If you had a pulse during the last decade or so; or if you watch HGTV or national news then you have probably heard the term “short sale”. If you actually spoke to someone who was involved in a short sale then you probably heard a lot of cursing mixed in with the words “short sale”. The process is relatively new and has become more and more prevalent during the economic downturn. For this reason (and many other reasons) the process can be painful.
What does it actually mean? Simply put, it means that the owner of the property owes the bank more money than the owner can sell the property for in the current market. Let’s put an example to it: John buys 123 Main St in 2006 for $100,000. In 2010, John wants to sell his home and move to a larger one. John has been paying his mortgage down for 4 years so now the balance he owes to the bank is $90,000. During those 4 years, the economy tanks and John finds out that he can only sell his home for $85,000 in 2010. John owes the bank an extra $5,000 if he sells his home for $85,000 because his mortgage balance is still $90,000. This is a short sale. Typically when you sell a home, the first proceeds from the sale go to the bank to pay off the existing mortgage. In short sale cases there isn’t enough money to pay the bank back, so the person selling the home has to either pay the difference up front, work out a deal to pay it back over time, or in some cases the bank will forgive the debt.
Why does this process suck so badly? I would have to say that most of the problem with short sales lies in the bank’s process. As I said, it is a relatively new process and there is no “standard” way of doing a short sale. Every bank has their own system and most of these systems are confounded and unorganized. Plus, with no real guidelines in place, the mortgage servicers could literally take as long as they need(or want) in order to respond to a short sale application. Added to that, there is very little communication between the bank and the other parties involved during the transaction. This is especially frustrating to Realtors like myself because we have a client who is trying to buy or sell a home, yet we cannot convey to them how long it will take or if it will even close. I could have a client waiting for 6 months just to hear back from the bank that they are rejecting the offer! Crazy.
With short sales up 23% in 2012 from 2011, and the amount of time it takes to close one increasing as well; mortgage providers decided that it was time to improve. Until recently, most banks would not even talk to the client about a short sale unless they were behind on their mortgage (which makes no sense because if you’re behind on your mortgage, you’re in danger of foreclosure. If you’re trying to do a short sale it doesn’t necessarily mean that you can’t pay your mortgage, it just means you can’t sell your house for a high enough price) This lead some people to stop making their mortgage payments in order to move. Ridiculous.
In November of 2012, mortgage king and queen Freddie Mac and Fannie Mae implemented a new process for short sales in order to cut down on the amount of time it takes to close one. Part of the process would allow for homeowners who have never missed a mortgage payment to sell their home short. Of course, if you want the bank to forgive the difference, you need to provide evidence of hardship, which can include unemployment or the death of a spouse. Also, mortgage servicers now only have a 30 day window to respond to a short sale application. They are also required to provide a weekly update on the file. According to Freddie Mac EVP, Tracy Mooney, the time it takes to close a short sale should decrease by 50-75%. Fortunately for most people in the Highlands, our property value stays a bit higher than some of areas of Louisville. So there were less short sales in 40204 and 40205 than the majority of Louisville zip codes in 2012.
With all of this said, only time will tell if these systems will actually improve the efficiency of the short sale process. I am hopeful, but I will still warn anyone that is thinking about buying a short sale to make sure that they have an agent that has been through the process a few times. Buyers need to know that, while it is possible to get a “good deal” buying a short sale, it is also possible to lose your mind at the same time. If you have questions about any of this please feel free to contact me at 502.509.9278 or via email at email@example.com