In a market where short sales have become a large percentage of available inventory it is important to understand exactly what they are. I don’t have the official statistics of how many homes are short sales in the metro Denver real estate market, but I do know, from the showings I set, the number is substantial.
What is a “Short Sale?”
A Short Sale occurs when the homeowner owes more on the mortgage than the house is worth. Many homeowners have found themselves in this position because:
- purchased the home with little or no money down
- refinanced and/or took out second mortgages
- live in an area that was appreciating and now the values have dropped or are stagnate
- recently purchased the home and now find it necessary to sell before the home value has appreciated
- loss of income
Short Sales in general have become so prevalent that real estate brokers have been forced to attend classes on how to facilitate them. Despite the training we are still finding Short Sales are not enjoying a high degree of success. In fact my associates around the country admit they find short sales very frustrating on so many levels.
Mary Pope Handy who writes Real Estate in Silicon Valley Blog recently illustrated this point in her post entitled, “Short Sales Sell But Don’t Often Close, Why?”
The trouble with short sales is that there are a lot of people involved, so there are a lot more places for things to go wrong. Unfortunately, they often do go wrong. I believe the national average is that about 20% of short sales that sell (go pending) actually close.
Mary’s list of hurdles to jump for a successful short sale is very much what we face trying to sell short sales in Denver. The process is laborious and rank with flaws.
Home Owners + Short Sales = False Sense of Security
The irony in this is how we now are experiencing a backdraft of failed closings because in order to get one, a buyer must write purchase agreements on many properties. From the buyer’s perspective they are doing this to insure they actually end up with a property, but from the distressed homeowner’s perspective it wastes time, a commodity that is extremely precious when the foreclosure clock is ticking.
When it comes to the Bank, many times the “right hand doesn’t know what the left hand is doing.”
A recent article in the New York Times gave a real-life example of a homeowner who was on the verge of losing her home. She was in the process of requesting assistance from President Obama’s “Home Affordable Loan Modification Program.” She was given temporary relief (3 months) on her mortgage, she paid the agreed upon amount while continuing to campaign for permanent assistance.
While she was waiting the same bank that was “working” on her assistance foreclosed on her home!
While this real-life example may seem extreme, it really is very typical of the total confusion involved with short sales and loan modifications.
Loan Modification Programs = Miserable Failure
According to the New York Times the Loan Modification Program that was ballyhooed as a way to help homeowners avoid foreclosure has not proved to help many at all.
As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation. ~NYTIMES
The problem with the Loan Modification Program is the misinterpretation of the consumer as to what it actually means. Temporary relief can only assist homeowners who are only slightly in trouble. Permanent loan modifications take time and aren’t given liberally. Specific qualifications must be met and few actually qualify.
Most homeowners who need the relief wait way too long before stepping forward and asking for help.
Promises of Loan Modifications
Distressed consumers are falling prey to a modern-day Carpet Baggers of Real Estate who promise the moon, yet fail to deliver those promises. These Carpet Baggers are everywhere. I get emails and even pre-recorded messages on my voice mail advising me of all the wonderful miracles they offer.
They are trolling for suckers. Please repeat after me, “I will never, never, never pay anyone upfront for loan modification services.”
Despite the promises of a new-beginning, Loan Modification Companies they cannot guarantee success for the borrower, because they aren’t in control but at the mercy of the bank. They can guarantee their own success because they take money up front for their services. Once paid there is no commitment or guarantee they will be able to provide mortgage relief to the borrower.
Many homeowners have lost their last dime to these unscrupulous people. The reality is, no one can make promises about a mortgage modification without first investigating the circumstances of the borrower. In Colorado it is illegal to solicit residents for loan modifications without being a state-licensed mortgage broker. Even at that I would suggest exercising extreme caution, before writing a check.
What Should a Distressed Home Owner Do?
- Consider and weigh all options
- Determine if there is actually enough “time” to do a short sale.
- Consult with a licensed professional Realtor who actually has the knowledge and background to ask the right questions and provide truthful guidance
- Have a Plan B and Plan C
- Don’t procrastinate – optimize the time available
Risking it all with a Short Sale
Using the short sale option to sell your home means taking a risk that may or may not work out. With the current successful short sale numbers being so low, chances are a short sale will be declined.
So why bother? I’ll talk about that tomorrow. (The Benefits of a Short Sale )