Nothing short about short sales as lenders eye risks

Q: I’ve been reading a lot of your columns about short sales. Why do short sales take so long to complete? How can I make the short sale process go faster?

A: Short sales occur when the owner of a home owes more to the lender than the home is worth and wants to sell, but the buyer’s offer won’t cover the repayment of the loan and the other costs of the sale. When the lender agrees to take less than is owed, the value of the property is short (or less than) the amount owed, hence the term “short sale.”

For the short sale to close, the buyer either has to pay the difference between the net sales price (after broker’s commissions and costs) and the payoff amount of the mortgage out of pocket or the lender has to agree to take less than what is owed according to the terms of the loan agreement.

Here’s the short answer to why it takes so long to go through a short sale: There’s little incentive for lenders to take a loss on the books until they absolutely have to do so, and lenders will want to make sure the borrower absolutely can’t pay what he or she is supposed to pay.

Lenders hope that by pushing off the decision, prices will rise or the owner or buyer of the home will find the money necessary to make the deal and pay off the lender in full. It was an irrational business decision during the Great Recession, where home prices were flat for years. But now that prices are rising fast in much of the country, it seems like a smarter strategy for getting more money out of the property.

However, a short sale will generally hurt a seller’s credit history and credit score. The buyer may end up getting the home and, in some cases, may end up getting a good deal, but not always — especially if the property has a lot of deferred maintenance. The real estate agents often end up getting less commission than they are entitled to, the lender requires the attorneys in the transaction to limit what they can charge, and certain fees and expenses will not be allowed by the lender. You can see how everyone involved has to kick in cash to get the deal done, so frequently, few people come out happy after a short sale.

But back to your question. When an owner applies for a short sale, the lender will ask for a ton of paperwork.

In some ways that makes sense. When the lender gives a borrower a loan, the lender expects to make money on the loan. Now that the lender needs to approve the short sale and wants to minimize that loss.

The system isn’t perfect and it just eats up time. And, the more money the lender will lose, the more time it may take to process and approve the short sale. At the end of the day, just when you think you’re almost done, the lender may consider whether foreclosure could end up giving the lender a better result.