The Inside Scoop on Short Sales

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The National Association of Realtors is out with an insider’s guide to real estate agents who use short sales. It’s worth reading for both buyers and sellers looking for a short sale deal.

In a word, short sales occur when the proceeds from the sale of a home are less than the balance owed on the mortgage loan. Usually, the lender must agree to accept the lesser price to push the deal through to completion. While they can be reluctant, banks and lenders increasingly do so, figuring it’s a better deal than foreclosing. Still, getting lenders to agree is akin to a root canal — it’s painful and can take a long time to close (as long as four months in many cases).

Even so, short sales are on the rise. Bank of America (Stock Quote: BAC) estimates that short sales requests doubled from 2008 to 2009. In Las Vegas alone (a city hit hard by the housing bust) short sales accounted for 22% of all home-sale closings by the end of 2009.

That’s up from 8% at the beginning of that year. So what is the NAR’s take on short sales?

The association lists six “temptations to avoid” for real estate agents involved in short sale deals. A quick look reveals that there is no shortage of land mines for sellers and buyers to negotiate when considering a short sale deal.

According to the NAR message to its real estate member base, those “temptations” include:

1. Standing in the way of home-retention efforts. The lender's first responsibility is to help owners who want to stay in their home do so. If the lender approaches them with a good-faith effort to modify their mortgage, let them out of the agreement.

2. Embellishing the hardship letter. Real estte agents are supposed to help clients be as accurate as possible when they describe their degree of hardship to their lender. Helping to prepare a letter and other documents that aim to mislead or obfuscate is never justified.

3. Shopping the buyer’s offer. Short sale transactions require too much of a commitment on the buyer’s part to try to get a better deal for your sellers at the last minute. If a buyer has made a good-faith effort to offer market value, don’t seek higher offers.

4. Selling to a flipper. Unless the investor in a flip is prepared to add substantial value by fixing up a property, don’t participate in a flip. Short sale flips benefit only the investor, who’s clipping off money that could go to an already bleeding lender.

5. Shifting funds off the HUD-1. If a junior lien holder or other party to the transaction asks for payment, undisclosed on the HUD-1 statement, as a condition of approving a short sale, say no. That can constitute mortgage fraud.

6. Manipulating the BPO. It’s appropriate to control access to the information that goes into your broker price opinion but not so you can get a house on the market for less than it’s really worth.

The takeaway? The NAR seems to be saying that despite several possible shortcuts to a sale, the real estate agent’s mission is to secure the best deal for its clients. Whether a short sale represents the best deal is an open-ended question.

A giveaway appears elsewhere on the NAR Web site. There, the association takes great pains to steer agents away from short sales, citing the complexities and the potential barriers involved. This from the Web site:

"Limited experience - Many realtors are new to the short sales process; a difficulty which is compounded by many lenders' lack of sufficient and experienced staff to process short sales. Even if the realtors are experienced, most servicers are under-staffed and still not adequately trained, making negotiating a short sale particularly difficult."

And this . . .

"Our members have reported difficulties with: unresponsive lenders; lost documents that require multiple submissions, inaccurate or unrealistic home value assessments, and long processing delays, which cause buyers to walk away.”

If that’s the takeaway for real estate professionals, then it’s definitely food for thought for homeowners — and homebuyers — as well.

Call them an evil necessity or call them a last resort. Either way, short sales may be more trouble than they’re worth — and that sentiment comes from the leading real estate association in the country.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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