DEAR BERNICE: I have submitted five short-sale offers in the last month and haven’t gotten an answer on any of them. What do I need to do to get these agents to do their jobs? –Jim D.
DEAR JIM: Without knowing the particulars for each of your offers, it’s hard to tell if the agents are doing their jobs or if the problem is elsewhere. When a bank takes less than the loan balance on a property, there are a number of complex steps they must take before they can approve a short-sale offer. This approval process can take as long as six to 12 months.
The example below from Tim Burrell, a Realtor and an attorney who works with short sales in California and North Carolina, illustrates why short sales are so difficult:
"I recently closed a short sale on a property in California. Lender A, the holder of the first and second trust deeds (instruments that secure the mortgage debt), told me that our application had a good chance of being approved. Lender B held the third trust deed on the property. Even though I inquired regularly about the status of the short-sale application, Lender A didn’t respond for several months. We later discovered that part of the delay was due to a dispute between Lender A and Lender B. Lender B demanded that they receive part of the sale proceeds. If not, they would refuse to sign off on the short sale.
"When Lender A refused to pay Lender B, Lender B decided to stall. Despite having copies from the title company showing when each lender recorded their respective liens against the property, Lender B claimed their lien was filed prior to Lender A’s second trust deed lien. That dispute took a month to resolve.
"Lender A decided to start foreclosure on both the first and the second trust deeds. In a foreclosure, if the holder of the first or second trust deed forecloses, the third trust deed holder receives nothing. It would also prevent the short sale.
"To resolve the issue, Lender A finally agreed to a small payment to Lender B. Lender B demanded 10 times that amount. Both lenders refused to yield. At this point, we had been under contract for six months. We proposed a payoff five times the size that Lender A proposed. Most of the money would come from the Realtors’ commissions.
"Lender B told us that they would recommend our proposal for approval. With the short sale looming and only two days before we were supposed to close, Lender B again demanded 10 times the payoff. The Realtors cut their commission again and closed the transaction.
"Buyers don’t understand why many competent agents avoid short-sale properties. On this sale, I successfully stalled the foreclosure sale three times, negotiated short payments on the second and third loan, negotiated a discount payoff on a fourth judgment lien, handled the transition of Lender A being sold to another lending institution, and kept my young buyer and four Realtors working together. My compensation was slightly above the minimum wage." …CONTINUED
Jim, as this example illustrates, short sales are exceedingly complex. Sadly, this example is not the exception. Here are some of the other common reasons for short-sale approval delays:
1. Missing documentation
To approve a short sale, the lender must have the appropriate documentation. For example, did the sellers submit a hardship letter explaining why they need a short sale? Just owing more than the property is worth is normally not an adequate reason for the lender to approve the short sale.
2. Does the seller have other assets?
Lenders generally will not agree to a short sale if the seller has other assets. This could include a boat, car or other real estate. Gathering the necessary documentation takes time.
3. Minimum price approval
Many lenders have specific guidelines that prevent them from selling below a certain percentage of the existing loan amount. Unless your offer falls within those guidelines, the lender will reject your offer. In fact, they may not even issue a counteroffer.
4. The seller still has to pay the lender after the short sale
If the lender believes that the seller has a strong earning capacity, the lender may demand that the seller sign a personal note for all or part of the short payoff. While this prevents the seller from having a foreclosure on his or her record, it’s common for owners to reject this option, especially if the prices have declined substantially.
5. Tax liens
If there is an IRS tax lien against the property, the probability of getting a short sale approved is virtually zero. City and state tax liens can sometimes be resolved, but it tends to be a very lengthy process.
Jim, since you are submitting offers on several properties, be patient. You may not get answers on all of them, but if you have made reasonable offers, one or more of your short-sale offers may eventually be approved.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com.
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