I am brand new to this forum and just posted this same message under the “poll” category – apologies for the duplication as I am just figuring out how to use this thing!!!
I am just getting involved in real estate investing (a newbie) and heard about short sales. It sounds interesting but when I was doing some research I came across this very negative article (see below). Is there anyone out there who has experience doing short sales and who can verify if this article is accurate? Thanks for your help! WC
Why Short Sales Don’t Work
By Alexis McGee
Does this sound familiar?
“With the latest in discounting techniques, you will learn how to steal
properties from the banks and create giant profits for yourself”
Welcome to the newest twist in Guru Marketing: “Short Sales, The Hottest Topic in Real Estate Investing Today.” (Hot topic for WHOM, I wonder?)
Not a day goes by that I don’t get an email asking me about short sales…
“Alexis, how do they work? Do you do them? Are they the “best way” to find a deal?” and so on. Before I answer those questions, let me give you a bit of background on banks and foreclosures.
So what are Short Sales?
A short sale occurs when a lender agrees to write off the portion of a mortgage balance that’s higher than the value of a home. A buyer must be on hand and ready, willing and able to purchase the property.
Why would a lender do that?
It would seem simple. Banks are in the business of loaning money, not managing and selling real estate. Although they may seem quick to pull the foreclosure trigger, they also want to minimize their holding expenses and any losses.
One way to accomplish this is to sell the property through the Short Sale process, to keep from owning the property (aka: REO property) through foreclosure. If they do nothing, and let the property go through foreclosure, they will end up owning a property they didn’t want in the first place, along with the costs of the foreclosure process, and holding expense as long as it’s on their books.
But there is more to it than this. Please read on.
When I first started in the foreclosure business in the late 1980’s, most banks didn’t have a REO (real estate owned) department. Forget about a Short Sales department, they just didn’t exist. Any bad loan simply went back to the loan officer, as a form of punishment. Great idea huh?
That poor loan officer (aka: REO asset manager) had to do it all. They had to foreclose on the property, hire the team to fix it up, manage it, and then sell it. As an REO property they had more time and costs invested, and often times sold their properties for a bigger loss than if they had “cut their losses” by doing a Short Sale in the first place.
At the same time, during the late 1980’s, our real estate markets were in a mess, with a banking crisis, rising interest rates, falling property values, and a new tax reform act to swallow.
But back then; lenders just weren’t as organized as they are today. They did the best that they could. I was thankful for that. I bought a ton of property at very deep discounts. Banks wanted cash and “as is” quick sales. And for that, I got tremendous deals. Those were the days….
Fast forward to 2004.
Banks now have full Short Sale and REO departments and are ready and able to facilitate deals in the best interest of their bank. They have agents doing BPO’s (brokers’ price opinion) for them, as well as doing all their legwork (for a measly 5% commission that they have to split with the buyers’ agent). They work their agents to death, get their houses on the market quicker and sell their houses for over market value!
Yes, Banks are our competition now! (Read more about this here.)
What does the coming foreclosure wave mean?
Most agree foreclosures are at an all time low, but the foreclosure rate is now growing. It’s my belief it will continue on an upward swing for the next two to four years. (Read more about that here.)
More foreclosures mean more investment opportunities for investors. It also means that our escalating real estate values are not sustainable, and some of our equity run up will simply go away. How much equity will evaporate is hard to predict. (Read more about my thoughts here.)
But what I do know is that with less equity, fewer owners will be able to borrow their way out of trouble. These owners will be faced with doing a Short Sale or letting the property go back to the bank as a REO foreclosure.
What I also know is that as an investor the pendulum will shift from being “hard to buy and easy to sell” to being “easy to buy and hard to sell”. (Read more about that here.)
Here is Why Short Sales Don’t Work.
Yes, the Short Sale can offer a softer financial landing than bankruptcies or foreclosures, provided you survive the turbulence on the way down.
But, what no “Guru” will tell you is the truth about the tasks required to get a short sale approved, or the likelihood that your wholesale price will not be accepted.
Short Sales involve much, if not more paperwork than the original mortgage application itself. Plus, it is an extremely difficult real estate transaction for a consumer to get approved. Here are just a few of the reasons:
- Tons of Paperwork:
Instead of the owners proving their credit worthiness and financial stability, as they must to get a loan, they now must document that they are broke. They must be without cash flow, and have no other assets, including savings, investments, trusts, liquid retirement funds or other finances to tap. Wait until you see the list of papers the homeowners will need to accumulate to prove they are worthy of doing a short sale. It will boggle your mind.
- Fraud from the Past:
Ironically, while they are proving their insolvency they may also reveal the dark under side of their original loan application. Their insolvency today could be rooted in financial trouble that began before they purchased their home. That spells trouble if they didn’t reveal things to their lender in the beginning, and who could now consider their tight lips at the time of application to be fraud from the past.
- Those who will Stand in Your Way:
Property encumbered by a second mortgage will likely kill a short sale deal, because the second lender often won’t remove its lien and risk losing its investment. A private mortgage insurance holder will also want to protect its interests.
- No Wholesale Deals:
Before the owner can even approach the lender they must have a firm “market value” (you read correctly here that no “wholesale” deals will be accepted) offer from a qualified buyer (that means you must be rock solid financially) and a broker who can negotiate the deal (like there’s room to pay a commission).
- More Costs for the Owner:
And when the owner can least afford it, they will have to hire an attorney to negotiate what the lender will report to the credit agency.
- Tax Bill Nightmare:
If they finally do qualify for the short sale, it isn’t over until the tax collector sings. Any remaining difference between their home’s value and the balance on their mortgage is considered a “forgiveness of debt” and in virtually all cases, that means a 1099 is coming in the mail. Yes, you read right. The owner has to pay taxes on their loss, as if it were earned income that year.
Wow! Where’s the good in that? If you believe in the Golden Rule as I do (“doing unto others as you would have them do unto you”), then Short Sales are NOT for you. After 20 years in the foreclosure investing business, I know there is a better way.