Musically, U2’s “Unknown Caller” is one of their most over-the-top, triumphant songs. It’s got everything in it, with a church organ, bagpipes, a perfect rhythm, a blazing guitar solo.
It also has Brian Eno’s influence at his most… Eno. The lyrics were dated before they ever recorded the song.
It’s an interesting song, but it also is a synopsis of everything that is wrong with No Line on the Horizon: a band at the top of their orchestration and instrumental powers, goes off on some obscure references trying to link themselves to the fabric of the day, and in the process, sets themselves up for apt comparisons to a bunch of out-of-touch-geezers trying to recycle the pop culture that surrounds them. The lyrics sound a little more like 1998 than 2009. Cloaked in the fabric of the day, U2 missed a huge opportunity with one of their most deeply spiritual albums, and came across as tone deaf and out of touch with their audience; a band that had sold 150 million albums only sold 5 million, and in my opinion, did so largely due to dating themselves lyrically.
In 2007, the short-sale wave smashed into Colorado Springs. Personally, I was confused how all these agents were listing properties for less than the debts owed and how they planned to get rid of them. I had done one short-sale myself, in 2003, and it was a bloody nightmare. Was it possible people were signing up to specialize in these things?
Well the answer was (and still is) yes, agents were/are going to shroud themselves in the fabric of the day and specialize in short-sales, including some of the biggest agents in the city. The “logic” was/is that to specialize in short-sales was/is to embrace the only place of growth in the market. The opportunity to dominate the one sector where there was lots of demand was at hand. Enter the specializations and advanced classes. Get one of those was the Certified Distress Property Expert badges and put the CDPE behind your name as an “expert” in this field. Create a system, and you’ll live like a king while everything around you smolders and burns…
For the last five years, our phones and emails have been bombed with “opportunities” to embrace this same specialty. But Hannah, Kim and myself all electively saw through that line of logic, and refused to go that route. We saw this “opportunity” as:
1.) Totally inconsistent with who we were and who we wanted to be in the future
2.) Would fundamentally force us to change all of our processes
3.) Didn’t really look like a system and therefore, didn’t pass the “truth” test and
4.) Force us to ramp up with infrastructure that was short-term. As bad as the market crash was, it had to have an endpoint (one historically, that is in the rearview mirror, today), and we only believed in embracing skills that sustained multiple sales cycles.
All of us concluded, independently, that embracing designations like the CDPE was out of message with our audience. We would not “date” ourselves with the language of the moment at the perils of removing our permission asset with our client database. Stubbornly, consistently, and yes, pridefully, none of us have a CDPE. We saw it as trendy. It has taken five years, but today, we see confirmation of our thinking.
As of September 17th, 2012, there are 270 listings with a short-sale addendum signed that are active in the MLS. This goes against 413 that are under-contract short-sale. The transactional treadmill thinking is that “this is a brilliant strategy, control the short-sale market and there are 52% more contracts than active listings! You’ll be rich!” But go inside the numbers, and here are the three macro points:
- There are 6130 listings that are Active, Pending, Under-Contract, Under-Contract-Short-Sale, Under-Contract with a First-Right of Refusal. Short-Sales represent 683 of those units. Why on earth should we dedicate so much of our resources to go after 11% of the market? Wouldn’t our dedication to an 11% “niche” be a travesty to our audience that more readily represents the plurality of the market?
- What percentage of these short-sales actually close? Sure, congrats, you gotta contract on 413 of them. But how many of those are an undisclosed time bomb waiting to go off that will never close?
- By it’s very nature, a short-sale is a negotiation between three or more principals. A conventional transaction (which usually includes bank-owned sales) is a negotiation between a buying party and a selling party. A short-sale can bea negotiation between a buyer, seller, a bank, a 2nd bank, a 3rd bank, other creditors, the federal
government. The top of every contract has language encouraging the participants to consult legal and tax counsel. Well in the case of a short-sale… believe it.
Here are some real war stories of Shortsaleville, which according to census data, is rapidly shrinking, but nonetheless, has a vibrant culture of financial land mines. These are just some of the things that can wrong that we have experienced first-hand in the last 60 months:
- Seller can terminate the contract on a short-sale. That’s right, they can choose to bail on the deal, something that is practically impossible on a conventional sale.
- The seller usually ends up short-selling due to some other financial headache. Here are some of the more popular: divorce. Medical bills. Bankruptcy. Business failure. Loss of business revenue. Move out of state to “terminal residence”. IRS liens. Personal judgements. Just today, a 12-day old contract on a short sale with Bank of America blew up. The buyers were making a cash purchase, and hoped that the “cash” aspects of their offer would enjoy 5% of additional value to the lender. Well Bank of America never even got to render a judgement. The title commitment showed a $36,000 IRS lien, plus two personal judgements adding up to over $110,000. The seller is now going to try a “deed in lieu of foreclosure”. Okay. What about the $36,000 IRS lien that has primacy? Why exactly will Bank of America play ball with that? Other financial voodoo is usually jamming up the system, and one or more of those items can raise it’s head to blow everything to pieces. The seller sent across a notice of termination this morning.
- One piece of most short-sale negotiations is that the seller must demonstrate a verifiable financial malady. Well, if you refinanced a house in another state last year and seized on the super low rates of the day, and you’re abandoning ship elsewhere… your bank has access to that credit report. Your financial malady all of a sudden looks pretty “choosy”. Even if a short-sale makes market sense, the bank doesn’t have to be restricted by “market sense”. They can’t tell their shareholders, “oh yeah, this guy here was lucky enough to refinance his place in California and he lives there now, that’s his new primary. So his old primary is set adrift and we have to eat that bill.” Good luck. The shareholders read that piece of corporate speak as “he has already shafted us and now wants another deal.” Shareholders no longer are known for the market excesses of old where they handed out “opportunities for deals” right and left.
- Think about this: Attorneys specialize in divorce cases, but any divorce attorney will tell you there is no such thing as a standard divorce. Well now add an asset encumbered by a deed of trust in a state where assets are deemed shared. Divorces are a leading cause of short-sales, and conventional divorce real estate transactions are more often than not nasty. Now combine a short-sale with divorce… well, you do the math.
- Banks can sometimes do something called a Broker Price Opinion where they pay active real estate brokers to evaluate a price for a property based on active market conditions and how long it will take to sell it in a scheduled period of time. They may do one to five of these on a single listing. Agents like to think that the net dollar amount of 83.7 to 87.3% of the BPO is where the bank will be happy with a short-sale offer, so if they BPO the house at $200,000, and the property is listed for 6%, and there are $4000 in concessions in the offer, a $190,000 less $4000 offer ought to work as that hits at 87.3%. See? There’s a documented system to this madness! Okay, well, what if the bank that initiated the loan has servicing through Fannie or Freddie and after the house hits at the BPO value, Fannie and Freddie have ultimate oversight and therefore short-sale approval? What if Fannie (and especially Freddie, at least they used to) had to send an appraiser out to verify that value? And what if the appraiser says the value is $225,000, not $200,000? Now the offer has to be $213,750 and the foreclosure sale is a week or two away. The buyer is countered at the eleventh hour with a value 12.5% higher than what they negotiated with the seller and they probably don’t qualify for it.
We have another half dozen stories to share, but some of these are so grossly personal in detail that it would be unethical to print them. Short-sales are like a public financial (and sometimes marital) surgery where the patient is sliced open without anesthesia and everyone stares into the body cavity and decides whether or not they want to proceed with the operation. Usually contracts are not written as buyer-friendly as short-sales, and considering that the Colorado contract is already extremely buyer-friendly, this makes for a highly peculiar negotiation. Consider the following date structure, and if you were a conventional seller, would you except any of this? Alternative Earnest Money Deposit: SSA+ 3 Days (Short-Sale-Accepted, usually 40-120 days into the contract, plus an additional three days); Inspection Objection: SSA + 10 Days; Loan Conditions: SSA+ 25 Days. I point this out, because by their very nature, there are a dozen additional yellow lights-turning to red in any offer written for a short-sale property. There are warning lights akin to a railroad crossing, everything from the ringing bells to the falling arms blocking the path telling all parties “are you sure you want to do this?”
Sure, short-sales are a better solution than foreclosure. The reasons to do them are valid:
- The banks save money because the costs of foreclosing a home are significant (legal, repossessing, repair, insurance, marketing times, winterization) that don’t apply to a short-sale (owner A out; owner B in)
- The credit drop is USUALLY not as big for the seller
- There are buyers who will buy them (53% more short-sales under contract than actively listed right now)
- They’re a good-buy (we won’t argue that for all the pain, suffering, and risk of time a buyer spends on these things that they do offer a below-fair-market price. They do. At least… they ought to).
But at the same time, The Pikes Peak Urban Living client demographic doesn’t look like people that have:
- Infinite time to wait out a bank’s decision
- Infinite patience to sift through the financial rubble of another individual or family’s life
- Consistently made over-leveraged financial decisions that ultimately lead to the nasty place that is a short-sale
Part of our job is in taking “Acceptable risks” on behalf of our clients. But another part of our job is counseling clients as to what acceptable risks they might have to make with their time and money. As you can see from the abstract landscape of financial and personal ruin that is Shortsaleville, there is no way to system to the madness, and correspondingly, it is a bit of a stretch for us to tell our clients that we “specialize” in short-sales.
It’s 11% of the market that we have effectively quit, so that we can reap better returns for our clients in the 89% where systems and sanity tend to prevail.
The opinions voiced in this posting are those of Benjamin Day, a licensed real estate broker in the State of Colorado. The opinions are those of Benjamin Day and may or may not reflect those of Selley Group Real Estate. All agents with Pikes Peak Urban Living and Selley Group Real Estate are licensed according to the laws of Colorado.