,000, making the short fall $41,000.
- George's Realtor has a buyer interested in the house at $150,000
- So what does he do?
- George's Realtor team starts calling the bank to ask, beg, plead with the bank to forgive the $41,000 difference, and allow him to sell the house as a "Short Sale". To do this, the bank has to either make up the different (the loss), and/or get George to agree to pay the bank back some portion of the $41,000 short fall.
So, why do Short Sales take so long to happen? Why do most short sales fail? The answer is very simple. Put yourself in the bank President's shoes and tell me what you would do. Here is the situation that I just described from his point of view:
- George agreed to pay off the full amount of his $200,000 loan.
- George still owes $180,000 on this loan.
- George is still making monthly payments every month.
- To sell, George has to pay the bank and pay closing costs.
- George is asking for the bank president to write him a check for $41,000--at no charge.
- Most banks don't like giving away money--so what do they do? Nothing. No response. No answer. No $41,000 check.
Our friend "George" is one of MANY MANY people who are asking for forgiveness of large amounts of mortgage debt in the US today. Banks get requests from Realtors and home owners every day, asking for the bank to forgive the debt and cover the short fall in their home value. In a short sale, the home owner is normally still making payments or maybe just missed their first payment or two. When the home owner stops making payments, banks normally start their foreclosure process. At that point the bank has to take action. This is a "non-performing loan". The bank is forced to take possession and attempt to re-market the property independently of the home owner. But as a short sale, there is very little motivation for the bank to act and lose so much money while the home loan is still "performing" as written.
This is a very sensitive matter today. With so many home owners struggling with devalued properties, and banks trying to manage foreclosures and per-foreclosure short sales, the decisions are difficult and the process is long and drawn out. Most buyers and most sellers never make it to the 245th day to see a short sale actually happen. And banks don't normally even respond to short sale requests during the first several months of calls. When the bank does start talking to the home owner, it is a long, painful, and difficult waiting period for both buyer and seller. Both parties must stay in the game for a short sale to actually happen. This is not for the faint of heart or impatient, and anyone who tells you that banks are better now about handling short sales and banks are giving away money in 60-90 days, just simply does not understand how banks work, or why a bank president would rather deal with a foreclosure, than have to deal with the ambiguity and problems of a short sale. At least with a foreclosure, the bank president does not have to justify why he signed off on the loss. It was no longer his choice.
Austin has been lucky during the past couple of years. Compared to the nation and hard hit areas, we have had a very small percentage of foreclosures and short sales.
Disclaimer: I am not a CPA, Mortgage Banker, nor am I in the field of Finance. If you believe you are in a situation of a potential short sale or pending foreclosure, or having problems making payments on your home mortgage loan, please do not consider this blog article to be advice to you or your situation. This should in no way be considered advice. This is simply a description of situations and stories that I see every day in the business of helping clients buy and sell Real Estate in Austin Texas. If you have questions about your particular real estate needs, don't assume that this is advice to you or someone you know.