Short Sales: Buyer Beware

To fully understand why many real estate agents who work with buyers roll their eyes at most of the properties offered for sale as a “short sale”, consider the following.

Little Johnny’s dad (poor little Johnnie…he always gets picked on in stories) saves his hard earned money and ultimately buys a new car…a $75,000 Mercedes.  Little Johnnie, being the budding entrepreneuer that he is, decides to advertise his dad’s new car for sale at $25,000!  Naturally, Johnnies cell phone rings off the hook with prospective buyers, because who wouldn’t want a new $75,000 Mercedes for $25,000.  Eventually, after a mad scramble by the buyers (who get in a bidding war for the car, with the highest bidder finally offering $30,000), little Johnnie finally settles on his best buyer, and approaches his Dad with the good news.  Dad, after pulling himself off the ceiling at hearing Johnnie’s story, blows the deal, grounds Johnny for life, and tells the buyer he was crazy to get involved in the purchase of the car without even getting an approved suggested sales price from the real owner of the car.    Buyer is bent, Johnny is imprisioned in his room, and Dad thinks his son is an idiot.

Welcome to the world of real estate short sales.

In theory, a short sale is a good idea.  Seller is behind in payments, the home is worth less than what is owed, and perhaps it may help everyone if a new buyer can be found to purchase the home at it’s current market value (again, less than what is owed to the lender or lenders) before the foreclosure process is started or finished.  But life very seldom operates in a theoretical world.

In reality, most lenders in todays market are grossly overwhelmed with bad loans, and completely unequiped to deal with discounting an existing loan.  Believe it or not, they are more prepared to foreclose on the property than they are to deal with the problem before they foreclose.  I know that doesn’t make sense, but such is our world of banking at the moment.  The bank would rather lose a lot later, but stick within corporate rules and regulations, than lose a little now by treating each loan on an individual basis.  Strange but true.  We see it here at Westcoe every day.  SO…back to our short sale.

The problem with most short sales is that the property is being offered for sale at a price that the existing lender has not approved.  To state this in it’s most alarming simplicity, buyers, agents, sellers, and everyone else is running around trying to sell a property without the approval of the one entity that has total control over whether this can work or not….the existing lender.  Sounds crazy, but it’s true.  I would guess that approximately 90% of the properties currently offered for sale as a short sale have not been approved by the existing lender….so you as a buyer run the risk of getting emotionally involved in a property that will never sell at the price it is being offered.  What’s even worse, is that the lenders are so swamped at this time, that once your offer is sent to the lender asking said lender to waive tens of thousands of dollars (and remember, the lender may not even know the property is being offered for sale!), it can take anywhere from 2-6 weeks for the lender to get back to you and tell you to take a hike.

Why don’t real estate agents get the lenders approval up front, you ask?  Well, it’s not that we are completely stupid, because a good agent (read that as one here at Westcoe Realtors) will try…but herein lies the true “Catch 22″of the real estate market.  When we call or write the existing lender to approve a short sale price so we can market the home and save them a lot of money, they respond “Bring us an offer first and then we will talk.”  We try to tell them that the list price comes first, and the offer second, but who are we to argue with the great and powerful Wizard of Real Estate Oz.  Hence, the short sale price is a guess as to what the lender will take, and can only be confirmed when some poor buyer writes an offer…only to have his head handed to him on a real estate spike when the lender does not like the price and says “fahgetaboutit.”

And, to make matters worse, there are some rudely unprofessional real estate agents (collective gasp) who deliberately set rediculously low prices on a short sale in an effort to attact unsuspecting buyers to submitting an offer or to purposely start a bidding war…..just like Johnny did…and they should be grounded as well.  These agents know perfectly well the existing lender will never take that low of a price, but they don’t care.  All they want to do is either get you as a prospective buyer to sell you something else, or hope you will get so emotionally involved with the home that you agree to pay thousands and thousands of dollars more to get it.

And this is why many of the true, hard working professional real estate agents out there simply avoid working with short sales…because the last thing we want to do is waste your time, or get you involved with a  home that you have no chance of ever getting.  One of our jobs is to protect you from the bad behavior exhibited by some of our bretheren.

SO…what’s a buyer to do?  Simple.  Get with a real estate agent you can trust, believe them when they tell you short sale horror stories, and let them direct you to the homes that are really for sale at real prices….not those that simply appear to be for sale.  Of course I am biased, but we at Westcoe truely understand this concept.

Remember:  cotton candy looks good, but there’s not much there when you take a bite.