Short sales are a big deal and to see why just look at the numbers: The National Association of Realtors reports that in March short sales represented 11 percent of all existing home sales and typically sold with a 16-percent discount.
But while short sales have an undeniable attraction to buyers they do not exactly cause excitement among lenders. In a typical short sale the borrower and purchaser come together, arrive at a price, and then ask the lender to accept the sale arrangement. Lender approval is crucial because in a short sale the sale price is less than the amount owed on the mortgage. By approving the sale the lender is agreeing to take the loss.
From the lender's perspective the only reason to approve a short sales is to avoid foreclosure, an event which may lead to even larger losses.
Lenders worry that in a short sale the proposed price could be less than the property might actually be worth, but Pam McKissick has an idea which might resolve a few lender worries and make the short sale process quicker and more transparent. McKissick says the better approach is a public auction.
McKissick, the CEO of Williams, Williams & McKissick — one of the nation’s biggest auction firms — says with the current system “going to the large mortgage servicer/banker as a consumer or real estate agent wanting a short sale is akin to surgery without an anesthetic.”
McKissick, author of the new book, Auction Your Home? Absolutely!, explains that “many mortgage servicers are required to submit short sale offers to multiple loan modification programs before the short sale can even be considered by the short sale department, if there is one. If any offer may go through another gauntlet of short sale divisions, none of whom talk to each other.”
So what's the better solution?
“The right way to handle short sales,” says McKissick, "is to have the auction company and the seller meet with the bank and agree to a pay-off “short” of what is owed them. Then the auction company and seller put together worst-case contingency plans: What if the auction doesn't generate enough to cover the loan balance at the bank? Does the seller bring cash, take out a signature loan for the difference, or have the remaining balance forgiven by the bank? Then the homeowner can go to auction knowing he is paired for the worst and poised for the best.”
With an auction the short sale process is public and open to multiple bidders, something which should at least assure lenders they're getting the best available price.
And what about buyers? A short sale by definition is a distressed property. It's going to sell at discount and with an auction, says McKissick, noting that the process should be faster and more certain.
The McKissick book is interesting and perhaps provides a better approach to the question of how best to handle short sales. Given the vast number of short sales out there, it might be interesting to try a few auctions and see what happens.