October 21, 2009 by MSI
Let’s begin with the definition of a short sale? A short sale is a sales transaction in which the seller's mortgage lender agrees to accept a payoff of less than the balance due on the loan. Some time ago, lenders would not participate in short sale transactions and would rather initiate foreclosure actions. In a rising housing market, it could increase the recovery while preserving the right to pursue the borrower for any deficiency.
However, with the high number of homes today currently in foreclosure, lenders are willing to consider a short sale transaction. The alternative would be for the lender to assume ownership of the property, paying more money out of their pocket with the money tied up in a non-performing asset that costs that lender heavily in leverage on their working capital.
For many home buyers, including those engaged in relocation, it may be enticing to buy a property offered through a short sale transaction, as some short sales are priced incredibly low. So low, that the sellers' bank will never accept them. In some real estate markets, less than 1 in 10 short sale transactions make it to closing. When a property is listed as a short sale, it doesn’t necessarily mean it’s actually for sale (it is subject to lender approval), nor does it mean it will sell at the listed price.
In a short sale, the lender is in control of the transaction and can dictate the terms and the timing. When they do respond to an offer, the short sale lender will typically try to negotiate more money out of the transaction. Often times, the buyer is given an ultimatum of paying more money or losing the property. If the listing is below market, quite often multiple offers are received. To get an offer accepted, it will typically need to be priced near market value.
In addition to the challenging and often frustrating negotiation process with short sales, the transaction is also lengthened, taking anywhere from 2 to 4 months, on average, to close. Because of the delay, the mortgage loan rate lock is more expensive for longer periods. If an extension is necessary, the buyer may incur additional fees. Even if the buyer can float the rate, they are at the mercy of the financial markets as to the rate they may ultimately obtain. Neither of these situations is optimal for the transferee.
For relocating employees, purchasing a short sale property may not be the best alternative. Many home buyers do not understand the process and view the opportunity as ‘getting a great deal on a new home.’ And, while that may be true in some instances, there are challenges and other mitigating factors that may impact the individual, especially if they’re engaged in a corporate relocation.
One of the primary objectives for employees engaged in relocation is to have the individual and his/her family settled and assimilated in the new location as quickly as possible. With the current real estate market, we have witnessed delayed sales cycles on the existing home and its financial impact on the overall relocation including increased benefit exceptions. When you add to that a non-confirmed purchase process, which may or may not yield any financial benefit to the individual, the result is a significant amount of additional stress and pressure on the employee and family and potential additional increases in benefit exceptions including interim living.
The facts of life in short sales work against the transaction, while sabotaging the transferee’s ability to control the deal. And in many instances, the transferee and the company would be benefitted by a traditional home purchase.
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