In past months, who would ever have thought that it would be a better idea to purchase a short sale than a foreclosed home? As our market has been taken over by distressed properties, buyers have often chosen to stay away from short sales and try instead to buy homes that have already been foreclosed upon and are now owned by the bank.
There have been several reasons for this preference for foreclosures, or “REO” (real estate owned) homes. There is one less party involved in an REO purchase. It is owned by the bank, so it is truly the seller, and all offers are reviewed by the banks only. Since the bank already owns it, they’re ready and willing to get rid of it, so response time is a matter of days. They want to close quickly, usually within 30 days, and they’re able to do so because there is no personal seller involved. No one needs to pack and move, or find another place to live. The home is already vacant and cleared out, though it may have been damaged when the homeowners left it.
Short sales, on the other hand, have been viewed as messy. The homeowner still owns the home, and they’re living there much of the time. They can sometimes make showing difficult, because some of them don’t really want to sell, but rather want to forestall the foreclosure process as long as possible. Others genuinely do want to sell, so they may make showing easy and respond to offers quickly.
Still, when an offer is accepted by the seller, it’s a relatively hollow acceptance. They don’t have the ability to make the sale happen unless the bank agrees to the sale, because the bank has to agree to let the seller off the hook for the balance of their mortgage. Many listing agents struggle to get the short sale package submitted for lender review. Some are simply inexperienced, but most are dealing with ever-changing rules and requirements, so even when they’re doing their best, the banks don’t make it easy. Then there’s the response time. Banks are unbearably slow responding to short sale offers. When they do respond, their only basis for determining the home’s value is a broker’s price opinion (BPO), which they’ve ordered from a local real estate agent who ran some comps and told the bank what they think the home is worth. BPOs are of varying value, depending on the agent’s expertise. If the bank gets a poor BPO, they will believe the home is valued at a higher amount than it really is, and offers will not be accepted even when they should be.
When the bank finally does respond, it’s often with a counteroffer that prolongs the process, perhaps asking the seller to put in cash to close the deal. By the time a short sale closes, it is often a minimum of four months from the time the buyers submitted their offer, and stories abound of much longer times.
Given the headache of a short sale, why would a buyer ever choose to go that route? One reason is that today, there are very few REOs on the market. Banks have been holding on to their foreclosed inventory at the behest of Federal regulators who are concerned that the real estate market will sink even further if these distressed properties are put on the market. If the banks haven’t already foreclosed on a home, right now they are unlikely to do so. They don’t want to hold on to any more inventory. Then there’s the huge issue of the “robo-signing” debacle. Many banks have unlawfully foreclosed on dozens, hundreds, maybe even thousands of homes. Title insurance policies are going to be paying out to many buyers, I expect, but more importantly, buyers who purchased these homes are questioning whether they will be subject to legal action and perhaps lose their homes. (My personal opinion is that the buyers are in good stead because they are “bona fide purchasers for value,” meaning essentially that they are innocent third parties who had every reason to believe that the sale to them by the bank was legitimate.) Still, it’s messy. REALLY messy. I would not want to have purchased an REO and now be questioning whether I obtained it after someone had been wrongly foreclosed upon.
As we recently showed when we successfully obtained the rescission of a foreclosure sale, the banks are fully able to make that happen. So, if I am looking to purchase an REO, I am bound to question whether the bank is going to continue to hold title or if a broker or attorney is going to get that foreclosure sale rescinded before I buy. And then if I do buy it, am I going to be able to rest easy that I have obtained title without any unlawful activity having taken place?
Short sales still suffer from all of the downsides that have kept buyers away from them. But, they’re secure. All parties are at the negotiating table, so you know that there has been no wrongful foreclosure. Plus, with the increase in short sale inventory and the decrease in REOs, choices are more limited now. Banks have noticed this change, too, and they’re putting much better systems in place to get short sales moving. If they’re not selling their REOs and they’re not foreclosing on homes, the only way for them to dispose of their non-performing loans (those on which payments are not being made) is to make the short sale process work. They’ve finally taken notice and put much better systems in place.
Moving ahead in the coming months, this will be the rise of the short sale. The market, the buyers and the banks have no other choice.