Real Estate Short Sale Contracts Come up Short of Expectations
Seen as the only way (short of foreclosure) out of an upside down mortgage and inability to make payments, most short sale contracts do not close.
Palm Coast, Florida – July 23, 2008 – Property owners who are upside down with their mortgage lender and unable to pay have limited options. Short sales seem to be the best option. A short sale occurs when the lender allows the property sale for less than the mortgage amount. The lender releases the lien and forgives the unpaid balance. The seller exits with scarred credit but avoids bankruptcy and/or foreclosure. Unfortunately, short sales have not lived up to their expectations.
The numbers tell the story:
-
Of 1,921 single-family residential homes listed for sale in Flagler County, 22% are short sale listings.
-
53% of the current 343 pending or contingent sales contracts for single-family homes are short sales.
-
Only 12% of the 566 single –family homes sold in Flagler County since March 1st were short sales.
-
Only 7% of the 82 homes sold since in July (through 7/21) were short sales.
Conclusion: Most short sale contracts never close. This is a real problem for sellers, buyers, and the realtors® involved. Time and effort are expended while the seller’s problems deepen. Here’s how the short sale process typically works.
The seller, working with a real estate agent, lists the property with a "short sale" designation. This stipulation signals buyers that any contract is contingent on the lender’s approval. Lenders will not discuss short sales in the absence of a firm contract between buyer and seller.
Lenders require detailed financial information from the seller to verify that they are in no position to pay.
Then the lender obtains a Broker’s Price Opinion (BPO) to determine the property’s true value.
If the mortgage is insured with Private Mortgage Insurance, the PMI provider will also be involved with the decision to accept/reject the contract. PMI providers usually sign off only if the seller signs a note for the unpaid balance, defeating one of the purposes of the short sale from the sellers perspective.
Lenders normally do not accept contracts that are less than 85-90% of the BPO, so it’s important to set a proper listing price and accept only realistic contract offers. Throwing a lowball price out to attract an offer may get lots of attention, but any offer significantly off the BPO value will almost certainly be rejected.
Even though the seller and buyer agree on a selling price, the lender must approve the contract. The standard Florida Association of Realtors’® (FAR) short sale addendum gives lenders 45 days to do this. Apparently, many lenders are unable to move that quickly, voiding the contract or requiring extensions.
Lenders will not discuss a short sale until a firm offer is received, so setting a listing price or accepting an offering price is a lot like shooting in the dark unless an agent experienced in short sales is part of the process.
Broker Alina Pekarsky has extensive experience with short sales (26 current short listings in Flagler County, 22 pending short sale contracts, and 12 closed short sales). She tells me that while she still accepts short sale listings, she no longer solicits them. "They take lots of time with little reward," she says. "There’s a lot of paperwork and phone calls. Most contracts are not accepted. Of those accepted, most don’t close." And lenders habitually cut the agreed commission from 6% to 5%. "It doesn’t make sense," says Alina. "These are the same lenders who will pay 7-8% when listing a foreclosed property."
Lenders apparently were unprepared for the glut of short sales contracts. Many lender employees do not understand the market. Washington Mutual and EMC are good banks to work with according to Alina, but Wachovia and SunTrust are quite the opposite.
Whether you are a seller or a buyer, be prepared to expend resources on research and work with an agent who has demonstrated some short sale "savvy," preferably one who does BPOs. You will be spinning your wheels otherwise. Of course doing everything right may bring the same result. That’s why short sales so often disappoint.
PMI??
Toby, what then is the point of the private mortgage insurance? It appears they have a way of having their cake and eating it, too.
PMI Insurance
The characterization of PMI as the mortgage industry’s "dirty little secret" is very biased and misleading and should have been made out as such by you Toby. In fact, historically the purpose of PMI in the past has been to allow a home buyer to obtain a mortgage loan under circumstances when a lender would not normally have granted one. Back in the days of financial prudence, bankers would not lend to potential homebuyers if they had less than a 20% down payment. Since many first time homebuyers would not have that kind of cash they would be excluded from being able to buy a home. PMI insurance came about as a means where the borrower would obtain an insurance policy guaranteeing the portion of the 20% equity investment the homebuyer did not have in order to induce the lender to approve the mortgage. In the event that the borrower defaulted on his loan, the bank would be reimbursed for a portion of the loss covered by the insurance. This resulted in the benefit to the homebuyer of being able to purchase a house he would otherwise have been unable to purchase. The bank obtained no benefit from the insurance premium other than the collection of insurance benefits in the event the borrower defaulted on his loan. Perhaps if mortgage lenders had stuck to this prudent system of lending instead of the 100% financed, no-document, no-verification loans that they made over the last several years we would not be in the huge mess we are in today.
PMI and the Banks
Why are the Banks able to write off biillons in bbad laons when infact they are getting the property and the proceeds from the PMI. Doesn’t every sub prime mortgage have mandatory PMI coverage?
PMI/Short sales
PMI covers the top 10-20% of the loan. If the loan defaults it will cover that percentage and some fees..but not the full loss as some people seem to think.
Other than that…so..what’s this whole thing with short sales do to all those stats you were posting a couple of months ago?
short sales
Toby based on the most recent data on Realtrac this morning there are 738 properties that are in the lis pendens status in flagler county.Thre are 217 in the forcloser process, up from 198 last week. True not all of these are on the MLS as of today. The reality is these will not go away and will increase in the months to come. Why? The number of loans that were to reset were high in the months of May and June, the next high months are in Oct and Nov, so the potential for lis pendes will be there. As far as forclosers, we are entering August I do not think the banks will just say no to short sales, their balance sheets are up side down, if they can get a short sale through they will do it. Property values are not rising, the forcloser costs between attorneys fees and court fees have an impact there potential profits. If they hold the property for another 6 to 9 months the valuation goes down, additioanl lost
Banks Not Logical
We had a short sale we worked on for 6mos +. The Banks own appraiser said the value was $175,000 in Jan… We had another agent bring us a buyer with a full price offer, the bank played around till July and came back with a counteroffer of 205,000, and the comp. value is now $155,000. Makes no sense. We dropped the listing; no way we can sell that house for $205,000. We could have left the house on the market for $175,000 and tried to get someone else to waste their time on trying to get the Bank to get reasonable. We are honest and ethical and feel that we have to list the house for what the bank said they want. That was only 1 of 5 short sales we had that didn’t go anywhere. We don’t take them anymore, too much work, for nothing.
In the Banks defense I have to say they didn’t come to us and ask us to sell the house. If they want to keep it through foreclosure, that is their right.
Reply to Tom
I agree that the continuing stream of foreclosures will cause the banks to take a harder look at short sales. Both they and the realtors are bound to get better at the process too. However, the presence of PMI insurance will continue to be a negative.
Reply to Bearuymrgn
I actually included short sale contract closing rates in my June newsletter. Even if you discount the total number of pending sales to allow for the fact that many short sales do not close, pending sales are still ahead of the beginning of the year. The number of unsold homes listed for sale has dropped from about 2,600 in the last quarter of 2007 to 1,926 on July 26.
Reply to Dalgarnif
Yes, PMI does make home ownership available to those who are unable to put 20% down. However, if a homeowner is in trouble with his mortgage, the lender is probably less likely to talk about a work out since they know they can foreclose and collect the PMI proceeds. In that case, the presence of PMI puts the lenders motives at odds with those of the homeowner who, after all, pays the PMI premiums.
Reply to MLS
PMI is not designed to protect the buyer. It is designed to protect the lender. PMI is a contract between the lender and the PMI provider. The homeowner is not a party to the contract, never sees the contract, is never disclosed the contract terms. The homeowners only role is to pay the premiums. PMI is the mortgage industry’s dirty little secret.