Short Sales Offer Solution to Foreclosure Crisis - Part 1

By Annalisa Burgos, FrontDoor.com | Published: 6/15/2009

Despite its name, a short sale is by no means a "short" process. But unlike what you may have heard, getting a short sale approved by your lender is not as hard as you may think -- if your real estate agent knows what they're doing.

In order to orchestrate a successful short sale, you need a master negotiator, says Troy Huerta, short sale division leader at Coldwell Banker Residential Brokerage in San Diego. "Many agents forgot how to negotiate. There was no negotiating in the past. You would list a home at a ridiculous price and someone would pay it."

Those days are long gone. Home values are falling. Unemployment is at 9.4 percent. And according to RealtyTrac, there were more than 321,000 foreclosure filings in May, 18 percent higher than a year earlier. That's expected to get worse.

But there's a way to help ease this flood of foreclosures, Huerta says. Do more short sales.

In the past, lenders have been reluctant to do short sales. And why would they? They stand to lose a LOT of money. But the reality today is that if a lender doesn't do a short sale, it may get stuck with a property that is harder to sell or will sell for less than it could have gotten. (A buyer is more willing to buy a short sale in good condition than a bank-owned foreclosure that needs a lot of work.) Not to mention the cost of pursuing the foreclosure process.

Even Fannie Mae felt short sales could help reduce foreclosures. It launched a pilot program pre-approving short sales for homeowners in Phoenix and Orlando.

Now, lenders should be more motivated than ever to get these deals done -- as part of President Obama's economic stimulus plan, the federal government will pay lenders up to $1,000 for each completed short sale or accepted deed-in-lieu of foreclosure.

In Huerta's market -- San Diego -- about 70 percent of the properties for sale are short sales, 20 percent are bank-owned or REOs, and 10 percent are traditional sales.

On average, only a third of short sale deals actually close. In other words, the failure rate for the average agent doing a short sale is a whopping 66 percent, Huerta says.

The problem? "About 80 percent never counteroffer," Huerta explains. "The bank will tell them no and the agent stops there. But that's their job to say no."

Negotiating a short sale is essentially loss mitigation, Huerta says. The property is priced based on two to three broker price opinions (an agent's estimate of its current market value), which is less than what the seller owes. Interested buyers tend to start with a lowball offer and lenders want to recoup as much as they can, so it's the agent's job to negotiate a price that satisfies both parties. If the seller took out a piggyback loan or a home equity loan, multiple lenders are involved. And with the barage of short sale applications lenders get, you can see why the process can take as long as six months to a year.

But short sale experts who have extensive contacts within the mortgage industry and experience with these complex deals can close them quickly. Huerta and his team, for instance, work with lenders throughout the country, like Countrywide and Washington Mutual, and can get these deals done in 60-90 days, boasting a 90 percent success rate.

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