Short-Sales and Pre-Foreclosures
First, it is important to understand what a short-sale is. Quite simply a short-sale is when the lender is willing to accept less than what the owner owes on their mortgage. Although many listings state in them short-sale of pre-foreclosure the two terms are not the same, although many Realtors use the terms interchangeably. If an owner cannot afford to make mortgage payments for three months there may be a foreclosure process started, but if they sell they do not necessarily need to sell short. That is because they may be able to sell the home for more than they owe on their mortgage. It is only a short-sale if more is owed than the home can sell for.
I recently saw and article explaining how the National Association of Realtors Multiple Listing Issues & Policies Committee will be meeting in May and one of the things they will be considering is how to define a short-sale.
In our MLS and in many others we are required to put in the words "subject to lender approval" and often more wording.
The issue according to some NAR committee members is the following. First, when a Realtor lists a home for sale, the Realtors Fiduciary duty is to the seller. This may include getting the most money, quickest sale, etc. It would definitely exclude doing or saying something that would cause the home to sell for less. And that is one of the points that will be discussed at the meeting. Is the Realtor really doing their fiduciary duty if they tell the world that the home is a short-sale or pre-foreclosure. Normally this will result in a sale at a lower price. In a sense then, the MLS's are requiring agents to ignore their fiduciary duty of not hurting the seller? Or are they? In a short-sale the seller owes more than the home will sell for. By selling the home quicker, their credit score may take less of a hit than if the home took much longer to sell, or especially if the bank took ownership. In a short-sale the owner accepts the offer, but then the offer goes to the lender for either final acceptance or rejection of the offer. If the lender makes the final decision does the Realtor fiduciary duty extend to the lender? Many questions to answer.
I can see the NAR committee members view though in that by saying the home is a short-sale we are automatically bringing the price down. The article also states the banks do not like the disclosure of a possible short-sale as it encourages low-ball offers. The lender may be able to get a better price if these words were never used.
Then the Realtor along with the owner and lender could set the asking price. If after a period of time it does not sell then reduce the price and continue doing this until it sells. Without the words short-sale the home very well could sell for more money and likely in about the same amount of time.
One other point they make is that you actually do not have a short-sale until the lender has accepted the offer and you have a sale. So should it be marketed as a short-sale before you have a sale?
My thoughts on this are as follows. I do think it would be preferable to not have anything in the listing about short-sale or pre-foreclosure. Any Realtor will tell you that any home will sell if the price is right. There is a market value for every market, whether it is a sellers, normal or buyers market. When the home is at the current market value the home will sell.
By listing the home as a short-sale we are likely artificially bringing the final sales price to a point somewhat below the current market value, and of course this now becomes the comparables that Realtors and appraisers will be using to determine market value for future listings and sales. Therefore every short-sale that goes for less than the current market value creates a new market value. Are we getting into a viscious circle of we are actually helping to bring home prices down faster and hurting all sellers, which then of course helps buyers coming into the market.
Although I personally believe that the values would be better maintained without short-sale placed in the listing, I feel that these words are necessary at this time due to the slow respone of lenders to offers on properties where the home would sell for less than is owed. Presently, when we have a buyer make an offer on a short-sale the acceptance or rejection of the offer can take 4 - 6 weeks. If rejected then the buyer makes another offer and waits. This can often go on multiple times. Normally when a buyer makes an offer we put a deadline of 24 - 48 hours for a response by the seller. With a short-sale we cannot put in a tight deadline, and if the buyers did not know that the offer could take weeks there would be real issues, especially if they need a home now.
Therefore, although it is likely a good idea for not disclosing short-sales in listings, it would cause multiple problems unless the lenders were made part of the process and would have to approve the asking prices before the listing is marketed. Then lenders would have to be held to the same deadlines that private owners usually get when they get offers.