Short Sales Sell But Often Don’t Close: Why?

In some parts of Santa Clara County, a very significant percentage of homes for sale and homes under contract (pending sale) are “short sale” listings.  This is particularly true in entry level areas like San Jose’s Alum Rock area, the Blossom Valley district, the Santa Teresa area, etc.  These homes can be hard to sell and even harder to close – but why? They are usually well priced so should just fly off the market, but often that isn’t the case.

The trouble with short sales is that there are a lot of people involved, so there are a lot more places for things to go wrong. Unfortunately, they often do go wrong. I believe the national average is that about 20% of short sales that sell (go pending) actually close.   Think of it like hurdles:

  • The first hurdle is getting a buyer to write an offer (despite the significant risk that the sale will never close)
  • The second hurdle is getting the seller to accept the offer (and the seller’s agent to agree that it is viable)
  • The third hurdle is in having the lender or lenders approve the purchase agreement – it is MUCH easier if there’s only one lender, very difficult if there are two lenders and extraordinarily hard if there are three lenders. Sometimes lenders would rather foreclose than work with a short sale, especially if there’s more than one loan.
  • The fourth hurdle is the seller approving the lender’s terms, which may or may not be easy to swallow (some lenders require that a seller promise to pay back some of the money over time or upfront).  Sellers reserve the right to refuse the terms.
  • The fifth hurdle is the agents (and possibly buyers) approving any concessions the bank requests. Sometimes the bank will require a commission cut. Agents may or may not be willing to accept what the bank requests. (Imagine having your income suddently cut by 1/3 or 1/2. You might say no too.) Buyers may be informed that the bank requires them to pay more costs too.
  • The last hurdle is keeping the buyers in escrow during the prolonged period between when the seller accepts the offer and when the seller accepts the bank’s terms.  Sometimes unscrupulous buyers will write offers on several short sales and then wait to see which one is accepted first – and bail on the others. This causes a great deal of harm to the seller, who may have been nudged closer to foreclosure.  On the other hand, though, with only a 20% chance of success, buyers wonder why they shouldn’t take this approach just to hedge their bets.

I’ve seen all of the above happen in my Silicon Valley real estate practice: buyers writing offers on multiple homes, sellers refusing bank approvals, lenders foreclosing when a great offer was on the table, agents refusing commission cuts.
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