LOOKING AT SHORT SALES IN 2018 & BEYOND

Many of our current readers may not have even been licensees at the onset of the Great Recession that affected the real estate industry immensely. Many of you will recall the many years that we all struggled through the many short sales that constituted the real estate business during that long recession.

We were with you at that time arm in arm negotiating short sales along with many of our readers. Thank goodness, the market has improved as the number of short sales has expectedly decreased. Our huge short sale negotiation department is a bit smaller than during the ugly ravages of the Recession. However, we are still committed to that area of practice. Why?

It’s simple really. We still have a healthy pipeline of active short sales flowing through our office. We do these on a statewide basis so our geographical impact is pretty broad.

In addition, literally all of our competitor short sale negotiation firms have moved on to greener pastures.

Also in addition, with the marketplace so robust why would any real estate broker today want to spend hours on the phone to negotiate short sales? Much better use of your time in my opinion is to outsource. We do the

heavy lifting of short sales. We have done so for over ten (10) years and we are very good at it.

The Recession lasted a long, long time. While it was going on, a whole host of parties came on board as “Short Sale Negotiators”. Some were qualified; most not. That was a long time ago now.

The State of Washington, mainly through the Dept. of Financial Institutions, was charged with such matters and they made it very clear almost ten (10) years ago that not all parties may negotiate short sales on behalf of distressed homeowners.

Not much has been said about that subject over the last few years, but we received a couple of inquiries to our LEGAL LINE this past week as a local Broker received a mass email from a company out of state still advertising to perform such services for him.

Still another inquiry to our office involved a Real Estate Broker in the state that was advertising their services to assist other Brokers to negotiate short sales for a fee. I also had a class on short sales recently, in which no Broker in the room was aware that there were any regulations regarding who may negotiate short sales.

In the State of Washington, the law is clear. To perform short sales negotiations in the State of Washington, one must be:

A.   An Attorney licensed in the State of Washington. [Being licensed in California and farming for business in Washington will not cut it].

B.   A Mortgage Loan Originator licensed in the State of Washington competent to perform such services can do so for a fee.

C.   A Real Estate Broker licensed in the state of Washington that has an agency relationship with the seller, as Listing Broker or Co-Listing Broker, can themselves negotiate short sales for that specific seller and for a specific transaction, but cannot charge any fee over and above the fee earned for the sales commission attributable to that short sale transaction.

As we move forward in the future, the complexion of short sales is taking on a different flair. Many newer Brokers out there today do not have experience in this area of practice. I highly encourage Brokers out there to not take the reins of a short sale unless you have had the opportunity of at least talking with trusted advisers who have years of experience in this arena. They are still very different and still very changing on an on-going basis. We are happy to sit down and talk with you and answer your questions. For this there is no charge. 

Many of my readers will remember back to 2008 and 2009 when we were just beginning this adventure called “Short Sales”. At that time, of course, it was a far different marketplace than it is today in 2018. Many of those foreclosures are behind us. Still thousands and thousands of short sales have been completed since 2007 and 2008.

During the early years of short sales, it was a buyers’ market. As you know I come from Pierce County. Many real estate professionals in Pierce County could hardly even ask the buyer to place an Earnest Money Deposit on a property during the early times of the recession as they were desperate for buyers to make offers. Much has happened since the days of the “Wild Wild West” of short sales.

As we've transitioned into a post-recessionary time, we have again become a sellers’ market. In this particular market where there is relatively little inventory in many of the submarkets that we work, the dynamics associated with short sales have changed pretty dramatically. I'm making some comments today on how one should price real estate in a short sale mode given the fact that we are a sellers’ market in 2018.

THE SHORT SALE PRICING DANCE… (PATENT PENDING)…

It was now over eight (8) years ago that I first used that phrase (“The Short Sale Pricing Dance”) to describe our strategy for selling short sale properties. I remember at first getting a few chuckles from Brokers as I would dutifully say “patent pending” each time I described this methodology of successfully pricing properties in short sale transactions.

It has been over eight (8) years and NOW we find that even FANNIE and FREDDIE are on board with this strategy and, in fact, have newer rules in place that REQUIRE you to use this strategy in order for them to even accept a short sale offer. I will go over these rules in more detail in a minute.

Before that, all of us need to clearly understand a few Short Sale Rules:

********** RULE ONE:  INVESTORS (LENDERS) IN SHORT SALE DEALS WANT TO LOSE FEWER DOLLARS… THEY KNOW THEY ARE GOING TO LOSE MONEY… JUST WANT TO MINIMIZE THAT LOSS!

Think about that for a moment. It is true. If you are a lender (or “Investor” as we call them) that owns an under-water loan on a residential property that a distressed seller is selling, wouldn’t you “want to lose fewer dollars?” It goes with the territory.

It is an easy analysis. If they sell for a higher price, they will lose less. [They can also curtail the costs that they will allow to flow through the short sale transaction in order to limit losses.] They know that there is a realistic short sale value and that it is discounted a bit because it is a short sale, but they also know that they can’t ever sell it for greater than the fair market value of the property at that time in the marketplace.

Many Brokers out there give no credence to that proposition as they continuously make “bottom feeder” offers to short sale sellers and feel insulted when that seller has the gall to make a counter-offer. “Why not let the bank decide the value of the short sale property?” cries out the selling Broker. “What are you trying to do Listing Broker, make the bank rich?” I have heard that before, time and time again. I am certain that you have as well.

********** RULE TWO: INVESTORS (LENDERS) IN SHORT SALES KNOW THAT MOST SELLERS DON’T CARE WHAT THEY SELL THEIR PROPERTY FOR!

In about 80% of the cases we handle in short sales (with two mortgage loans) the first position investor (lender) will get paid less than what they are owed. Because of some favorable law in Washington State, we have a greater than likely chance that the investor (lender) will accept that discounted amount as payment in full.

However, investors (lenders) are not dumb. No matter what insulting comments you have about investors and servicing companies out there today; they are not dumb. They want to get every stinking dollar they can from a short sale property.

Many sellers don’t care what price they sell their short sale property. Some Listing Brokers don’t either. Selling Brokers and their buyers are trying to get the deal of a lifetime. Most short sale negotiations won’t result in such a windfall.

********** RULE THREE: INVESTORS (LENDERS) WILL SELL FOR A REALISTIC SHORT SALE VALUE, BUT SOMETIMES THEY ARE NOT REALISTIC (OR EVEN ACCURATE)

A few months ago, I wrote an article for an attorney’s group about FANNIE and FREDDIE and how they are handling valuations of short sale properties (sometimes not very well). Both organizations have invested heavily in computer based valuation techniques to determine values for their short sale properties. These are sophisticated technologies and, in some cases, are very accurate. In many cases, however, they fall short. This is especially true in rural areas as well as properties that may be in need of repair. We are happy to talk with you about their methodology and how it may affect your particular transaction.  

********** RULE FOUR: INVESTORS (LENDERS) WILL ALWAYS WANT YOU AS LISTING BROKER TO EXPOSE THE PROPERTY IN THE MARKETPLACE FOR AN “ADEQUATE” MARKET EXPOSURE TIME…

Now we are back to the heart of my “Short Sale Pricing Dance” again…

*** WHAT EXACTLY IS THE SHORT SALE PRICING DANCE? ***

It’s not a dance really, but a methodology that is tried and true. Those Brokers that utilize it have far more favorable and successful short sales than those that do not. Depending upon how much time one has to market the property, we can take more time on market than if we have a Trustee’s Sale happening in a couple weeks.

Start out by placing the property on the market at a price that reflects its full fair market value. In most cases short sale properties don’t sell for full fair market value and are discounted by what we refer to as “the short sale pricing discount”. However, we start out at that price in order to create a baseline in the marketplace.

To the extent that we have time on our side (and no impending foreclosure) we call this strategy: “The Short Sale Pricing Dance Waltz”. We gradually waltz down the price of the property at pre-determined times in order to properly allow exposure of the property at specific time periods.

I never recommend a stated amount or a percentage to reduce. I recommend that the Listing Broker re-evaluate the property every 10-14 days and, based upon that re-evaluation and the previous activity (or lack of activity levels), lower the price a specified amount in order to broaden the buyer group who may be interested in that short sale property.

I also highly recommend that the Listing Agent keep copious notes on a self-prepared listing history sheet that tracks calls, emails from brokers, inquiries, key box hits, showings and the like and compile those at each pricing evaluation point. That Listing History will be a valuable asset after an offer comes in and negotiations with the banks begin.

This pricing strategy allows the Listing Broker to gradually reduce the price over time and overcome any pressure that the lender may think that an offer came in too early. It works!

********** RULE FIVE: NEVER ACCEPT AN OFFER IMMEDIATELY AFTER LISTING THE PROPERTY AS LENDERS MAY OBJECT

In our practice we become concerned when a Purchase and Sale comes in the door reflecting a full price offer about three (3) hours after the property hit the market. Think about that. Wouldn’t you anticipate that the short sale lender would think that maybe we left some precious dollars on the table? I think so.

In fact, FANNIE and FREDDIE have rules that preclude them from even looking at a short sale offer if it hasn’t been listed for about a week and part of that time has to be over a weekend. FHA has a rule that they won’t look at an offer that comes in earlier than fifteen (15) days after listing. These rules are cast in concrete to a great degree and can really rain on your sales parade especially if you are in a market with low inventory and at a price point that produces lots of interest and flurried offer activity.

I am getting about five (5) deals a week in our office that are accepted short sale offers that were sold immediately upon listing the property. Guys, this will not work with FANNIE and FREDDIE or with most other investors out there. Talk to our people if you are anticipating an offer close in time to your initial listing of the property.

**********RULE 6: BE CAREFUL THAT FRENZIED OFFER ACTIVITY MAY RESULT IN AN OFFER FOR WHICH YOUR BUYER’S LENDER WILL NOT BE ABLE TO APPRAISE!!!

All of our short sale people are constantly concerned that this seller’s market that we are in will produce offers that will be higher than the value a buyer will be able to obtain a loan based upon a loan appraisal. Cash buyers tend to be flippers and investors that are attuned to the market. There are certainly cash buyers out there purchasing for themselves. High offer prices will certainly ring true for short sale lenders, but we fear that the short sale lender may approve a price for which the buyer's lender will not sustain after appraisal. Frankly, I am surprised in our practice today that we haven't had more occasions of post approval re-approval based upon the buyer’s appraisal not sustaining the approved short sale price.

In our practice, we certainly have experienced this on an on-going basis. It hasn't created too much of a stumbling block, but it has created extra time and effort in order to re-approve a short sale. It's frustrating for the parties. It's frustrating for the sales folks involved in the transaction. My normal caution to all real estate professionals involved in these transactions is that we do have comparables from the marketplace that will sustain the price in our purchase and sale agreement.

My best practice is to utilize this short sale pricing dance strategy and anticipate an offer about a month into a listing and you will be in good shape. I use this “Short Sale Pricing Dance” approach to short sales in my consultations. Most Brokers out there who really have a goodly number of these deals under their belts will agree with this strategy. If you are new or haven’t done many short sales, I would highly recommend that you talk to my people that about this strategy and any of them are happy to walk you through it. It works!