Short Sales

Not a day goes by that I don't get a question about short sales. My short reply is to tell folks to pass on them and read my columns "Short Sales: Don't Waste Your Time" and "Why Short Sales Don't Work".  The market has changed a lot since I wrote that column and yes, there are tons of short sales happening every day. The question is, are they profitable deals for investors, or just a more complicated way to get a house for a slight discount to market value?

At first glance, a short sale might seem like a win-win for everyone involved. The defaulted owner sells the home for less than the amount owed and the lender forgives the difference. The sale releases borrowers from their obligations and for the lenders; it can be less costly than foreclosure. For buyers, it seems to be an opportunity to buy a home at an attractive price. The key word here is "seems".

But short sales are not easy deals. Here is why:

* It can take weeks or months to get the bank to respond to an offer.
* Mortgage servicers balk at the purchase price.
* Homeowners have more than one loan on the property, complicating and drastically slowing the process down.

Short sales are a good way for lenders and investors to minimize losses. Short sales typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, (as a REO) according to a recent analysis by Clayton Holdings Inc. The costs of foreclosure can include not only legal fees, but also taxes, insurance and the expense of maintaining the home until the property is sold and repairing any property damage.

Currently short sales currently account for about 18% of home sales, according to the National Association of Realtors.

But it is extremely difficult to get short sale deals completed. Unlike a traditional real-estate sale, a short sale requires the approval of not only the buyer and the seller, but also the mortgage-servicing company. In many cases, loans have been packaged into securities -- which means that the mortgage servicer must consider the interests of the investors who own the loans.

Deals oftentimes fall apart because the mortgage company rejects the price that has been agreed upon by the buyer and seller. Add to that the long delays in simply getting an answer from the mortgage servicer in the first place. The process can be so frustrating that many real-estate agents have decided they are not worth their time and they do not show them to their buyers.

The success rate for short-sale offers is very low, real-estate agents say. In my area only 10% of short-sale offers actually close, compared with 90% for a traditional purchase. Because so many deals fall through some agents are advising their buyers when making a short sale offer, to add a clause in their contract that says the deposit can't be cashed until it is clear that the sale has been approved by the mortgage company and the contract has been signed.

Many borrowers walk away in frustration because it takes so long to get a response from the mortgage company to their offer. Servicers take an average of 4 1/2 weeks to provide an answer on a potential short sale, according to a recent survey by Campbell Communications, with some taking two months or more to respond. By contrast, it takes an average of less than two weeks to get a response to an offer for a property that is an REO.

Gathering all the information needed to evaluate a short-sale offer can take time. The loan servicer must first determine whether the homeowner really can't continue meeting the loan payments, then get an appraisal or broker's opinion of the home's value.

Mortgage servicers also try to ensure that the proposed sale is an "arm's length" transaction between two parties rather than, say, a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan. If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan and provide an analysis showing that the investor will be better off with a short sale than with another solution.

There are additional complications if the borrower has a mortgage and a home-equity loan. In that case, both parties must approve the deal -- which is a challenge when the sales price may not even be enough to cover the mortgage balance.

Now you can see why I would much rather have you work REOs than short sales... if you are looking for a great deal and not a lot of hassles. Next month I will cover "How to Buy and REO" as yes, NOW is the time to start looking for deals from banks.