If you are active in the San Carlos real estate market and are not completely familiar with short sales, you will be. Until recently, short sales have been relatively uncommon in San Carlos. I am willing to bet that they will be much more common in the next twelve to eighteen months.
One of the benefits of running a blog similar to this one since 2007 is that you get a feel for the undercurrent of activity and sentiment in the market before it reaches the public eye. I respond daily to questions from San Carlos homeowners and buyers. Over the past year, while the economy and local housing market have improved, it has become clear that we have many San Carlans holding on by their fingertips in terms of their current financial situations. Judging by the increased frequency and seriousness of the emails I have received, I believe the number of short sales making their way to the San Carlos market is about to noticeably increase.
The term “short sale” is still a bit of a mystery for most people. Truthfully, the inner-workings of short sales and the process to successfully close one is still a mystery to most real estate agents. That being said, many San Carlans are about to get a crash course on short sales as a possible option for their current financial situations. The goal of this post is to give you a better understanding of what they are and how they work within San Carlos.
What is a Short Sale?
A short sale starts when a homeowner is having difficulty making payments on their home, combined with the notion that a prospective sale at market price will not yield an amount suitable to pay off all lien holders on the property – usually one or two mortgage holders. The mortgage holders then agree to take less than the amount owed on the property to clear the debt (and potential costly foreclosure action off of their books).
There were many homes sold in San Carlos between 2004-2007. Almost all of those homes are worth significantly less than when they were purchased. While the economy has improved, I believe that a higher than expected percentage of San Carlos residents are struggling with making payments and may seriously consider a short sale as a possible exit strategy.
Why Short Sales Work for Sellers
A short sale can be a way out of a spiraling financial situation. If executed properly, it can save struggling homeowners from having to go through the foreclosure process and can reduce the risk of bankruptcy in certain situations. While a short sale is disruptive to your credit score, it is generally regarded as not having nearly the devastating, long-lasting effect of a foreclosure.
Why Short Sales Work for Buyers
Any buyer who has been through a short sale will tell you that it takes a tremendous amount of patience. When they are successful, short sales can take anywhere from 45 days to a year or longer to close. Buyers need to stick with a process where it is uncertain that the lien holders will grant permission for the short sale. However, most properties sold as short sales are sold at a small discount….and that is the carrot for buyers considering a short sale.
The Majority of Short Sales Fail
There are a variety of reasons as to why short sales fail. However, this conversion ratio is far worse than it really should be. I believe that most short sales fail, not because the prospective seller did not qualify with the mortgage holders’ short sale guidelines, but rather because of improper execution on behalf of the seller and the listing agent.
I’ve had a good deal of experience with short sales in San Carlos and we have been successful with them by keeping the following in mind:
(1) Have a plan. Many short sales fail because there is absolutely no strategy in place for completing the sale. Packaging the documents up and sending them to the lender is simply not good enough. How you price the property, the type of offer you accept, the current financial situation of the seller, the number of lenders involved and a host of other data points all need to be taken into account when laying out a plan for a successful short sale.
(2) The bank(s) involved make a difference. Simply put, some are a lot better than others in terms of allowing short sales and their efficiency in executing them. I am not going to publish a list of which ones are better than others. If you have a specific question on the reputation of a particular bank, please email me. Knowing the reputation and protocol of the involved bank is essential when putting together your plan.
(3) Organization. The lenders will not be organized, thus the listing agent will need to be. You may have heard horror stories of sellers and agents trying to fax the required documents to the lender, only to have them not go through, receive endless busy signals or have the lien holder lose the file completely. Unfortunately, based on my experience, all of these stories are somewhat true. Persistence is usually the deciding factor in whether or not a short sale is accepted by the lender.
Time is Money
Often, by the time a prospective realtor gets a call from a homeowner who is considering a short sale, the situation is already fairly dire. The trick with short sales is to give yourself time. Doing so will improve your odds.
San Carlos and Short Sales
San Carlos is a small town. In some ways this is a very good thing, but it also comes with some disadvantages. There is a sense of embarrassment that some sellers believe comes along with a short sale. News spreads quickly in San Carlos and advertising your financial situation to everyone in San Carlos through a short sale can be difficult for some sellers to handle. Of course, this is completely understandable. However, I am going to tell all of you the same thing I have told my past and current short sale clients: (A) you are not alone; many in San Carlos are in the exact same situation and are simply hiding it well; (B) think of it as a business decision for your family and your long-term financial health; and (C) by attempting the short sale, you are being pro-active; there is a certain satisfaction that will ultimately be gained by taking control of the situation.
Summary
Attempting a short sale as a seller is complicated and requires a comprehensive plan and the ability to avoid common pitfalls. Obtaining strategic advice from a realtor experienced with short sales is absolutely crucial. You will also be encouraged to buy some time with a real estate attorney and your accountant. Just remember that it can be done.
4 Comments
Good post but you are only addressing the seller’s situation… how does a potential buyer deals with 45 days to a year or longer to close? What has happened in just a few weeks from your wishful FaceBook IPO impacting San Carlos in a huge way?
Hi Mich Mi,
Patience is the largest requirement for the buyer. The buyer also needs to be armed with the understanding that the short sale may not go through or the bank could further negotiate the purchase price. For buyers, outside of the approval that is needed from the lien holder(s), this process operates in an almost identical manner to a regular purchase. 95% of the short sale process rests with the seller and the seller’s lien holder(s).
I am not sure what you are referring to the “wishful FaceBook IPO” question. First, it is not wishful thinking. I have personally represented multiple FB employees in San Carlos. Second, the FB impact is already being felt in San Carlos as many of those employees are beyond their vesting period and have sold their shares on a right of first refusal. I can assure you that there is very much a FB presence in San Carlos. Second, I am not sure where you are going with that comment. The FB buyers and the group that would make up the short sale market are two totally different groups and really have no bearing on each other. The two are mutually exclusive.
Thanks for the post.
Bob
We were on the buyer end of a short sale. I agree that being organized, patient and persistent did eventually get the job done. But I must say that our realtor did a great job with follow-ups. As a buyer, knowing in advance that there’s nothing “short” about a short sale…helps adjust expectations.
The delays we experienced mostly came from the lenders on the seller’s side. The seller had 2 banks – A primary and a secondary. The primary accepted our offer…the second one did not – which added some more negotiations and time.
After we got the house, As buyers, we were faced with PMI which added quite a big chunk to our monthly mortgage…but after doing some cosmetic upgrades to the house (interior and exterior paint, new fence, front yard landscaping)- we had the house re-appraised and were able to get rid of our PMI after just one year. I’m not even sure if that’s good, but it reduced our monthly payments significantly.
My advice to buyers is to find out what the motivation of the seller is, e.g. as long as possible in the house, not contributing cash, etc.
If somebody is using the short sales process to stay in the house longer and you’re not willing to wait or your can’t, then it’s probably best to move on.
If they are ready to move on but money is an issue then be prepared to wait a little longer while “seller contributions” or liability are negotiated away or perhaps the deal can be structured where some money comes from the buyers’ side to satisfy a (mostly the 2nd) lien holder.
Yes, each deal is different and structuring things ahead of time is very wise, but at the end of the day the lenders for the most part don’t want to foreclose and want to skim off the extra “cream” off the short sale deal (vs foreclosure).
As with a regular sale, if you’re a buyer and you really like a house then it might be worth the wait.