Our team has been having some really interesting discussions about short sales lately, and how little consistency there seems to be in how they’re being handled. At this point most people are familiar with the term, but for those who aren’t, a short sale can be an option when a homeowner needs to sell but owes more than the property is worth. The owner accepts an offer pending approval by the bank, which must agree to take a short payoff to make it happen, and that approval depends on the seller demonstrating financial hardship and the lender’s acceptance of the sale price as market value. It can be a great alternative to foreclosure for both sides, but by nature there’s a lot of room for ambiguity and no real standard for the process.
What got us talking about this recently was how we sometimes see a short sale listing come on MLS that is either already contingent with an accepted offer, or that goes contingent right away, and then ends up closing a few months later with the listing agent (or another agent in that same office) representing the buyer too. That means the property wasn’t exposed to the market and other buyers weren’t given a chance to make offers, and the offer that’s being sent to the lender for approval may not be the strongest that might have been out there.
Lenders don’t generally scrutinize the marketing of short sale listings like they do with foreclosures. For example, with an REO they often require the agent to expose the house to the market for a minimum number of days before taking offers, in an effort to ensure they’re getting the best offer rather than taking the first one that happens to come in. This isn’t normally the case with short sales. The lender might require the property to be listed on MLS, but it’s not common for them to ask for specifics about when the offer came in or how much actual market exposure the property was given.
Of course, with an REO the bank is actually the seller of the property, whereas with a short sale the owner of the home is the seller and the bank is just approving the sale, since they’re the ones taking less money than they’re owed when the lien is payed off at closing. This is an important distinction since it brings up the question of fiduciary duty and who’s calling the shots.
Agents have this fiduciary duty to their clients, meaning an obligation to represent their clients’ interests above all others, especially including their own. And in a short sale since the client is the homeowner, not the bank, the listing agent’s duty is to help the seller get the short sale approved and avoid foreclosure. In many cases the seller doesn’t really care what price the house sells for as long as the bank approves it and the deal closes (assuming they have no tax consequences or deficiency judgement), so it may seem like a good idea to just take whatever offer the agent has and send it off to the lender for approval to get that process underway, which can take months. But we think it’s fair to question that strategy.
Barring special circumstances, like an imminent auction date, we think it can be in the seller’s best interest to see what might be out there by putting the home on the market, at least exposing it on MLS for a week let’s say before accepting anything, rather than letting the listing agent pre-sell the home to his or her own buyer client. The strongest offer will have the best chance of getting approved by the bank, and that offer from the agent’s in house client might be “good enough” in the agent’s eyes but might not be the strongest. We’re not fans of agents “double ending” their own listings in general, but there seems to be even more potential for conflict of interest where a short sale is concerned. And if the listing agent has a willing buyer all ready to go, then it’s likely that buyer will still be there a week later if it turns out he’s actually bringing the best offer.
Short sale sellers are typically in stressful situations and just want to get the house sold and move on, and we don’t like to see agents taking advantage of the situation, either out of laziness or because they want to get a good deal for a buyer they’re also working with. There is also the neighborhood to think about. If you sell a home for less than it would be going for on the open market then that can affect prices in the area, as that sale will be used as a comp for other homes. Some sellers may not care, but we’ve worked with many who don’t want to hurt their neighbors’ home values if they can help it. Why not expose the property to market for even a minimal number of days if you have nothing to lose by doing so, and potentially much to gain for you, the neighbors, the bank, and the housing market in general?