EthicalShortSales

With growing frequency in preforeclosure short sale scenarios, its simply not enough to present a compelling, full market value, cash, as-is purchase offer to a foreclosing lender in hopes it will release its security interest and accept less than is due.

Sometimes a properly constructed, well supported, and timely short sale proposal is rejected, even though a short sale appears to be in all parties’ best financial interest. Why?  There are other, untold forces at play.

Criteria imposed by the Investors (owners of the mortgage debt) which employ the loan servicers who are reponsible for collection activities including preforeclosure short sale workouts and forced foreclosure sales have specific business objectives which may not appear to make short term financial sense to us.

Internal investment criteria used to consider short sale workouts include, but are not limited to derivitive relationships and their impact on earnings, taxation, and position in the marketplace.

Loan Servicer:  “We have considered your request for short sale. The Investor says we can only accept the full amount due.”

Agent:  “But the fair market value is less than what is owed.  This is a great offer!  You’ll never net this much if this property is sold at Sheriff’s Sale or Trustee’s Sale!”

Loan Servicer:  “That may be, but we can only accept payment in full.” 

Agent:  “But you stated you woulkd consider a short sale as an alternative to foreclosure.”

Loan Servicer: “Yes, that’s true.  We will consider a short sale.”

Agent: “I have complied with all the criteria listed in your application.  A fair market value listing agreement.  An MLS activity history.  A contingency free Contract of Sale.  A Preliminary HUD1.  Full financial disclosures.  A letter of hardship.  Everything.  You’ve done a BPO and confirmed the asking price is market value.”

Loan Servicer:  ”Yes.  Thank you for all your hard work.  I can only accept the full amount due.”

Even though your transaction may fail,  you can be sure your presentation (market data, borrowers’ hardship, etc.) will be used by the loan servicer when it seeks to justify losses sustained by its Clients.

 An Ethical Approach (to preforeclosure shortsales)

I did my first short sale in 1985 or 1986, and have been involved since then in preforeclosure shorts from all sides of the closing table: as buyer, as seller, as real estate agent, and as loss mitigation asset manager for the foreclosing mortgagee. 

I’ve spent years reviewing failed short sale attempts (my own, early attempts, included which I call Trial by Education)), and repairing botched but salvageable short sale attempts for brokers, brokers’ agents, speculative investors, and private homeowners. (not all botched attempts can be salvaged, and not all well constructed attempts are successful)

In my experience, the most common cause for failure can be traced back to inadequate prequalification of the short sale candidate, and/or the inadequate foundation of the short sale construct.

When building a house, like a short sale, there is a process to follow.  You don’t start by building the roof…. you must first build a stable foundation.  If the foundation is built poorly, or the construction techniques shoddy, the house will not stand.  And you don’t run the electrical wiring or the plumbing AFTER the drywall is up.   There is an order to follow. 

When on a listing appointment the agent first suspects a preforeclosure scenario, and quite possibly an indicated short sale scenario… it is essential to provide the homeowner accurate information and quickly displace and reign in the seller’s unrealistic expectations with cold hard facts. The agent’s task is to tell the seller what it needs to hear, not necessarily what it wants to hear.  At this critical moment, the seller will hear what it wants to hear, and remember what it wants to remember. So great care and attention must be paid to detail, both in the collection of information from the seller, and in providing information to the seller. 

Builders who use faulty construction techniques don’t have many happy customers.  Neither do real estate agents who fail to lay the proper foundation, use faulty techniques, and botch sellers’ chances to escape foreclosure via short sale.

An agent who answers a seller’s foreclosure or short sale related question with, “I don’t know, but I’ll find out” is doing a greater service to all concerned than if he or she gave an incomplete or inaccurate response.

Recently, an agent handed me a file which contained a listing she had taken the day before. The seller owed about $50,000 more than the property was worth.  Not only had the agent listed the property for sale about $25,000 too high for the market, there was a Sheriff’s Sale scheduled within a few weeks. Yet, she gave the seller hope (false hope) a short sale could be worked out within that small window of time.

It’s hard to unring the bell.

 Oh, and not every upside down situation indicates short sale feasibility.

• An Ethical Approach (to preforeclosure shortsales)