By: Gracee Arthur
I began my real estate career in 1991, then watched in horror as each subsequent year the real estate market went farther “south” until changing direction in 1997. My knowledge of the housing market’s recent history gives me confidence we will all survive the current decline in the real estate market. In the ’90′s, we saw not only foreclosure properties being sold by banks, but also bank closures by the FDIC which then became a seller of foreclosed upon real estate. The ’90′s market also brought us the term “short pay” which in 2011 is known to us realtors as the dreaded “short sale.”
In theory, the concept of a “short sale” (which means short of the amount owed to the lender) sounds like a win/win for the borrower and the lender. The borrower can avoid foreclosure and often escape tax consequences on the forgiven loan amount, as well the stigma and longer term credit degradation of a foreclosure sale. The lender avoids dumping too many foreclosure properties on the market at one time, hoping to avoid further neighborhood price declines triggered by foreclosure sales. However, despite new government guidelines for banks to help shorten and improve the “short sale” process, it remains a lengthy, arbitrary and tainted process complete with “negotiators” of varied experience and levels of honesty. The manipulative way these sales are often handled by some real estate agents representing the sellers, adds to a very unsavory mix of elements which scream out for more regulation!
Some of my recent experiences are, I fear, typical of what is going on in this “gangster” area of the current real estate market. A couple of years ago, I wrote an offer for a client on a “short sale”
property which was represented by an agent with a known and respected real estate company. At my suggestion, all parties signed a confidentiality agreement, to keep all details of the offer private from other potential buyers and agents. My buyer’s offer was accepted and sent to the lender via the “negotiator” chosen by the seller’s realtor. My client, a cynic, did a test call to the agent after his offer was sent to the bank, only to discover the agent was not honoring the confidentiality agreement! Shortly thereafter, the agent was sending an additional offer to the bank and phoning me to suggest how my client, whose offer was accepted by the seller, would be able to win over the subsequent offer. The suggestion was, “would your buyer pay something to the seller to get him to accept his offer?” I immediately confronted the agent informing him what he just suggested was a felony, at which point he backed off and said essentially he was “just the messenger!” My buyer withdrew his offer.
Another agent recently has asked via the MLS that anyone who wants to see a particular “short sale” property first write an offer on the property. I have a buyer who has done so because the MLS listing, the agent verbally and in emails, has said all potential purchasers will get to view the property. To date, a month and half later, the viewing has not occurred and the agent is now backing off on who will get to see the property. Other misuses of the process include listing agents only showing a “short sale” property to their own buyer to stack the deck so the bank only has one potential buyer for a property. The agent immediately puts the property on “looking for back up” and discourages other agents from showing the property because they already have a “good” offer. Sometimes in these situations there is an under the table agreement between buyer and seller for some money on the side to the seller (a felony). The most consistent and common issue with short sales in the incompetence of the lender’s “short sale” departments which make the process so lengthy and tedious most buyers drop out before the deal can close. Sometimes, negotiating with 2nd and 3rd lenders, who would be wiped out in a foreclosure, further complicates negotiations. My first short sale offer in this market went on for 4 months before my buyer dropped out, as did several other buyers until the seller’s property eventually got foreclosed upon.
A further misuse of the “short sale” process is in the realm of residential income property. The “short sale” process should not be used to reward income property owners who, after they have stopped making their mortgage payments, lease units to unsuspecting tenants. These landlords try to manipulate the bank into doing a “short sale” on their property by intentionally withholding mortgage payments while collecting rental payments from the tenants! This should be a crime, in my opinion, not an opportunity for a “short sale.” Bank regulators urgently need to investigate the abuses and arbitrary procedures used by lenders in the “short sale” process, not only too simplify and clearly define the process but to create conforming rules to keep the process honest and efficient. The banks must be held accountable rather than allowed to continue in such a cumbersome and unfair fashion which rewards scammer and punishes, the honest financially strapped homeowner.