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In a declining market, buying a short sale is too tall an order

This is my column for this week from the Arizona Republic (permanent link).

In a declining market, buying a short sale is too tall an order

Is it time to kick the stilts out from under short sales?

Right now in most neighborhoods in the Phoenix area, the houses that will draw the most attention from buyers will be either short sales or lender-owned homes. They’ll be in all states of repair, but the prices will be very aggressive.

And of those homes, the lender-owned homes will actually sell. They may be completely trashed, but the people whose job it is to sell those properties are judged by how quickly they can unload non-performing assets. Make an aggressive offer and you’ll get a aggressive deal.

There are downsides, of course. You can inspect all you want, but don’t expect repairs. Because of this, many lender-owned homes will not qualify for FHA or VA financing. And once escrow closes, you’ll have to restore the home to livable condition.

By contrast, a short-sale home might be in better condition. And it might be even more aggressively priced. The trouble is, the price in the MLS listing will be meaningless. The seller can approve that price, but the seller’s lender has to approve it as well. And the people who approve short sales aren’t judged by how quickly they sell the home but by how much money they bring in.

The lender can take from 60 to 90 days to respond to your offer for a short sale home. And the response may be to counter at a higher price. If you counter back, you may wait another 30 days for a response.

Here’s the worst part about this unwieldy procedure: Home prices are still falling in the Valley. You could wait months to get approval on a contract for a house that is now worth tens of thousands of dollars less than what you offered for it.

My take? We need to cut short sales off at the knees. It seems foolish for Realtors to take them as listings, and beyond foolish to encourage buyers to pursue them. Lender-owned homes are offered by motivated sellers. Short sales are a waste of time.

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32 Comments so far

  1. Dave September 28th, 2008 7:08 am


    IMO, that is a very near-sighted view of the situation. By that logic, why would you be in a hurry to close today on any property that is facing the same declining market?

    What am I missing? What is the difference between a short sale that takes 120 days to close vs a traditional closing in 30 days? Aren’t they both in the same declining market? Doesn’t the new buyer stand to lose just as much in value in both cases? It sounds to me that the buyer can just start losing quicker in a traditional sale vs. a short sale by using this logic.

    And let’s not kid ourselves, do you honestly believe that lender owned homes are unilaterally well priced?

    I agree that short sales are cumbersome, inefficient, and are not necessarily good buys (just because they are short sales). However, what I think we should be saying is let’s kick the stilts out from under all home values.

    I am obviously biased. I run a short sale team in Florida. However, I believe whole-heartedly that the solution to our housing mess revolves around the re-indexing in prices. In many parts of the country the de-valuation process still has a looonngg way to go.

    There are only a few ways to re-index property values in mass: principal reduction loan mods, short sales, and the foreclosure process. I think all of these can contribute to speeding the recovery.

    Thanks for the work you do.


  2. Tony Arko September 28th, 2008 7:09 am

    I had that same attitude about 9 months ago here in Northern Virginia. But at that time demand was still stagnant. However, as soon as demand picked up and inventory leveled off in our market, short sales became viable alternatives for patient buyers and knowledgeable agents. I have sold 3 short sale listings and representated 2 buyers in the purchase of short sales in the past 2 months. I expect the same thing will occur in your marketplace eventually.

  3. Natalie September 28th, 2008 7:12 am

    I agree with almost everything you’ve stated. The only exception is the needle in the haystack – a.k.a the bank approved short sale, where the price listed has already been approved by the bank.

    Unfortunately, by the time a home reaches that point there have probably been several buyers who’ve wasted months waiting for approvals on offers much lower than that price, losing out on some great homes they could actually of bought if they hadn’t been caught up in short sale dreams. The vast majority are just what you stated: a waste of time, on all sides. There needs to be some sort of regulation/legislation making it possible to get a bank approved price before bringing the bank an offer. Or atleast a rule that you price a home no less than 10% under market value so that it’s not false advertising – which is exactly what I feel most short sale prices in my area are.

  4. Wine Dog September 28th, 2008 7:25 am

    It’s so amazing to me. Lenders can take the short sale or leave money on the table for several months in a declining market while they take the property back in a foreclosure. Short sighted might be a better term. Once they take them back (a process of at least three months in California) they’re paying full commission, they’re paying for asset management, they’re paying for trash out, clean out, vandalism and utilities while it’s being managed. They get a lot less in the end. I’ve got one right now where the owner gave up and sent in a deed in lieu and the bank won’t even acknowledge that. They’ll probably run it through the foreclosure process anyway. I’ve got a guy who will give them cash today and they can’t figure out if they’re coming or going.

  5. Bob September 28th, 2008 7:30 am

    Dave beat me to it.

    If you are truly concerned about your buyer clients losing money over the next few months, then quit trying to sell them a home, as we both know that in your market and mine, what ever they buy today will be worth less tomorrow.

  6. Natalie September 28th, 2008 7:58 am

    I meant to state “no more than 10% under”. Not no less. Less is bad. I think the short sales we see moving now have come at a high cost of previous buyers and brokers alike having wasted precious time. Works out well for those just coming across those short sales now after that long process. For the ones where the process hasn’t even started…well, just don’t hold your breath.

  7. Gary Frimann September 28th, 2008 8:04 am

    Any house in any market has the possibility of being worth less tomorrow than what the buyer paid for it.

    People want to short sell their home because it is worth less than what they paid for it–period. They don’t want good money chasing bad money. The market is a cruel mistress; unforgiving and relentless.
    A car loses 20% of it’s value the moment it is driven off the lot by the new owner, yet they still make payments, because of the percieved value and benefits. The short sale process, in my opinion, is being abused and that is why the financial system is so screwed up. One of the principles of contract law is the non-breaching party has a duty to mitigate, so banks must try and get money, yet at the least cost avoidance, which in these days, short sales may not be accomplishing that as rising inventories are causing prices to fall further ( in some areas). Get short sales out of the market place, and let them go into foreclosure. Some lenders won’t allow short sales, as they may not be in default, and they have been making the payments. I think there is a lot of “I just don’t want to make the payment because my house is worth less” mentality out there. In the past, short sales were done, but the borrower usually had some skin in the game, and the lender was not taking a huge haircut. In my area (Silicon Valley) some of the lenders are taking $200-300K, or more,in losses on some of the higher priced properties (probably bought with cash back at closing scheme). It’s ridiculous.
    I say let them all go into foreclosure, it will, or should, make for quicker sales. In some cases, the “Hardship letters” are as fraudulently obtained as the loan was.
    Crazy, crazy market.

  8. Doug Quance September 28th, 2008 8:18 am

    I won’t work a short sale, these days.

    The listing agent usually doesn’t know the process… and the lender will usually foreclose a property and use their preferred agent to market the property before they take a huge loss… not to mention the number of second lien holders who will not release their liens without compensation.

    It’s just easier to work an REO deal.

  9. Bob in San Diego September 28th, 2008 8:47 am

    Doug, there are several lenders who DO NOT WANT the property back and with regard to the 2nd, a deficiency may be an issue either way.

    Nice attitude, Gary, and what a ridiculous over generalization. Can I quote you on your position? I’ll be sure and give you a link. I’m sure there are quite a few homeowners in your market who would take issue with your statements.

  10. Gary Frimann September 28th, 2008 10:27 am

    Doug, which statement do you take issue with?
    What over-generalization? I’d be willing to discuss…

  11. Brian Brady September 28th, 2008 11:38 am


    What part of Gary’s statement is an over-generalization? The word “period”?

    I’d agree that Gary’s definitive declaration disallowed for the few folks who have genuine hardship but he is mostly on mark. Many investors bought properties that produced negative cash-flow, the value declined, and now they want out. These will be same folks who complain that investor loans are too expensive, next year.

    My specific question, for Bob: Do you think the majority of short sales come from hardship?

  12. Mike Rohrig September 28th, 2008 12:55 pm

    Short sales are working in my area for me. But if I was on the wrong end of a couple of deals I would hate them too. I know of many agents that hate them and want them banned.

    Short sales keep the market moving and save a foreclosure on the seller’s credit.

    Most agents don’t know how to do a short sale and that is most of the reason why they fail but not the only reason. If we cut off short sales at the knees won’t we hurt the market even more?

    As you say, bank owned properties often have more trouble qualifying leaving less people with the ability to purchase them. I don’t know if you just had a bad experience or wanted to stir the pot but I disagree with your suggestion.

    And every system gets abused by some segment of the population. Stopping short sales punishes the rest.

  13. Bob in San Diego September 28th, 2008 1:11 pm

    Playing devil’s advocate Brian, or do you really believe most short sales are fraudulent?

    Are the hardship letters that are written by people that you gave loans to as fraudulent as the loans they got?

  14. Brian Brady September 28th, 2008 2:33 pm

    Are you accusing me of loan fraud, Bob? Your loaded question suggests that you are.

    I never suggested fraud, I asked your opinion.

  15. Dave September 28th, 2008 3:34 pm

    Come on now. If anyone thinks that you can label the majority of short sales as shady, then you clearly are a novice and insulated agent. I invite you to come join the real world.

    In the same breath, I think we can all agree that it is preposterous to think that the majority of these loans that went south were predatory. However, there are certainly borrowers that are throwing the towel in prematurely, simply out of convenience (I strongly suggest that you do not work with these sellers).

    This issue is neither black or white, nor is it simple. If anyone cares, I would recommend focusing on your customers needs. If your buyers are intrigued by a short sale, they are probably trying to send you a message. In my opinion, that message is loud and clear, “Find me a great deal”. I sincerely doubt that they will “only” buy a short sale. If that is the case, then you probably could brush up on some sales training.

    If your sellers are upside down in their property, and can no longer afford it, you may be doing them a disservice by writing them off as losers for being in the situation they are in. There are certainly true hardships that exist.

    Foreclosures hurt everyone worse than short sales. If you don’t believe that, then ask yourself, would you rather the house next door be vacant and abandoned for over a year, or would you rather have a new family living in it?

  16. Bob September 28th, 2008 4:10 pm

    Of course I was not accusing you of fraud Brian, nor do I believe you capable of even entertaining the notion in order to get a deal done. However, you did say that you thought Gary was mostly on the mark and you asked what part of his statement was an over-generalization. I asked the question to demonstrate how ridiculous I believe some of his statements to be.

    To answer your question, yes, I think more than half have some kind of legit hardship, and that is based on my own experience with short sales (currently doing 25) and the literally hundreds of calls, emails and comments I get from people asking about short sales.

    I agree wholeheartedly with Dave’s comments above.

  17. Clarendon condos -- Jaybird September 28th, 2008 4:30 pm

    I penned the truth about shift sales a year ago along with my hyperopinionated Frank Llosa:

    Here’s the question brought to the table by a very productive agent w/ a small team locally:

    “I am curious what kind of success people are having with their buyer clients purchasing short sales.

    I have probably written about 20 offers on short sales and only 1 has gone through. That is a 5% chance of getting a short sale through.

    I am getting really worn out by these short sales.

    I am curious what sort of numbers other are generating on short sales on the buyer side.


    Agents, if you’re time is valuable, have anybody who is thinking about wasting your time viewing a shift sale read those 2 articles and then ask if they’d really like to see the home or focus on other options.

    I have yet to have somebody interested in shift sales after reading the articles. And I’m not wasting my on them personally….


  18. Thomas Johnson September 28th, 2008 5:33 pm

    The lenders are so capital impaired, they cannot realize the loss on a short sale, or take the house as REO, since that impairs their capital as well. That is why the NOD’s are ballooning and the foreclosure sales haven’t spiked in like fashion. The lenders are allowing the defaulted homeowner to live rent free for extraordinary amounts of time. It’s cheaper than dealing with a looted carcass. Shh! don’t tell anybody, free rent!

  19. casey September 28th, 2008 6:03 pm

    I’m a buyer in a market that is declining and looking at a 90+ day to close brings out the worst fears about the fate of the homes value (via a short-sale). The frustration to wait for responses by realtors and banks also add to anxiety. More negative feeling are involved with a short-sale therefore, I agree with Greg that is a tall order.
    Now that congress has passed the new bailout the banks will be willing to unload REO’s at better prices knowing revenue is coming when gov’t buys “toxic investments”. Starting monday home loan applications should increase as astute real estate market investors can anticipate the end of declining values and inventory. There are deals newly formed thanks to the govenments intervention in which one could profit handily by dealing with bank inventory rather than an owners financial burden.

  20. Brian Brady September 28th, 2008 6:42 pm

    “Of course I was not accusing you of fraud Brian, nor do I believe you capable of even entertaining the notion in order to get a deal done.”

    Thank you.

    “To answer your question, yes, I think more than half have some kind of legit hardship, and that is based on my own experience with short sales”

    That’s what I was looking for. Now, the real question should be “what defines hardship?” I’ll ask that question to the BHB community in a blog post (and invite your consistently excellent commentary)

  21. Barry Cunningham September 28th, 2008 7:37 pm

    greg wrote..”Short sales are a waste of time.”

    hardly! they are a waste of time for agents who have no earthly idea as to how to properly execute them. I would venture to say that nearly 99% of agents do not know how to properly execute them and are unwilling to properly do the work that allows the bank to accept the offer. Seen it time and time again.

    With such a low barrier for entry to even sell a home, most agents are COMPLETELY lost in properly formatting short sale packages and will not take the time to learn how to do them correctly. That would take education, negotiation and a commitment to better oneself and most agents ain’t getting on that bus!

    They would rather lament about how hard or unworthy of their time they are.

    Greg, I have to disagree with your assessment of doing short sales in a declining market. If executed correctly they are a veritable goldmine and it’s a shame more real estate “professionals” don’t know what they are doing…present company excluded of course.

    Maybe there should be a short sale session at Unchained. No sense in going to a clinic to learn how to administer anesthesia if you don’t know how to perform the operation. Especially in a market with a GREAT need for those experienced in triage.

    Just my opinion.

  22. Teresa Boardman September 29th, 2008 4:10 am

    I agree about the short sales. I have listed them and represented buyers who want to buy them. I honestly don’t want to be involved in them at all any more, life is too short. In my market the banks do not seem motivated to sell the foreclosures. They are hard to work with. I guess I would rather not sell those either but I do because they make up 30% of our market and I feel like I don’t have a choice if I act in the best interests of my clients. There is so much hype these days for Realtors about becoming foreclosure specialists. I say it is a bad specialty to have because in a couple of years the market will have dried up. I strive to run a balanced business and to not have all my eggs in one basket.

  23. Barry Cunningham September 29th, 2008 4:58 am

    “it is a bad specialty to have because in a couple of years the market will have dried up.”

    Wow. Minnesota must be on an island! We have been successfully doing short sales for 7 years (yes..even BEFORE they became the cool, “in” thing)

    Short sales are not new. The technique has been viable for years and very profitable as well.

    There will ALWAYS be a market for those who correctly know how to work the distressed property niche, just as there is a need for those who work the luxury market, or the affordable housing market, or the senior market…such a generalization seems a bit outlandish.

    Like I said above, too many realtors denounce short sales but when you look at the process in depth, they simply are not working them correctly and have not been trained correctly.

    Put it this way…working a short sale correctly takes a lot of training and should not be taken lightly. It is not as simple as finding a buyer and hoping the bank accepts the discount. It surely is not taking a contract and forwarding it to the bank to “see what they’ll take”.

    I admire Teresa’s comment. I just wish more agents who don’t know what the heck they are doing would also step aside. They are truly stinking up the joint!

  24. Mack September 29th, 2008 5:28 am

    I think this is great Idea.

  25. Jim in Chatham NJ September 29th, 2008 7:33 am

    Wow Greg, Sound like you have had a few bad experences as of late. I have not been doing short sale as listings but not because I am turning them down because of that, but because the areas I market, just don’t have that much for short sales or foreclosures, although I am tied into one right now representing the buyer. Keeping my fingers crossed that bank will respond sooner rather than later.


  26. Steve Norris September 29th, 2008 8:53 am

    Short sales are not the right solution for most buyers’ goals. The time frame for response and counter is longer than most home seekers are willing to endure. Even if they have been advised of those time frames in advance.

    To that point, Greg is correct that most of these bargain hunters would be better off looking to REO properties because the deal can get done in a more timely fashion.

    For those with the patience to wait out the banks (and those unfortunate folks at the bank buried under piles of files) there is opportunity to be had. Barry is proof of this, as are the agents who are successfully working this niche. But that’s going to be a small segment of the buyer pool.

    Kick shorts to he curb? Nope. Just make sure you’re matching the right prospect to the right opportunity.

  27. Dylan Darling September 29th, 2008 10:29 am

    Short sales require knowledge and time. If the listing agent has the “short sale skills”, a deal can be reached without too much pain. It’s when the listing agent doesn’t know how to approach a bank that that makes short sales hard. As a buyers agent, sometimes you have to coach the listing agent along. Make sure that they are taking the right steps to put a deal together.

    Also, short sales are typically much easier to work out if the seller has a legitimate reason- lost job, illness, divorce, etc.

  28. Dan Melson September 29th, 2008 11:15 am

    I wrote about this months ago

    Here’s the rub as a buyer’s agent: I cannot control the transaction. There is a third party with veto power, that’s going to take a minimum of six weeks to decide whether they’re going to veto the transaction, blackmail my client for more money, or just sit tight and hope for something better.

    I’ve had dozens if not hundreds of agents *swear* they’re experienced in short sales. But the bank will not listen to the buyer’s agent, and if the listing agent is too busy to talk to me (THEMSELVES – not some 18 year old receptionist that is just barely aware that real estate costs money) before an offer is made, I can bet any amount of money you like that they’re also too busy to get the bank to listen.

    It takes a hell of a deal to make a short sale worth trying for a buyer – and the lender is most likely to spike precisely that deal. When I negotiate a deal, it’s because everybody is willing to consummate the deal at that price, and we can get it done and get on with our lives. But for short sales, that is not the case.

  29. Barry Cunningham September 29th, 2008 11:38 am

    Hey Dan..have you ever had the Buyer select the title company, or the buyer determine where the closing would be held..or negotiate any of a couple of dozen points on a contract? Of course you have!

    When you say that as a “buyer’s agent: I cannot control the transaction” that is wholly untrue. EVERY SINGLE short sale deal I have been involved in as a buyer I demand that I handle the short sale negotiation and said declaration is a point of contract.

    It is absolute nonsense for anyone to say that the buyer can’t control a short sale. Here’s a hint..most banks actually prefer it. Never had a problem. Get them approved all the time and again, you hit the actual nail on the head when you said you’ve heard hundreds of agents decalre they are experts. They are full of sh$t!

    Seeing what’s happening in the market right now is casue for these BS artists to be exposed and to go back to whatever they were doing. It’s time for those who actually know what they are doing to step up.

    By the way, the more agents who become frustrated and decide to no longer be “experts” in this field the better.

  30. Thomas Hall September 29th, 2008 5:28 pm

    I am not a big fan of short sales. I just showed a number of properties last night to a client – 4 were short sales. Interestingly enough, the other properties in my opinion were more aggressively priced and were NOT short sales or REOs. Depending upon the property type and location in my neck of the woods, the short sales aren’t really the best deal.

  31. Barry Cunningham September 29th, 2008 5:52 pm

    hey are making my point exactly…How do you know that the short sales you saw were not the best deals?

    There is NO WAY for you to know. Why? You looked at the property and then at the listing and concluded that the price was not worth it. Here’s a pop quiz. Where did you think that price came from?

    I’ll tell you. An uneducated, inexperienced , short sale incompetent!

    If you are looking to buy a short sale or representing someone who is buying a short sale IGNORE the list price. It is wholly irrelevant.

    You put in the offer that you are prepared to pay AND substantiate to the bank and if you can indeed substantiate your offer with a host of documentation and due diligence you indeed get your great deal.

    I’m telling you right now…without any equivocation. The problem with short sales is NOT the bank. It is 100% the listing agent involved and that’s the absolute truth!

    Here’s your first indication. If you call a listing advertised as a short sale that is an ACTIVE listing, when you get a hold of the listing agent ask them if they have begun negotiations with the bank WITHOUT having an executed offer in place.

    If you get an affirmative answer, RUN! No deal to be had..listing agent is a moron and there is not likely going to be a good deal.

    On the other hand..same listing and you get the answer..of course not, we can’t begin negotiating until we have an executed contract, then you know you are dealing with a competent and experienced short sale professional.

    The latter is hard to find and the former is a fraud perpetrated on the American public!

  32. Thomas Hall September 29th, 2008 6:30 pm

    Barry – interesting point – in my particular instance, there was a non-short sale listing listed at $162,000. A roughly equivalent listing was priced at $155,000 – non short sale – plus the listing agent of begged us to put together an offer.

    Now – in this particular instance, the owner of the $155,000 could respond immediately. In the case of the short sale, the listing agent – who already told me that the seller’s attorney has been in contact with the bank – would only commit to a 90 day response time.

    My only conclusion in this particular deal – the non short sale was listed for less and could turn around an offer quickly.

    I am not saying I wouldn’t sell a short sale – just saying they aren’t always the best deal.

    Even if the bank could respond in 48 hours, we could still be done with the other deal in half that time.

    Someone please wake me up with this is over so I can get back to work – thanks. 😉