Quick Answer Series: What’s All the Hype about “Short-Sales”?

Lately, it seems you can’t read anything about real estate and not see somebody selling their unique short-sale technique, their book or system on how you can become the “short-sale king” in your area, or their coaching on how to profit from doing short-sales.  It’s become so prevalent now that it seems there is even a Certified Short-Sale Professional (CSP) designation!

Don’t get me wrong — I’m all in favor of agents handling short sales for their clients when necessary, and doing so is often a great service to your client that saves them from losing their home to foreclosure.  But it’s not the real estate panacea that it’s touted to be.  Before I go further, let me explain what a “short-sale” is to those unfamiliar with the term.

Imagine as a listing agent, you have a client that really needs to sell his home.  Maybe the family has had a financial hardship– maybe someone lost a job or lost an income, or maybe somebody has suffered a medical problem.  For whatever reason, they have to sell.  Normally, it’s a financial reason.  Now also imagine that the home, because of the recent economic downturn is only worth $300,000 and their mortgage balance is $325,000.

They have a problem.  If the cost of selling the home amounts to 10% of the sale price (for the cost of brokerage), plus any seller concessions, the seller will need to write a check for $55,000 or more at the closing table, just to walk away.  But because of their hardship, they don’t have it.  Under normal circumstances, the next step is the seller letting their home go into foreclosure.  And that’s where a short-sale comes in.

A short-sale is when the mortgage lender agrees to settle for less than the balance due in order to prevent an even bigger loss should they be forced to foreclose, likely have to do repairs, and ultimately settle for an even lower price in a foreclosure sale.  The bank is simply doing a cost-benefit analysis and cutting their losses.

Here are a few more things you ought to know on the subject of short-sales.  There has to be a reason to justify the lender’s concession.  True hardship.  Not just a seller that doesn’t want to be upside down on his home.  The lender also needs to be convinced that the only true alternative is foreclosure.  If the borrower is able to continue paying the mortgage and not sell, the lender likely won’t agree to a short-sale.

OK, so now that you know what a short-sale is, what’s the big deal?  Why so much focus in the industry about short-sales?  I think there are basically two reasons — one legitimate and one not so legitimate — why this topic has become front and center lately.

First, it is important for an agent, especially a listing agent, to know that a short-sale might be an option for their seller-client.  Remember, as a listing agent, our fiduciary duties are to our seller.  If we can prevent further hardship and help them make the best of a bad situation, by negotiating a short-sale with their lender, and keep them from having to suffer a foreclosure, that’s good.

Having helped negotiate numerous short sales for listing clients long before it was all the rage, I can tell you this with absolute sincerity:  It is really not a niche of the business you want to go after.  The asset manager (the person with the bank or lender you will dealing with) is going to make your life miserable.  You will be doing much more work than in a typical sale.

If you’re like me and typically list at 8% and keep 4%, you’ll probably be forced to take a cut in your commission as well.  Even if you typically keep 3%, the lender will probably want to see a concession or will threaten to walk away.  Believe me, the lender won’t hesitate to put you in the middle, forcing you to drop your fee or lose the short-sale for your client.  Anyone that says otherwise has never done a short-sale.

So, more work and less money?  Hmmm… Let me think… No, I think I’ll have to pass.  I am certainly in favor of helping your client with a short-sale if you can save him from a foreclosure, but it’s certainly not a business segment you want to actively pursue.

Now, the less than legitimate reason this topic has become so popular of late.  To the cottage industry of real estate coaching and training, it is simply the flavor-of-the-month.  After all, agents are having a hard time of it and sales of coaching and other agent services are down.  So they whip together a quick course, booklet, coaching series, or designation, to ring the cash register.

And the way successful marketers have learned to sell to agents is by creating a sense of urgency in the REALTOR community that there is a business opportunity they are somehow missing out on.  There might be such an opportunity, but short-sales is certainly not it.  So before you get sucked in to spending a thousand dollars to learn all about short-sales, consider this:  Short-sales to an agent is much like changing diapers to a parent.  It’s all part of the job, but not the part you look forward to.  And that’s my quick answer.

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