by Roberta Murphy
We are trained and skilled negotiators. Give us a chance, and we could probably get hostages released from terrorists, convince a teenager to leave his tongue unpierced (perhaps)–or successfully negotiate a sale leaseback of the Brooklyn Bridge.
As competent Realtors, it’s what we enjoy doing, and we are passionate about negotiating on behalf of our clients.
Most successful transactions have been hammered out when we account for and respect the needs of both the home buyer and the seller. When we understand what each party really wants, we can begin to negotiate a successful resolution. And though each party to the transaction ( much like a molecule) has different missions, perspectives and requirements, we each function efficiently to facilitate the smooth transition of lives.
Short sales, though, are the real estate market’s free radicals that are contributing so much to its current decomposition and breakdown. And just like the free radicals that attack our health, short sales are unstable, highly reactive, and prone to creating chain reactions when combined with so many other short sales and foreclosures.
One only needs to go through burgeoning MLS inventory in distressed real estate markets to see the effects of this chain reaction:
- Non-negotiated short sales create uncertainty in the market prior to a sale because neither the Realtor nor the buyer/seller knows what price the lender(s) will accept–especially a second lien holder who stands to be totally wiped out because there is no equity to support the loan.
- Realtors have also come to realize that short sales entail much more work than the usual transaction, have a much higher failure rate, and have uncertain compensation if the transaction does succeed (lenders arbitrarily determine the fee). It’s far easier to work with a property that has already been foreclosed upon, or better yet, negotiate a purchase from a motivated seller who is obligated to disclose known property defects and any hidden liens. When a homeowner sells a property, everybody generally knows what to expect. The buyer is advised of repair histories, insurance claims, and other details the seller must disclose. Additionally, the home seller knows what funds to expect at settlement, and the agents who put the transaction together also know they will ultimately be paid. The title company or attorney has checked for liens or other outstanding claims against the property, and surprises should be few.
- Short sales are languishing unsold on the market, while foreclosures and market-priced homes are moving. Why? Because these latter offerings have some degree of certainty (beware of as-is disclosures, though) and time is not wasted trying to negotiate a price before the home goes to foreclosure. What we see happening in the San Diego real estate market is buyers offering less on a short sale than a foreclosure or owner-offered home because of this uncertainty, and not knowing the pricing floor.
Why don’t lenders pre-negotiate their short sales so they never have to go to foreclosure in the first place? Why not set a price prior to or just after a listing is taken? Why not set out clearly defined requirements for all?
It just makes sense.
When a homeowner needs to sell and owes more than what the property is worth, lenders should step in, quickly set a realistic sales price and handle negotiations with secondary lien holders if possible. These junior lenders may be willing to accept pennies on the dollar, rather than being wiped out altogether–and allowing the transaction to fail prior to ultimate foreclosure. Appraisals and BPO’s (Broker Price Opinions) could be done in advance, which would allow for realistic pricing that could compete with foreclosures and motivated sellers.
Additionally, sellers might be motivated to keep up with monthly payments, knowing that there is a resolution in sight. As it now stands, most lenders won’t even discuss a short sale unless the seller is seriously behind in payments.
Lenders, why not encourage some degree of responsibility on behalf of your borrowers?
Instead, agents and buyers are avoiding short sales because of the transaction failure rate. While buyers and their agents wait for lenders to decide what they are going to do, other desirable properties are being snapped up by more fortunate buyers. Though clean transactions are always more desirable, real estate agents would rather represent their buyers in a foreclosure than a short sale because the parties against which they are negotiating are at least known–and in a position to make a quick and positive decision. Not so with most short sales.
Wouldn’t it be better for lenders to take the lead in pricing and get those homes sold, rather than collecting them as REO’s on the courthouse steps?
Makes a lot more sense than ignoring offers! Hard to believe that something so simple can be so difficult for them! How about working together for the common good?
Roberta:
When you have a listing that will go “short” with a bona fide offer, have a lender call the lender to help you negotiate the transaction; we speak the same language as they do.
Brian: I agree wholeheartedly and think you would be a terrific negotiator for any transaction.
Roberta, first of all, great blog on this subject
You asked the following…
>>>Why don’t lenders pre-negotiate their short sales so they never have to go to foreclosure in the first place? Why not set a price prior to or just after a listing is taken? Why not set out clearly defined requirements for all?<<<
I believe the answers to your logical and practical questions lies with the current owner of the loan which has most likely been sold into a pool of loans as a Mortgaged Backed Security. The covenants and restrictions of the Mortgaged Backed Security restrict or prevent the servicer of the loan from pre-negotiating any set amount or percentage of loss the owner of the note is willing to take.
Your solution of a pre-negotiated price strategy and short sale protocol would most likely have to be agreed to by every investor of the Mortgage Backed Security. And there may be hundreds or thousands of investors to any particular Mortgage Backed Security. So getting hundreds of Institutions, Pension Funds and Hedge Funds to agree to any change in how they handle loss mitigation and short sales is DAUNTING…
Even Portfolio lenders that don’t sell their loans are reluctant to any pre-negotiated terms. But you at least have a chance in negotiating with a single owner of the note.
Unfortunately until Banks and Institutions listen to the practical suggestions of outstanding agents like yourself we will be hobbled with the status quo protocol of loss mitigation departments that inhibit rather than enable the closing of short sales.
Keep up the good work
Regards
Billy Taylor
Great information!
http://www.hermannlondon.com
Scott: It seems that a great chunk of our time is spent negotiating San Diego short sales and foreclosures. This is a far cry from the robust San Diego real estate market we enjoyed a couple of years ago.