Unlike with Uber and the ride-sharing revolution happening, there is no easily downloadable short sale management “app” that is going to instantly save you a lot of money and dramatically simplify your default servicing operation. If someone creates one, they will be rewarded much like the founders of Uber because the problems plaguing servicers across the country are still widespread and increasingly complex. Servicers are more eager to avoid foreclosures than ever given extended timelines and high severities. So short sales are clearly an attractive alternative in many situations, but one of the biggest problems we see with short sales today is that original marketing plans start out way too low. This occurs for a variety of reasons that evolve over time. However, the most effective strategies for elevating those marketing plan levels comes back to applying two old-fashioned solutions; expertise and effort.
The first challenge in avoiding under-valuing your property is understanding when a short sale should really be a deed-in-lieu of foreclosure so that you can make valuable repairs. The initial step is doing internal BPOs on every potential short sale opportunity so that you can begin to understand what, if anything, the house needs to make it eligible for FHA financing or to otherwise maximize value in a specific neighborhood. The servicer can then leverage the experience of the REO management team to assess the optimal strategy for the property. This is a point in the process where many property owners leave a lot of money on the table. We often spend tens of thousands of dollars when it makes sense from an ROI perspective. REO managers have become too focused on inventory management and too accustomed to sell “as-is” due to the priorities associated with the housing crisis. They need to re-discover the art of making impactful property improvements. It isn’t easy and it will usually take a few months, but the right servicer-REO manager combo can identify and execute on market-savvy rehab work that adds meaningful lift to the tail end of a disposition.
Effectively managing remediations can also keep you from listing properties too low. Many multi-unit properties in default are occupied by tenants and the landlord/owner (borrower) is uncooperative or absent. If the property has been identified as an at-risk property the owner can incur code violations for allowing the property to show signs of physical distress. Certain municipalities will fine the owner for providing services to the tenant for maintenance issues as minor as unclogging toilets or sending a locksmith to let a locked out tenant in the building. Often mortgagors can’t afford the upkeep or ignore remediating the complaints so the code violations can add up quickly. In these situations the servicer can save the note owner a lot of money by spending the time and using their expertise to carefully evaluate a prospective buyer’s remediation plan. Typically it is investors looking to rent or flip the property who are the natural buyers of homes requiring remediation plans given the added complexity and capital involved in the transaction. This makes sense and these buyers should be pursued if the plan is fair to the seller. But if the investor is asking for too much the servicer should be able to recognize it and step in. The servicer would then remediate the violations on its own to clear the items and likely end up selling the property at a better overall execution level.
Another pervasive challenge is the idea that a discount is always warranted simply because it is a short sale and the buyer will have to endure the pain of working with a large bank. But smaller and more nimble special servicers and their agent networks have developed skill sets doing short sales and even more specifically in 2nd lien negotiations and HAFA payouts given the volumes they have processed in recent years. They know who to call and how to facilitate a deal quickly at with the 2nd lien holders since those loans are highly concentrated among a few lenders. It just is not as slow and painful as many agents and borrowers assume with more counterparties today and it is servicer’s job to convincingly educate borrowers and on the under-appreciated efficiencies in the market.
The last challenge to short sale marketing plans (which I have room for in this column) is an ugly one; fraud. It is frighteningly common to see fraud where the borrower is in cahoots with an agent and a buyer (sometimes the borrower is actually also the new buyer) and they manage a short sale at a deep discount to market and then end up flipping the property three to six months later a much higher level. They will do “pocket listings” where they claim to have private showings and keep the property off the MLS. Others will flat out just ignore calls from the legitimate buying agents. The best way to fight this is to establish and use a trusted agent network. Another path is to demand that your properties are listed on the MLS. The MLS automatically feeds sites like realtor.com and Zillow in many areas which gives you an easy check. Lastly, whenever possible have someone local be sure there is a for sale sign on the property.
So you may not get all the way to an uber-esque valuation, but with some industry knowledge and attention, higher short sale executions are on the horizon.
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