It’s widely agreed that foreclosures and REO properties devastate nearby home values and impede the housing recovery. But we don’t hear similar complaints about short sales. How do the two categories compare where housing prices and a healthy real estate market are concerned?
Here’s my take on their differences:
– Seller motivation issues. Properties listed as short sales are often occupied by home owners who aren’t concerned with getting top dollar. Instead, their motivation may be to extend their “free rent” program or get out of their financial obligation to pay off a mortgage. Consequently, they often don’t fix up their house to sell it and may be less than cooperative about showings. On the other hand, REO listings are vacant properties and have a lockbox for easy access.
– Delays. Short sales require that home owners submit their financials to the bank every month—and if they don’t, the sale stalls. The delays and uncertainties make these listings very difficult to sell. In contrast, it takes a week or so to get a REO listing into escrow, with deals closing in about 30 to 45 days, whereas short-sale approvals these days take 30 to 60 days. To be fair, this is an improvement over a few years ago when it could take six to 12 months or more to hear from a lender.
– Pricing. Short-sale agents often price their listings aggressively low to compensate for the difficulty in selling. They hope that a lower price will draw buyers interested in a bargain. REO listings, on the other hand, are appraised by neutral third parties and priced for retail sale by the asset managers, who have a fiduciary duty to their investors to maximize return. So-called “bank deals” are largely a myth—asset managers don’t determine retail value and then knock off 10 percent or more. And if they do inadvertently price a property too low, their selling strategy enables every buyer to make an offer within the first few days. When that happens, the sales price can be bid up to retail—or even higher.
– Buyer preference. Buyers shy away from short sales because of their uncertain, murky reputations. Because of lower demand, they sell for a lower price. But there is a high demand for REOs because bank-owned properties enjoy the reputation that they are underpriced, even though they have been selling well for years.
– Fraud potential. Short sales are fertile ground for fraud. These properties, priced to sell by the listing agents, are sometimes shopped around exclusively to a small group of buyers already known by those agents. Deals that are made “prior to listing input,” and sold at an untested price without open-market exposure, are unethical in my view—and if district attorneys were to investigate, those transactions might appear fraudulent. Now, those listing agents might claim that if the bank approves the sale, then who cares? However, the NATIONAL ASSOCIATION OF REALTORS®’ Code of Ethics states that NAR members are to treat all parties honestly. It is not honest to send your short-sale package to the lender for approval and claim that you exposed the property to the open market if you haven’t actually done that. By comparison, REO asset managers insist on open-market exposure to ensure the best possible sales price.
As an industry, we should acknowledge that REOs offer a better way to sell homes and improve the housing market than short sales—for consumers and practitioners. Vacating houses, sprucing them up, putting a lockbox on them, and exposing them to the open market for a period of time is how you can sell distressed properties for the best price.
Jim Klinge has been selling homes since 1984 and is broker-owner of Klinge Realty, a company of eight agents with headquarters in Carlsbad, Calif. He and his renegade blog, bubbleinfo.com, have been featured on ABC News Nightline, CNBC TV, and Reason.tv, as well as in The Wall Street Journal, Businessweek, Grant’s Interest Rate Observer, and the Los Angeles Times.
CALABASAS, Calif. – Adding to its foreclosure prevention initiatives, Bank of America has launched a nationwide program that offers delinquent mortgage customers increased assistance with relocation expenses – between $2,500 and $30,000 – at the completion of a qualifying short sale.
“Bank of America is committed to providing alternatives to foreclosure whenever possible,” said Bob Hora, home transition services executive for Bank of America. “This program can help customers make a planned transition from ownership when home retention options have been exhausted or they have made a decision not to keep the home.”
The short sale relocation assistance program builds on the bank’s already robust short sale initiatives, which led to 200,000 completed short sales in the last two years and another 30,000 in the first quarter of 2012. This program is based on a similar incentive offer that Bank of America tested in Florida last year.
To qualify for the enhanced relocation assistance payments under the new program, the seller must work proactively with the bank to obtain a preapproved sales price prior to submitting a purchase offer to the bank. A short sale must be initiated by the end of this year and close by September 26, 2013, to be eligible for the payment. Qualifying short sales that have already been started but have not closed may be eligible for the relocation assistance.
The amount of assistance provided under the new program will be determined on a case-by-case basis using a calculation that includes the value of the home, amount owed and other considerations.
Initially, the program will be offered on mortgages that are owned and serviced by Bank of America.
While available nationally, Bank of America anticipates greatest response to the program will come from borrowers in California, Nevada, Arizona, Florida and other states hardest hit by the economic downturn and falling property values.
Customers who believe they may be eligible for Bank of America’s short sale relocation assistance program may contact program specialists at 877.459.2852.
To help homeowners understand the short sale process and other foreclosure avoidance programs, Bank of America encourages them to visit the Home Transition Services website at www.bankofamerica.com/hometransition.
When Jennifer Anderson’s family could no longer afford their mortgage and lost their home, she expected many years to pass before they would again become property owners.
But less than two years later, in March, they purchased a $297,000 house outside Phoenix, Arizona, after qualifying for a loan backed by the U.S. government.
They joined a small but growing number of Americans who are making a surprisingly quick return to homeownership after defaulting on their loans or being forced into short sales that cost their banks money.
“We didn’t really expect it,” said Anderson, 40. “We were resigned to the fact that we were going to be in a rental property for a while.”
Financial problems arose after she lost her job as a customer service representative for a health insurance company and her husband’s hours at an automaker were cut. To make matters worse, they used up her retirement savings trying to keep their home.
Data is not available, but interviews with more than 30 lenders, builders, Realtors and consumers suggest that a growing number of Americans are getting back into the housing market, even though they went through a foreclosure, bankruptcy or short sale in recent years.
“Most are not ashamed or bashful about what happened because so many people were forced into that reality in the last six years,” says Graham Epperson, vice president of sales in Arizona for the PulteGroup, a leading U.S. homebuilder.
The shift from foreclosing to short-selling is having its challenges.
The banks and servicers are not foreclosing at the same pace, presumably to give defaulters a chance to work their way through the loan-mod waterfall.
Once a loan modification has been attempted and failed, the servicers can recommend that a borrower should short sell their home – but they can’t make them sell it, or even list it. All they can do is keep applying foreclosure pressure, so the borrower has no other choice.
But by letting their foot off the foreclosure gas pedal, it appears that the banks and servicers, with help from government intervention, have created a defaulter purgatory, and free-rent bonanza.
Both foreclosures and short sales are declining in San Diego County:
Converting from foreclosures to short sales is enabling the banks and servicers to draw out the recovery process. In the meantime, the free-rent program will help to stimulate the economy?
We’ve complained that the board of realtors has no short-sale guidance or enforcement.
Well, now they do. The North San Diego County Association of Realtors (NSDCAR) created a task force of local realtors who wrote a guideline package entitled, “Short-Sale Practices and Suggestions”, though they skipped over the most hotly-contested problems.
Unfortunately, they didn’t address the short-sale fraud. There is no mention of a) how many days to keep the listing active in the MLS, b) how to ensure that the home is available to be shown to buyers, and c) how to create an open and fair bidding process.
Beginning June 15, real estate agents working with distressed homeowners whose loans are backed by Fannie Mae and Freddie Mac should expect to receive a decision on a short sale offer within 30-60 days.
The GSEs issued new guidelines Tuesday that fall under the Servicing Alignment Initiative rolled out last fall and aim to bring greater transparency to the short sale process and expedite decisions related to these pre-foreclosure sales.
Not only is a short sale an effective foreclosure alternative when home retention is no longer an option, but it keeps homes occupied and helps to maintain stable communities, according to the Federal Housing Finance Agency (FHFA).
“I applaud Fannie and Freddie for finally coming out with real guidance with real world timelines for their servicers,” commented Anthony Lamacchia, broker/owner of McGeough Lamacchia Realty Inc., which specializes in short sales. “There is no question that this will help short sales and the market as a whole.”
Bank of America is making changes to its short sale procedures and introducing an improved task flow within the short sale technology module from Equator, BofA’s short sale management platform of choice. The goal: to reduce the timeframe for a short sale decision to less than three weeks.
Starting Saturday, April 14, real estate professionals working with BofA will be required to submit five documents for short sales initiated with an offer:
The acknowledgement and disclosure form, short sale addendum, and the form for third-party authorization are available through the company’s online Agent Resource Center.
The third-party authorization form is a new standardized document developed specifically for BofA. Previously, the lender accepted third-party authorization forms in differing formats and from a variety of sources when transacting a short sale.
Bank of America says it recognized a need for greater compliance and consistency with this important document and has now created its own form to standardize the third-party authorization process. The two-page document requires signed acknowledgments from all borrowers and designated representatives in a short sale. Beginning April 14, BofA will accept only the official Bank of America Third-Party Authorization Form for short sales.
The bank’s new short sale process will enable real estate agents, brokers, attorneys, and other short sale specialists involved in pre-foreclosure transactions to complete tasks such as document collection, valuations, and underwriting simultaneously.
With these steps running concurrently, the timeline from initiation to closing is reduced. In fact, Bank of America says it will now be able to provide a decision on a short sale offer in 20 days. Typically, BofA’s short sale process has taken anywhere from 45 days upwards.
In continuing to streamline the decision process, should the buyer walk away from the sale, Bank of America is giving agents five days to submit a backup offer. Previously, the backup offer window was 14 days. Interested buyers are limited to two counteroffers and will receive a response from the lender within three days.
The additional forms look like short-sale-fraud prevention devices. This attorney thinks that realtors will balk at signing them, because they will be assuming all liability for misrepresentions or omissions (hat tip to Stormin for sending this in):
With the tax exemption of debt-relief expiring at the end of the year, we keep thinking that there will be a surge of short-sale listings coming to market.
Not only is there NOT a surge of short-sale listings, there’s not a surge of ANY listings, relatively.
Here are the total new listings that came on the market in SD County between March 1st – 15th:
It’s widely agreed that foreclosures and REO properties devastate nearby home values and impede the housing recovery. But we don’t hear similar complaints about short sales. How do the two categories compare where housing prices and a healthy real estate market are concerned?
