SSP 006 : Short Sale Help: Is a Short Sale the BEST Option for your Sellers?

The Short Sale Podcast for Real Estate Agents

During this episode I will be discussing how to help your homeowners decide whether doing a short sale is better for them or not

Short Sale Help: Is a Short Sale the BEST Option for your Sellers?

Is doing a short sale really the best option for your homeowners? Answering that question, making that decision, to me, is like deciding what to watch on TV. I remember when it wasn’t as complicated to decide what to watch on TV because there were only three channels, three networks that you could decide upon: ABC, NBC, CBS. You’d look at the program guide for television, choose something to watch and when that time came, you watched. That was it. Of course, as the years went by, the choices became greater to the point to where they are now where you have hundreds and hundreds of channels to choose from. So many so that it’s almost impossible to make a decision of what to watch. So what do we do instead? We channel surf. We don’t make a decision. We try to watch too many things.

What does this have to do with short sales? Well, it’s really simply this. Your job as a real estate professional is to help your sellers make a decision by eliminating all of the unnecessary channels. Keep their choices to a minimum. If you can eliminate confusion, you’ll help them make a choice, because the worst decision they’ll ever make is no decision at all. You need to help your sellers make some pretty basic, simple decisions. Should they move? Should they sell? Should they short sale? That’s it. And then, of course, should they hire you, which, if you help them with the first, second, and third decision, the decision to help you will become pretty natural.

Should your homeowner do a short sale? Would they be better off doing a short sale? Is a short sale the best option for them? Let me warn you about something here. Don’t assume that just because your sellers came to you and said they need to do a short sale that it means they need to do a short sale, or that a short sale is better for them. In too many cases, homeowners get misinformation and they make decisions based on what they think to be the right thing for them. You’re the professional, and the best way you can help your sellers decide whether or not a short sale is in their best interest is to consider every one of their options.

You need to analyze their situation, and to do that you’re going to have to sit down with them and have a private conversation. Something you should not do over the phone, you should not do at their door. You should do it at their kitchen table. When you do sit down with them, I would encourage you to ask the questions that are tough to ask. You could start with easy ones like: When did you buy your house? How much did you pay for it? How did you come up with the money for it? What do you owe on it today? You could get into the tougher questions. Are you current on your mortgage payments? In addition to your first mortgage, are there any other liens or loans against the property? Have your taxes been paid, or were they escrowed and paid with your payments? Do you have and HOA dues, fees? Are there any income tax judgments, any legal judgments, any mechanic liens?

All of this information will give you good insight into their specific situation. But you also need to find out are they struggling financially? Have there been any changes to their income? Perhaps they lost a job. Perhaps there was an injury, some medical issue, a divorce, maybe even death, some sort of financial hardship. And what got them thinking about moving? Who said moving is a good idea? Is it because they figure there’s not an option? Because you’re there to help them understand their options.

Now maybe it doesn’t have anything to do with them falling behind on their mortgage payments. Maybe they got a job relocation, transferred. Perhaps the house they’re in is too small, too big, too close, or too far away from something. But as you analyze their situation, be keenly aware of getting them to tell you what they think. What do they think the house is, as far as condition? Do they think it’s in good shape? Let them tell you instead of you telling them. Does it need a lot of work? Because most folks that are in a bad situation have a tendency to defer maintenance on their house, and you’ll see it: carpet stains, broken door handles, the yard has more weeds than normal. And find out from them what they think the house is worth, and what do they think it would sell for in its current situation, its current condition. Again, it’s better if you get them to answer the questions as opposed to you.

Let’s say that they have encountered a financial setback, whether it was due from a job loss or a health related issue, death, or divorce. But they’ve depleted their resources, and that’s a polite way of saying they’ve got no money. Maybe they’ve managed to stay current on their mortgage, but they let everything else go, or not. Maybe they’re not behind on anything. But here’s what is obvious. Whether they’ve taken care of or not taken care of their house, they owe more on their house than their house would sell for. This is what we call a non-equity seller. Should they move? Well, if this isn’t the house they need, then yes. This house is much more than they need at this time. If it’s the wrong house, it’s too little, it’s too big, should they sell? Well, it may present a problem selling, but it may be a bigger problem not selling.

And should they short sale it? Well, that’s still something we’re trying to determine based upon the information, because what you need to understand and explain to them at the right time is that if they do nothing, and in the case of them falling behind in their mortgage payments, it could be that the property sale won’t be up to them, what we call a forced sale, an auction, or a sheriff’s sale. A controlled sale is where the homeowner is in control of the outcome. They know what’s going to happen, and they know when it’s going to happen. Whereas a forced sale, they don’t really have control. They can’t control the outcome. If they let their house go to auction, they’re going to actually lose more money than if they control the outcome and minimize their losses, because houses sold at auction always sell for less than houses sold by agents. So if they want to maintain control of the process, they have to decide first that they want to sell it. And then second, do they want to sell it retail, or do they want to sell it wholesale?

Now there’s good and bad for either way. Retail is what most real estate transactions look like. That’s where you take a house and you make it really nice. You clean up everything, fix everything, and make it show like it should in order to attract the right buyer. Selling it retail is going to appeal to your typical emotional buyer, the ones most agents are accustomed to working with. Retail buyers are more demanding. And the good news about selling it retail is it’ll sell for more. The bad news is it takes longer and it takes money, because they’re going to have to put the property in tip-top condition.

They could sell it wholesale. The difference between wholesale and resale is price. Wholesale is the lower end of the pricing spectrum. You’re going to get it to sell quick because you’re going to sell it as a value. You’re not trying to appeal to the retail emotional buyer who’s going to want everything fixed and looking nice. Instead, you’re going to sell it to someone who’s more than likely an investor who’s probably going to fix it up and flip it or fix it up and rent it out. The good news about selling it wholesale is you can sell it quick and you don’t have to do any work on it, which, in many cases, they weren’t going to do anyhow. The bad news is it’s going to sell for less.

Now, this is where we get into the argument of is it better to do it as a short sale or not? So if your sellers have money in the bank, they’re not behind on their mortgage, but they owe more on the house than the house is going to sell for, but they’ve got some fallback resources, there’s really no need to do a short sale. The only reason to do a short sale is when there are no other options. There is no alternative funding. They can’t come up with the money to pay the difference, therefore their only alternative is to give up hope and let it go as a forced sale or a controlled sale whereby they hire someone like you to get the house sold and they know that they’re not going to have enough money to pay off the loan. Therefore they’re going to have to ask the bank to approve a short sale.

As an example, if the sellers owe $200,000 on their house but the house would only sell for, say, $170,000 in a retail sale, that’s still subject to them doing the work to get it nice, after closing costs are paid, they’re going to be short. They’re going to owe money. If they don’t have the money to come up with to cover the balance due to the bank, then they’re going to need to do it as a short sale. But that’s only going to work if they’ve demonstrated that they’ve exhausted all other options. The short sale is the best thing for them. Is it the best for them? Is it the best option if they have no other choices?

But let’s look at their other choices, their other options. They could do nothing. They could just let it go back to the bank, as you might hear them say. But that isn’t really good for them. Letting it go back to the bank is often called a deed in lieu. It’s another way of trying to appease the lender by giving the title to them, kind of like signing it over. But this option is very restrictive, and still, it typically ends up going to auction by the lender.

They could try another alternative, which is, well, let’s do nothing. Let it go to auction. That’s a terrible idea. They could seek legal remedies, bankruptcy. But in doing so, by doing this they can minimize the risk of the lender coming after them for the difference. But that difference hasn’t really been established yet. Where many times sellers make the mistake of thinking that they need to go talk to a lawyer before they exhaust the other options, talking to the lawyer about a legal remedy–and I’m not a lawyer and I’m not giving out legal advice–but I do know this. Prematurely filing bankruptcy is probably not going to put them in a position that’s going to be of any benefit to them. So the time that they need to file for that kind of protection is when it’s been established how much are they indebted to the bank, which can only be determined after they’ve sold the property or the property is sold at a forced sale.

So, is it really a best option for them to do a short sale? Yes, if moving is good for them, selling is the best option for them. If they owe more than the property is worth and they have no alternative to paying the difference, then doing a short sale is the absolute best option.

In upcoming episodes, we’re going to go a little bit deeper into some of the issues that you may run into with your sellers as far as obstacles, questions about a deficiency, and questions about what could possibly go wrong.

Thanks for Listening and Happy Learning,

Scot Kenkel, Instructor

P.S. What do you think? Leave your comments below. Thanks.

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