I wrote about my distaste for Short Sales (aka Fake Listings), and how only 5% close in Northern Virginia. I guess now my distaste has shifted away from Short Sales, and more toward clueless agents running the Short Sales incorrectly.
On the buying side, instead of just banning them completely from my showing route, I have implemented a new:
Top 10 Questions to ask the listing agent BEFORE showing A Northern Virginia Short Sale
Here is the e-mail I send to the listing agent once I've determined that the listing is a short sale. Feel free to copy and paste this.
********************* Hello, I have a possible buyer considering your short sale listing.
Our company policy is to ask for more information from the listing agent before showing any Short Sales.
Can you please answer the following questions:
Have you closed a Short Sale before?
Have you requested and received the short sale package from the bank, including the hardship letter?
Have you sent the package AND have you confirmed receipt?
What communications, if any, have you had with the bank?
Has the bank approved the list price?
Have you received any other offers that you are waiting to hear back from the bank on?
Does the loan have PMI on it? (Private mortgage insurance)
Is there one or two trusts? Any other liens?
What are the names of the banks? Are these FHA or VA loans?
How long do you estimate that the lender will take to provide an answer to an offer?
********* Am I missing anything? Please add more in the comments.
I recently sent this to 10 listing agents. Only three replied. Only one really knew what they were doing. The winner was Realtor John Ryanin Woodbridge.
His reply:
Started talking with the bank? Yes Has the bank approved the amount? Yes
Have you received any other offers? Yes, however we are only a few days into the process with the new offer. All other previous offers dropped off.
Have you closed a short sale before? Yes, several. I also have a dedicated team of five people that work the banks to get these through. I can give you feedback along the way so that you can keep your buyers informed.
****
Joy to the world...
So I hereby lift my ban on Short Sales on the buying side.
As for the listing side, after an eight hour NVAR CE class, from a group that gets a 90 percent close ratio, I have no problem taking them on (if the seller qualifies). Don't want a short sale, send it my way.
Also at the most recent Finance Committee meeting at NVAR, we passed a resolution to consider enacting some sort of Short Sale ____ (certificate, pledge, designation) for those that know what they are doing with Short Sales, so they can put it in the MLS Remarks and buyers can have more comfort.
- Written by Frank Borges LL0SA- FranklyRealty.com
Only 1 in 20 sells. In Arlington only 3 have sold out of 65 attempts.
I briefly went over Short Sales when I defined all SOL Homes including REOs, Bank Owned Etc. But Short Sales need more attention, as they are very tricky and misleading.
A Short Sale is a listing for sale that requires "Third Party Approval." That means that 1, or 2!!, banks are owed MORE than the list price.
For Example:
Home is bought for $500,000 with 5%, or $25k down.
Home has a $475,000 mortgage.
Value dropped below $475,000
If the seller is facing foreclosure, they slash their price for a quick sale
The Theory Behind Short Sales: Banks would be better off to accept a loss now, versus going through the legal expense of a foreclosure, just to end up selling it for less later. Win win, right? Wrong. Read on.
Bank Trick 1:"Sure, we will consider a Short Sale, IF YOU KEEP PAYING US." Yep, a bank sees a desperate seller, and a potential $50,000 loss. They then mislead them into thinking that they mightconsider taking a bath on the deal IF the owner keeps paying their mortgage. The bank then ignores offers for 2-4 months in order to squeeze out another $2,000 x 4 or $8,000 profit. Brilliant. The bank then takes it over after foreclosure and sells it for $10,000 OVER the Short Sale List price. $18,000 better off, NOT doing a Short Sale.
Bank Trick 2:Sometimes the bank has mortgage insurance and it is CHEAPER for them to let it foreclose versus allowing a Short Sale, which is NOT insured.
For example, I was at an NVAR short sale class and a Realtor asked the speaker, "Why after 60 days, calling 2 times a day (120 calls) with a full price Short Sale offer, did the bank not call us back?" The speaker claimed it was due to an overworked staff.
I asked:
Did they tell you they would consider a Short Sale IF you kept paying $3,000 a month? The answer was Yes.
Was the home bought with Mortgage insurance? The answer was Yes.
Bingo! Why eat $50,000, by accepting the low offer, if the bank a) gets $3,000 a month and b) is insured against a foreclosure and NOT a Short Sale.
She was pissed. She realized that she had been "had." But this goes on ALL THE TIME. It can take MONTHS to hear back.
Another example:
A seller in Clarendon 1021 tries to sell his property and profit $30,000 at $600k. (Yeah right!)
Then he drops it to $570,000. No bites, but the foreclosure is pending!
They SLASH it to $530,000
(sidenote, I get flooded with calls from friend that want to pick it up for a steal at $470,000! I said that it was impossible... since I'd buy if that price was a possibility.)
It sits for another month, then the listing disappears after 100 days!
A month later it is "bank owned" and listed for $560,000
It sells for $540,000 in 26 days.
The moral here is banks are not dumb and the market isn't so horrible that they will take all these lowball offers. They sold it for $10,000 OVER the previous list price (which probably had lower offers).
Short Sale Statistics:
Reston homes from $300k to $400k. - 20 Active "Short Sales" in Reston (watch out for "Not a Short Sale" listings) - 73 were Withdrawn, or Expired. - 3 Under Contract (1 under contract since Nov 2007! Many UC do not close.) Only 3 sold in the last 24 months. 3 closed sales in 100 attempts!
Dropped From $480k to $400k, sold at $400k (Full list)
Dropped from $430k to $400k sold for $380k (5% under list)
Dropped from $380k to $350k sold for $345k (2% under list)
Arlington Short sales. - 25 Actives - 37 Withdrawn Only 3 have sold in ALL price ranges in all of Arlington in the last 2 years.
Listed at $335k, sold for $335
Listed at 700k dropped to $620, sold for $600k
Listed at 480k dropped to $420k sold for $420.
In Alexandria, only 8 have closed in 2 years out of 80 attempts.
(most were at list, or 2% under list, some were $20k over list)
I show this, so you don't think "Wow, they are desperate, we can now lowball. These 3 were the ONLY successful ones. Probably because they gave the bank a real offer.
Ok, so enough already with the War N Peace, what should I do?
Advice for Regular Sellers
Do NOT blindly compete with a Short Sale. If you get an inexperienced agent, and they see 3 Short Sales in your neighborhood, and they have you compete against these "fake" listings, you can lose $25,000. Hope you "saved a ton" on that agent. (see Realtor Rebates)
Advice for Sellers Facing Foreclosure
Watch out for the bank tricks to "keep paying." Talk to a lawyer that specializes in bankruptcy to help guide you. They MIGHT recommend stopping payments immediately and saving it up for a rental.
Use an agent that has completed (as in CLOSED, not listed) at least 1 Short Sale.
If you have mortgage insurance, be extra careful, the bank might prefer that you foreclose.
Get bank approval for your list price before listing it. Put in the listing remarks "List Price approved." Otherwise you will get lumped into all the other Fake Listings and ignored by smart buyer agents.
Advice for Buyers looking for a "steal" (see "deals" post)
Avoid Short Sales, or expect to wait 2-3 months and expect to put in 5-10 offers on Short Sales before one is accepted. A Short Sale in my building now has 4 offers. He says he is expecting a reply any day now... sorry, but yeah right!
Look for Approved Short Sales. Ask if the bank has been contacted and if a price has been approved. Multiply time estimates by 4. Ie. 3 days= 12 days.
Consider offering near, full or OVER list. What! Over list! Are you nuts! CNN says this is a BUYER's Market! I know it sounds crazy, but if you and your agent see the price is well under your other options... I've said time and time again, I'd rather you pay $10,000 OVER list on a house that is $50,000 under the competition versus "saving" $50,000 on a home that is overpriced by $100,000. Ignore list price, focus on VALUE.
If you get one to close, change the remarks to SHORT SALE, NOT TO BE USED AS A COMP in hopes that the appraiser will take that into consideration and not trash the neighborhood (buyer agents, demand it of the listing agent to try to help your client's "deal" not turn into destroying his own investment).
Sidenote: A home should NOT go under contract until the BANK signs it, but many agents will make this mistake. The seller signing it means nothing, and it should stay on the market as Active.
Updated Correction 2-29-08I'd like to thank DAAR CEO Jeanette Newton for this correction. I'm excited that she is participating in blogging!
My above sidenote about when to go Under Contract is 100% wrong. So let me explain... IF a seller signs the offer, as written, it is to be listed by default on the MLS as Under Contract with No Kick Out. The problem for the seller is that most MLS websites will remove the listing, so the chance of a better offer (and a higher chance for the bank to accept) is slim to none.
Here are a sellers' options (please comment if you know of more options) :
1) A seller can counter the contract and add in a "Kick Out" so further offers can be reviewed. The listing then can be set to Under Contract with Kick Out (this was suggested by Loudoun Realtor Tony Arko). But only a buyer agent looking on the back end MLS can find UC/KO. (A Kick Out means "there is still a major contingency here, feel free to submit another offer, it still can be considered and the first contract might be kicked out.")
2) Another way to keep it active (like the unit in my building with 4 offers) is for the seller to send the "offers" unsigned to the bank. Why not try and keep your home as "Active" for as long as possible? Some banks will require the seller to sign, so try #3.
3) Or lastly, the seller might add "acceptance of the contract is contingent on lender approval." or "contingent upon review and approval of the lender." That one line can keep it "Active." I am not a lawyer, so please verify any additions you make to a contract with a lawyer.
As a buyer agent I would prefer it to be "Under Contract" if I was the listing agent, I would want it to be Active. So it depends whose side I am on, it is part of the negotiations. You can even counter with "Increase your price $2,000 and we will place it UC/KO."
New Trick: Now that Short Sales are getting a bad wrap, some listing agents are NOT disclosing that it is a Short Sale.
Conclusion: Short Sales suck.
Question: Realtors, should you have a "No Show" policy for Short Sales that aren't approved by the bank? Are they really "for sale" if the owner (the bank) doesn't even know about it? Feel free to just tell your clients "read this blog."
-Written by Frank Borges LL0SA- Broker FranklyRealty.com (please report typos)
[Lead up to quote; red emphasis added]... The aggravation has been building for a while and stretches beyond the agreement announced yesterday. For instance, under one congressional proposal, there would also be a break for "short sales" -- that is, when owners sell a home for less than is owed on the mortgage and the lender forgives the difference. Now, the amount that's forgiven is regarded as income, and the seller owes tax on it. The proposed legislation would forgive that tax.
[My quote] Without the threat of the tax, sellers might not be as reluctant to consider a short sale, said Northern Virginia real estate broker Frank Borges LLosa. He predicted the number of such [short] sales could double.
Maybe Congress should allow a 50 to 75 percent break instead, he said. "I am not saying not to help out these people," LLosa said. "It's very sad. I have spoken to people who have lost their homes. I just don't know if a bailout is the right thing for the marketplace as a whole."
Short Sale: Usually a Realtor MLS listed house that is heading toward foreclosure. The deal requires 3rd Party Approval (the bank) because the seller is trying to sell for BELOW the loan amount and is hoping that the bank will approve the deal, and eat the loss. Only about 5-15% actually get to closing since banks oftentimes say, "no" (blog post coming soon on this, so make sure you subscribe Update: Here it is).
Example of a regular Upside Down Sale: (loan amount is over the sales price)
2005, $500k home was bought with a $475,000 loan and $25,000 cash (5% down).
2007, home price drops to $450k.
To sell at $450k, seller must bring a $25k check to closing.
Example of a Short Sale:
2005, $500k home was bought with a $475,000 loan and $25,000 cash (5% down).
2007, home price drops to $450k.
To sell at $450k, they show the contract to the bank and ask for a short sale approval.
Upon rare approval, the bank eats the $25k.
Seller still gets a taxable 1099 for bank's loss, also called Phantom Income (at least for now).
The benefit for the seller isnot having a bankruptcy and or foreclosure, which is worse for their credit.
The benefit to the bank can belower foreclosure, legal and remarketing costs.
For those that they can't afford an Adjustable Rate Mortgage that is resetting much higher, this can be the savior, with the exception of having to deal with the Phantom Tax. But now the "Mortgage Cancellation Tax Relief Act, H.R.3648" wants to remove the 1099 tax bill.
This sounds great and dandy for a polititian to "keep from kicking people that are already down," but if you remove the penalty for doing a short sale, this will lead to... MANY MORE short sales.
More Virginia short sales will drive down prices, thus hurting others in financial trouble, and their neighbors that didn't buy risky loans.
-Written by Frank Borges LL0SA- Broker FranklyRealty.com (please report typos)
Sneak Preview: My next blog post will talk about FAKE Short Sale prices, and how you can lose $10,000 as a seller competing against these oftentimes fake listings, and how only 5-15% ever get to closing.
I wrote about my distaste for Short Sales (aka Fake Listings), and how only 5% close in Northern Virginia. I guess now my distaste has shifted away from Short Sales, and more toward clueless agents running the Short Sales incorrectly.
Below is my quote in today's Dec 7th 07 The Washington Post story, "
