Short Sale Could be the Next REO as Short Sale Process Gets Easier

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What is a short sale?

Although at this point it might go without saying, a short sale as it relates to housing is when the owner owes more than the property is worth. The short sale process entails negotiating with the current lenders to have them accept an offer from a new Buyer to purchase the property, and settle the borrowers (sellers) loans for less than what was owed with the new buyers funds. Sounds fairly easy, right?

Check out this video where I’ll give you a brief introduction to short sales:

Ask any agent or buyer in the last several years how easy it was to get a short sale through. They’re known to be clunky, take far too long, fall to pieces when an agent isn’t versed in the short sale process, and deal with the probability the investor overseeing the loan can deny an otherwise sensible offer. The lack of understanding of how they work and potential legal pitfalls for agents has led to much confusion, frustration, and even refusals (from buyers and agents) to work with short sales. This in itself is a pity since they offer, and continue to offer not only a solution in the marketplace, but opportunities for investors.

As with any complicated structures, it takes time to work out the kinks. There are recent statistics that paint a more optimistic picture of short sales getting done, in a more efficient manner, and getting the short sale process to be more fluid.

  • Short sales were up by 22 percent in the third quarter of 2012, and accounted for 65 percent of pre-foreclosure sales in the same quarter, according to RealtyTrac.
  • Between March 1st and September 30th of 2012, lenders were able to provide approximately $13 million in debt relief just from short sales.
  • In 2012, foreclosure sales steadily outnumbered REO sales; in the third quarter, 98,000 homes in foreclosure were sold, compared to 95,000 bank owned homes that were sold in the same period. Sales of REOS (bank owned inventory) were down 20% from the 2011.
  • Meanwhile, foreclosures (including short sales) made up 19% of all home sales, which was the same % as it was in 2011.

This is on a national level, and of course some areas that didn’t see a rampant growth spurt aren’t going to feel the effects of inequity quite as bad. So, your area might not see many short sales happening.

Short Sales Process is Getting Easier

But for markets like Arizona and other hard hit areas, short sales are still a healthy chunk of the market. For instance, here in Phoenix-metro, distressed sales are still approximately 40% of the monthly sales, with short sales claiming 70% of the distressed sales, or 27% of everything that is closing every month.

As well, many lenders have been able to shorten the entire process to just 60 days or less, which is down tremendously from the 6 months or longer it has previously taken to get through the short sale process to close.

But, things have changed and the agents that are still doing them tend to have a little better grasp, coupled with the fact banks are starting to get them processed much faster, some in as little as 60 days or less.

So if you’re tired of chasing REO’s or competing against ubiquitous buyer groups at trustees sales/auctions, why not go against the grain and try to create equity and get deals by buying a short sale?

What do you think?
Data Source: Realtytrac.com
Photo: josima1

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About Author

Tracy (G+) is an Arizona Short Sale Realtor, Investor, Rehabber, and Foreclosure Expert. She also is an avid blogger, vlogger and consultant on all things Arizona Foreclosures.

11 Comments

  1. I think it is a crazy idea… Well, you asked! I have watched my wife close numerous short sales in 2012, and none of them went smoothly. A 60-day close will be rare with any bank, whereas a 4-6 month close seems to be the norm. The banks keep talking about making the process better, but it has not even remotely begun to trickle down to the ground level where there is mass confusion & irresponsibility. So, if an investor is willing to wait for several months with no certain close date to get a deal that is usually just under market value, then they should go for it. Thanks for stirring up my disdain for short sales!

    • Hi Katherine, thanks for jumping into the conversation! Yea it’s sorry to say that some banks are still behind the 8 ball in getting things done. But, you’re right in the fact that if the buyer is willing to stick it out, there’s still good deals to be had. It’s not for everyone, but it is an option to add into the arsenal!

  2. As investors, there’s no reason NOT to go after short sales. If you have a competitive team to manage them, then you’re just stacking up the pipeline. When they’re ready to close, you close. Having them in process at the various stages doesn’t mean you can’t actively be doing your other deals. It’s all about leveraging your resources.

    Now if you’re the type of investor who can only do one deal at a time or has to manage the entire deal yourself, then good luck – short sales are not your ticket. But hopefully no one wants to be THAT guy. You should have other people doing your short sales, i.e. agents, so that you can be out doing more entrepreneurial activities like raising capital and talking to more sellers. If this sounds like The E-Myth, well, that’s no coincidence.

    • Hi Michael, you’re absolutely right, and in the area where there’s a severe lack of inventory, there’s no reason not to. But, as you so poignantly put, it’s not something you’d want to self manage. I’m a big believer in Michael Gerbers principles as well, and the more you can adapt them into your RE business, the more apt you are to be a successful business owner, not just a “deal slinger”. Thanks for the comments!

  3. I agree with Michael that you can stack your pipeline with short sales, and I have. However here in the DC market I am not seeing the process get any easier or take any less time.

    Just yesterday i was going through short sale property that I put under contract in August 2012. Still not approved, and the market has changed so many times since then that my offer from last August is no longer relevant here in February. And this with a professional short sale negotiator doing the hard work.

    I had another short sale under contract for a full year in DC, with an attorney specializing in short sales doing the negotiation, and it was finally denied. I just noticed that the house finally sold with a realtor a few months later for about $25k less than what I had offered. I have other short sale stories as well, but you get the idea.

    Short sales are so prevalent in the market right now we must work with them, but I have no confidence that the process has gotten or will get any easier or more efficient.

  4. Short sales are not getting easier if they are Fannie Mae. Here is a brief summary as to what is happening all over the country with Fannie Mae short sales.

    -Fannie Mae approves short payoffs at ridiulously high prices like the example I gave below.

    -No one buys them.

    -Fannie Mae forecloses or gets the property back in deed in lieu

    -Fannie Mae relists the property as a Homepath REO

    -Fannie Mae then offers financing on these overpriced properties

    -Fannie Mae then funds the new loan on their over priced property and DOES NOT REQUIRE an appraisal.

    -Now the new owner has a new Fannie Mae loan on an over priced home that they are already upside down in.

  5. Stuart Stevens on

    First I love short sales and they have been fairly profitable for me.

    Short sales became viable because of the governments forgiveness of debt and the public negative attitudes towards foreclosures. Banks were not staffed for short sales and banks know that short sales will effectively end when the government short sale programs and forgiveness of debt end(which may be at the end of 2013). So does a bank fully staff for short sales knowing that it is a short time business. Add to this the fact that around 50% of short sales have some form of fraud.

  6. In Las Vegas they passed a new bill that will allow homeowners to short sell their homes back to themselves. This will cause less short sales to hit the market thus lowering inventory further.

  7. Short sales are sometimes easier and sometimes they’re not. Wachovia has been really good for a long time. But B of A has been a real challenge for a long time. B of A has gotten better. Short sales have so many moving parts that it’s easy for any of them to go off the tracks…did the appraisal go south/ did the buyers find another property while waiting for an approval/ did a new lien get attached in the middle of the process (HOA)/ did the buyers hang in and have their loan fall through at the last minute (after they paid for inspections)/ is there mortgage insurance involved. Throwing a 3rd party into the transaction makes it inherantly difficult. As realtors all we can do is try to make it make since to home buyer and sellers and try to prepare them with some realistic expectations.
    I think banks are “complying” with newer regulations and doing a lot of PR relating to that and pretty much doing what they’ve always done…whatever they want. They are generally easier because lenders have figured out that it’s cheaper for them to do a short sale rather than take the property back.

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