Want to Get Serious Buyers Back in the Phoenix Real Estate Game? Eliminate Short Sales Once and For All

Let’s start with a quiz … when does a sale take place in the Phoenix real estate market?

Simple answer … when a ready, willing and able buyer and ready, willing and able seller agree upon a sales price, terms and conditions and successfully complete the escrow process and the deed to the property changes electronic hands.

Without a ready, willing and able buyer and without a ready, willing and able seller, there can be no sale.

As of yesterday, there were 26,000-odd single-family detached homes listed for sale in the Phoenix real estate market. Of those, nearly one third are being offered for sale by sellers who may be ready, who may be willing but aren’t able to sell. Aren’t able to sell, that is, without approval from the lender(s) who had financed the purchase of the property.

These 8,000 or so properties are short sales – the owner owes the lender more than the house is worth but still is trying to sell with the hope that the lender will be willing to write off the difference between the mortgage amount and current market value.

Few of these short sales ever are completed, most often because of delays on the lender’s side of the equation. In the 30 days to six months it takes for a lender to evaluate all the seller’s paperwork, review the value of the property and evaluate the offer, most buyers simply get tired of waiting and walk away.

“The lenders need to do better,” we yell, and it’s true that three years into this real estate fiasco lenders still haven’t managed to put consistent processes in place to handle short sales. Bank of America claimed to have done so by automating everything through Equator, but use of Equator unfortunately never led to BofA understand what market values really are. And the reality that lenders lose less on a short sale than a foreclosure has yet to make an ounce of difference.

Which is why the time is long past for lenders to clear the decks and end the illusion of assistance. How?

LENDERS NEED TO STOP CONSIDERING SHORT SALES

Oh, there will be pain associated with this.

Politicians who promote initial-chocked programs won’t like this idea because it removes their ability to posture and pretend they’re helping distressed homeowners.

Real estate agents who sell short sales as the salve for all financial wounds, even when foreclosure or bankruptcy might be a better option, won’t like this idea because it prevents them from collecting a commission check should the odd short sale be approved.

Distressed homeowners won’t like this idea, at least until they are honestly and forthrightly presented with the reality of short sales and they realize there’s false hope than true promise to the process.

Imagine a Short Sale Free Market

But let’s take a look at the larger picture …

Over the past 30 days, more than 5,000 single family detached homes have sold in Maricopa County. In short, buyers do exist.

What would happen if these serious buyers, the ones who have yet to close escrow, were no longer distracted by the false list prices and illusionary discounts of short sales? They wouldn’t disappear. They would turn their attention to the homes where there was a seller who was ready, willing and, most importantly, able to sell their property.

And those buyers would be looking at an inventory of homes closer to the 18,000 mark than 26,000 … rather than there being six months of inventory thanks to the nearly phony short sale listings, there would be closer to 3 1/2 months of inventory.

Mathematical semantics, possibly, but still valid given human psychology. When inventory is lower, a sense of urgency is injected into buyers’ thinking. That sense of urgency combined with outside factors – say a Canadian dollar at this second worth more than the American dollar – causes buyers to purchase. With the purchases, inventory is absorbed and theoretically, one day, prices will find a secure bottom and recover.

You might ask, “Yes, but wouldn’t those short sale listings just become foreclosure listings in the future, flooding the market?”

And I would say that’s already happening.

If 1 in 6 or 1 in 7 short sales close escrow, those other five or six homes are becoming foreclosure listings. Adding that extra home – we’ll round things off and say we’re increasing inventory by 15 percent if we don’t close the rare short sales – is a worthy trade off to lose a third of the perceived inventory by eliminating sellers who aren’t able to sell.

This is an idea whose time has come, whose time actually came long ago.

We need to stop selling false hope. We need to stop expecting lenders to do what they’re not equipped to do. We need to stop giving our political leaders the opportunity to sell platitudes instead of legitimate answers.

It would take courage to do so, but short sales need to be eliminated. Today.

About Jonathan

Jonathan Dalton is a 30-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.

  • I have mixed feelings on this topic due to the fact that I have written over a dozen short sale offers for various buyers and to date not one of them has closed successfully. Twice the bank countered well above market value and the buyers walked. On the others the buyers were able to find a traditional seller or REO to purchase before the sellers bank responded.

    I have 2 short sale offers at banks currently for buyers. The first is in its 3rd counter with the bank and I highly doubt we will come to terms since the buyer is unwilling to bring the $2500 in cash their lender is requesting. The 2nd just went to the sellers bank for review. In the meantime, the buyers are still looking since they are not confident it will close.

  • JD, I think one of the problems with short sales is that so many sellers seem to think that just because they are underwater on their homes, the banks will happily just let them off the hook.

    While it is a hardship, it isn’t the kind of hardship that the banks generally accept including but not limited to death of a family member, loss of job, divorce, health issues, etc.

    And of course, if the borrower has assets to cover the shortfall, well, isn’t the bank going to want them to use them and some banks are also requiring the seller of an approved short sale to sign a promissory note for future payment. So that’s just some of the reasons they don’t get approved

    But I agree with you to a point (and I don’t know how to accomplish it) but eliminating the ridiculous short sales that have little to no likelihood of closing would go a long way toward restoring order in the market.

  • Another Investor

    I bought two short sales in the last 13 months. Both were days away from foreclosure. In the earlier case, the seller signed a promissory note for the deficiency on one of the loans. Not sure he knew what he was signing. The other property had only one loan, and for some reason the lender wanted the property sold as a short sale. However, I have written several other offers and walked when the lender came back with a ridiculous price.

    Listers still put these properties on at below market prices to scare up an offer. They still think the object is to buy themselves and the seller some time and get a BPO so they know what the bank is really willing to accept. I completely agree that lots of sellers don’t understand they won’t qualify for a short sale. Agents that take listings where the seller clearly won’t qualify aren’t doing themselves or their sellers any favors and they are clogging up what is already an inefficient system.

    I investigated a short sale in the southwest valley yesterday. Turns out the sellers bought another house and apparently then defaulted on the one I was reviewing. That’s a huge red flag. On top of that, the lister put a “required” addendum in the listing for the buyer to sign, stating the bank would pay for unpaid taxes, HOA fees and liens, and utilities, unless of course they decided not to. Then the buyer would be responsible for all those expenses. Not signing that, thank you anyway. The property has had no offers and probably won’t get any. It’s a waste of everyone’s time.

  • Love the idea! That sounds like nirvana to get rid of all short sales.

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