It should be said that we do short sales as a company and hold a CDPE designation (Certified Distressed Property Experts). We do not shy away from them but the incredible reaction to this type of transaction is somewhat surprising considering that they have been around for decades. What follows is a short history of what got us here in the real estate market and the general feelings of frustration that abound. In the end we are big believers of the following. Life is 10% what happens to you and 90% your attitude. Short sales are just that. An attitude adjustment.
In the ever changing landscape of real estate transactions there has emerged the new standard of real estate sale. The real estate Short Sale in Florida followed closely by it's brother-in-arms known as the bank foreclosure or REO sale. By definition a short sale is a circumstance where the value of a home has fallen below it's current loan value. This is a known situation by most people nowadays. What is not so clear or understood is how these transactions make it from listing to closing? Owners and realtors alike tend to marvel at both the aptitude and general ineptitude of it all. But there are reasons for these things! Not necessarily reasons to give you comfort but reasons none the less.
What follows is a quick history of what got us here and a random walk through a typical real estate short sale in Florida. The idea is not to drown anyone in the minutiae and the subtle differences between a regular real estate sale versus a short sale but rather to hit the major points between regular and short sales. Having this in hand will give color to the nuances that make up the verbal and written discourse of these transactions both for those in the business and to those whose homes are in such a situation.
Your mileage will (like anything) vary as each situation is unique but they share some basic traits.
Here are some scenarios:
So, today you decide for any one of a number of reasons that it is time to sell your home. If you are one of the fortunate who has no debt on their real estate you find a realtor you trust who understands your goals and your market. Together, you do an analysis of the market and find that in most cases you are taking a serious hit to value. Especially if you bought within the last 3-5 years in say, Miami, Vegas or any other major market growing it's urban core. Outside of this time frame and within certain markets you might find you have flat equity value versus negative equity value (no debt but worth less than what you paid for). Again, real estate is very local in nature so differences will abound.
Now, for the rest of us (the vast majority actually), being debt free on what is typically our biggest purchase is something lovingly contemplated when nearing retirement age and a distant thought for the 30 and 40 something crowd. For the rest of us we have fluctuating mortgages, credit card debt, school loans, 401k's, car payments, shaky jobs and no where near the savings we would like in times of need. Hold on though just one minute! Think back for a minute... While in the heyday of the real estate boom everyone banked on the notion of perpetual equity increases in real estate value and the ability to constantly trade these real estate assets to others having the very same expectation of increase and return but lacking one key element. Nobody was living in these great places?! Another interesting thing happened as well. The stock market got involved and started getting really creative with the creation of new capital to feed this frenzy even further known as derivates but that is a conversation for another day. The SEC blinked, sneezed and kept a business as usual stance only glancing occasionally at these new fangled financial instruments.
The inevitable bubble burst and with it came the blame, anger, shame and general disgust that began to be hurtled in all directions with a keen emphasis on banks and financial institutions. You know them all too well. Those big, easy, slow moving, cash bloated targets of hate. Then came the appraisers, mortgage brokers, politicians, regulators and those greedy developers producing all these units in the first place. But we are forgetting one key player in all of this. Without this one group all the others would simply be looking for another product to pitch. Can you guess? ...No?
All of us! As in you, me (well, actually I sat this one out on the sidelines from day one) and just about everyone else in the current real estate market. We collectively lost our aggregated marbles... Without us none of this would be possible. We gave credence and validity to the creation of this new wealth and now suffer along with everyone else in it's lower valuation and lost dream of immediate leaps of increasing equity.
We all watched how regulators from both the prior and present administrations have grappled with and tinkered with the money supply, TARP, first time homebuyer credits, cash for clunkers and anything else to get our beloved market economy moving again. Thankfully there are signs of life and as a nation we will survive and hopefully be the wiser after our little romp in Tulipville.
We have even had sacrificial lambs. Lehman brothers took a hit and the death march commenced from there swallowing up any financial institution whose fed induced stress test came out, shall we say... stressful to those relying on it?
Having gone through our short history of financial calamity the question remains. Why do real estate short sales take so long? Why do owners, buyers, realtors, appraisers and lenders end up frustrated? We all collectively hate to deal with real estate short sales and their reputation is simply not good. The answer though, is relatively simple.
When you sell your house in what was once a normal transaction there were only a handful of persons in the decision making process. The Buyer and The Seller. Sure, there were appraisers, lenders, inspections and a host of other things that could adversely effect a transaction but that was the whole idea behind "right to inspect" and rescission periods. To give a set time to iron these things out and decide on whether or not the real estate transaction could be done.
Today it'a whole new ballgame! A short sale has the property owner and the holder of the mortgage becoming strange bedfellows in the sale process. Statutes designed to manage the transaction process started being circumvented by the new decision making structure invoked by selling for less than mortgage value. Timelines became increasingly more opaque as it became clearer that what drives a homeowner to sell is not what drives a bank to sell the very same asset. Granted the result is the same for both. The bank takes a hit to it's bottom line and has to account for a loss in it's books. We as individuals take the financial hit and the hit to our credit worthiness and family stability. Nobody wins but we lick our wounds, get back up and rebuild.
Think of it this way. Imagine each individual were to partake in a Fed sponsored financial stress test of their personal lives with the resulting outcome that they may be bought out or put on sale should their score not be stellar. That is a bit of a strange way to look at it but therein lies the rub. You are only one person on the auction block. Banks taking a hit to their bottom line risk disrupting their entire structural ecosystem should they be put on the chopping block. There is a certain ironic twist to this in that I can imagine more than one person out their saying "Hey, I can be bought out! If it clears my debt and get's me a clean slate without a hit to my credit like a seized bank, sure!" But banks shed people in these scenarios. I am not sure what an individual would shed in the same circumstance...
But banks like people hang on! Stubbornly clinging to that last vestige of hope. Hope in the case of the banks is time.
What do I Mean. If a bank forecloses they are on the hook for potential association fees, property taxes and other potential costs that are normally the responsibility of the homeowner. The servicing entities that manage these portfolio of loans the bank holds typically are not staffed for what has been an onslaught of non-payment activity and do not have the cost structure nor the desire to create staff around money losing propositions. The court house auction process does not recoup anywhere near the funds it used to as both the auctions and the courts are flooded and many properties remain within the banks portfolio effectively abandoned because of the servicer gap.
A short sale effectively is a bandaid on a bullet hole temporarily stanching or holding back what will be the inevitable credit worthiness hit to the individual and banking institutions books. The good news for banks is that they don't need to worry about home owners association fees (unless the association forecloses which, in Florida they can and DO do.) or taxes for at least a little while. As said, in this circumstance the loan is not written off just yet and is negotiated between owner and lender. This negotiation has become a cottage industry in and of itself and is a shame as there are many programs to help homeowners in a jam that are free!
So, the owner and the bank agree on a market price to have the property listed for sale and marketed. It goes on the market and offers come in. The owner now has taken on a partner that in many cases has substantially different goals than a normal person in a transaction.
Multiple offers on a single property become the rule. The name of the person in charge on behalf of the bank changes often and without notice making any form of consistency difficult at best. Financing to purchase is not considered a part of a good offer and cash deals are (unless the entity holding the short sale debt can refinance with the new buyer). The appraisal process has become onerous with the application of new HVCC rules governing the terms of communication between lenders, appraisers, owner and realtor and the use of timelines that are not conducive to good appraising. Realtor commissions and documents that are used for these transactions change regularly and continue to be under scrutiny due to the enigmatic nature of real estate today.
Effectively, Owners want to sell their real estate and move on. Take the hit to their credit and rebuild. Banks want to hold on and don't have the infrastructure nor the servicing agents to handle the short sale and foreclosure volume hitting them in the hopes of riding things out.
Result. Knee-jerk reactions abound and nothing gets done except by sheer force of will, specific knowledge and some good ole luck!
There is a silver lining.
Many markets have adjusted their rental policies, HUD homes are more plentiful, Workforce housing is seeing some potential housing opportunities and regulators and politicians are starting to address the obvious disparities that exist in the real estate short sale process.