Short Sales Require Lots of Patience

It’s called a short sale, but hardly anything about it is short. When you engage in one, either as a seller or a buyer, be prepared to wait. Nothing in this transaction happens very fast.

Though Fairfax County’s housing market is among the strongest in the nation, we do have our share of distressed properties. They can be close in, in places like Alexandria and Springfield, or in the outlying suburbs of Centreville and Chantilly. Or anyplace in between.

A short sale gets its name because the buyer and seller “come up short.” The buyer needs a certain amount to pay off the mortgage but the seller is only willing to pay something less than that amount because the value of the property has gone down.

A short sale can occur anywhere a homeowner is in a distressed situation and can no longer afford the monthly payments. Perhaps they are facing foreclosure, or maybe they need to move but owe slightly more than the home is worth.

In situations like these, the seller will seek a buyer, even if the amount the buyer is willing to pay is less than what is owed on the mortgage. Unless the seller has access to enough cash to make up the difference, the lender must agree to accept less than the full amount of the mortgage. Who wants to do that?

What’s the alternative?

But what if the alternative to a short sale is certain foreclosure? Wouldn’t the lender rather accept a negotiated sale, even if it were less than the mortgage amount, rather than have the house sit empty for months and not be sure what they would eventually get for it?

You would think so, and while the seller, buyer and the rest of the neighborhood see it that way, the lender doesn’t always agree that’s in its best interest. A 2010 study by the National Consumer Law Center (NCLC) in Boston found that many times it is actually in the lender’s financial interest to foreclose.

The reason is simple. The bank or financial institution that collects your mortgage payment almost never owns the loan. They are simply hired to manage it for the owners, usually a pool of investors.

According to the NCLC report, servicers have four ways to make money:

• The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
• Fees charged borrowers in default, including late fees and “process management fees”;
• Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
• Income from investment interests in the pool of mortgage loans that the servicer is servicing.

In a foreclosure, no matter what the sale price eventually is, those fees usually get paid. So while the buyer, the seller and their Realtors advance a short sale, they must work through the loan servicer, who will then poll the investors who actually own the loan, to see if they are agreeable to the proposed terms. And frankly, many loan servicers may not care if they are or not.

Other roadblocks

There are other things that can also hold up a short sale. The seller may be required to provide proof of their distressed circumstances. If there are other liens against the property, such as a homeowner’s line of credit or homeowners association dues, the lienholders must also be onboard.

For the seller, a short sale will result in a blemish on their credit report, though there is some debate whether it’s less than what would be the case in a foreclosure. But for many sellers, a short sale is psychologically preferable to foreclosure. The buyer benefits by getting at a discount a home that may be in move-in condition, without it sitting empty for months and perhaps suffering damage from neglect. And there is no question that the rest of the neighborhood benefits.

The challenge, then, is having enough time to complete the process and finding a real estate agent with the patience and knowledge to guide all parties through the process.