Short Sales: The New Frontier

Written by admin on 17 June 2009

From pushy lenders to aggressive investors, there are many challenges that real estate practitioners must overcome in the new world of distressed sales.

The hard sell by lenders is just one of the many challenges sales associates face when working with distressed sales. Other challenges: aggressive investors who try to make money through a “double close and flip” transaction that can leave sellers upset with their listing agent; salespeople who encourage buyers to make offers on several short-sale properties to see which deal sticks; and ineffective third-party negotiators who only complicate transactions.

Welcome to the world of distressed sales. In today’s market, short sales and REOs make up more than 40 percent of sales nationwide and far more than that in areas such as Southern California and Florida, where home prices have dropped significantly in the last two years.

It’s also scaring away buyers at a time when prices and interest rates are low enough for consumers to snap up real bargains. The result is a lost opportunity for the industry to shrink its massive overhang of inventory. Although hard-selling lenders are only one of the problems, they’re among the most common, say practitioners.

Sellers are also the big loser in a “double close and flip” transaction, says Lance Churchill, a short sales specialist who splits his time between San Diego and Boise, Idaho. In this type of transaction, investors tell a listing agent they can help bring a short sale to a speedy close by using their experience to negotiate the deal with the lender. All the listing agent has to do to earn their commission is find a buyer.

But that’s where trouble can emerge. Once the agent accepts the investors’ negotiating help, the investors talk the seller into turning over the deed to them and—in some cases—giving them power of attorney. Armed with that authority, they negotiate a deeply discounted sales price with the lender. Then, when the agent procures a buyer, the investors buy the property at the discount and flip it to the buyer at the original listed price, pocketing the spread.

This scenario, which is becoming more common, can leave sellers feeling that the listing agent didn’t do the job of getting the best price for the home.

Apart from dealing with pressures from lenders and investors, salespeople can create their own problems when they encourage buyers to make offers on several short-sale properties at once in the hope of finding one that will make it to closing. Agents can also derail transactions simply by not preparing well. One-third of homes listed as a potential short sale have no business being called that. In many cases, the seller really can’t make a qualifying hardship case to the lender.

Agents can also derail transactions involving sellers who have a legitimate hardship by simply being unprepared and submitting an incomplete proposal. The property might have several junior liens that the listing agent never took the time to learn about, creating a snag later in the process and raising a question in the lender’s mind about the preparation of the agent. At a minimum, agents should go to a lender only after they’ve prepared a complete, well-organized proposal to the lender, because absent that the deal is unlikely to survive the rigors of the process, he says, creating a bad experience for everyone, particularly buyers.

Short-sale specialists seek out practitioners who have either little experience or little time to deal with these types of sales and offer their services as a way for practitioners to focus on obtaining listings and finding buyers while they handle communications with lenders.

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