Tony and Suzanne Marriott's Phoenix Arizona Real Estate Blog

head_left_image

Strategic Default Vs. Strategic Short Sale And "Verifiable Hardships"

Strategic Default Vs. Strategic Short Sale And "Verifiable Hardships"

The new "buzz phrase" in our industry is "Strategic Default".  

Recently,  University of Arizona professor Brent White wrote an article dealing with the issue "Strategic Defaults".  In the article, he basically justified the idea of "walking away" from your mortgage, based on the fact that it was a "business decision" on the borrower's part, just as the bank made a "business decision" when they decided to loan the money for the residence. 

60 Minutes even decided to run a story on "Strategic Defaults".

As much as it pains me to say this (I'm an ASU Grad), I agree with much of what the UA Professor is saying.  Let's face it, when the borrower decided to borrow money, they were asked to not only use the lender's appraiser, but were also asked to pay for the appraisal.  The lender, in turn, decided that, based on the opinion of their own hand-picked appraiser, it was a good business decision to provide a loan to the borrower.  In addition, we were all privy to the age-old question from the appraiser of "Where do we need to be on the price?"

What I don't agree with is the premise of "walking away" vs. "making an attempt" to work with the lender.  In most cases, a borrower's credit would be less affected by conducting a "strategic short sale" vs. a "strategic default".  Don't believe me?  See my recent blog that details how FNMA looks at a foreclosure vs. a short sale, in terms of waiting periods to get their next loan.  

Now, some of you may ask, "What is a Strategic Short Sale"?

I'll do my best to explain...As agents, when it comes to short sales, we are always faced with Rule Number One...  Does the Seller have a verifiable hardship?

Six months ago, I wouldn't take a short sale listing unless the Seller had a "verifiable hardship"...  Things have changed...  We've recently closed several short sales for clients who did not have "verifiable hardships", as defined by most lenders.

So, what does this mean?  My opinion is that lenders are now beginning to look at their "bottom line" profit of a short sale vs. a foreclosure.  In other words, most lenders have finally realized that their "breaking point" in terms of bank-owned properties has been reached (i.e., they finally understand that it makes more sense to short sell a home than foreclose and take it back and sell it as an REO).  

My inclination is that they are now more willing to sell a home at market value, and they are realizing that current market value (as evidenced by their BPO or Appraisal) is much better than what they would expect to get if they decided to take the home back into their inventory (less the $50-$60k they will spend on a foreclosure).  More important, they are willing to "look the other way" when it comes to a "verifiable hardship" in order to make more $$.

Many of us subscribe to the rules of "No Hardship, No Short Sale".  I'm here to challenge you to "think outside the box".  We've had several short sales approved in recent months where there was no "verifiable hardship" present.  

While all lenders still require a hardship letter, we're finding that this requirement holds little, if any value.  The bottom line is if the lender feels that they can come out ahead (financially) in a short sale vs. foreclosure, they will more-often-than-not go for the short sale (if it makes financial sense, which it almost always does).  The beauty of a short sale is that your only competition is the BPO that the lender requires.  If your contract price is within 5-8%% of the BPO price, chances are, your deal will  go through.  

It's been repeated Ad-Nauseum, but I'll say it again here...  LENDERS DO NOT CARE ABOUT THE FINANCIAL HEALTH OF YOUR CLIENTS.  THEY ONLY CARE ABOUT THEIR OWN BOTTOM LINE.  In other words, if it makes more sense for them to short sell a home (which it always does, unless there is PMI, but that's another story) they will approve it.

A group that I happen to subscribe to (they will go un-named) preaches that if your client doesn't  have a "verifiable hardship", you shouldn't take their short sale listing.  I'm here to debunk this myth.  Banks could care less about hardships.  They only care about their bottom line.  Don't believe me?  

We recently closed two short sales for a retired orthopedic surgeon with two rental/investment homes with Chase.  He couldn't even write a hardship letter, based on his current financial position (i.e. no hardship).  Chase simply made a good investment decision.  

If you have a client who you feel doesn't meet this "hardship letter" requirement, and you don't want to take the listing, have them contact me.  I'll take it.

Let's quit talking about "strategic defaults", and start talking about "strategic short sales".  If the bank agrees to do it, what is the harm?  Let's face it, a short sale is a MUCH better alternative for a Seller's credit vs. a strategic foreclosure, and it's almost always a better alternative to the lender.

Now, before some of you jump in and slam this blog with your comments, please realize that what I'm writing about is reality.  We are not trying to "scheme the system" (please, get over the whole "victim thing").  The bottom line is that lenders are not stupid.  They (most of them, anyway) are finally realizing that approving a short sale is a better alternative than foreclosure.  In most cases, they are FINALLY coming to the reality that they own enough homes (through foreclosure) and they need to start making rational business decisions.  

In other words, it matters not what/how you feel about "strategic short sales", but how the lenders feel about them (at least in my recent experience), and how you can best advise your clients.

This blog is only intended to share what I'm seeing in my short sale transactions.  Your opinions are welcomed.

 

 


 

Bob Hertzog
Designated Broker-Summit Home Consultants 2009:
95% Success Rate Closing Short Sales
www.phxshortsalehelp.com

 

 


About the Authors - Updated 2018

If you are considering a Traditional or Short Sale of your home in Phoenix, Scottsdale or any location in Maricopa County Arizona, you owe it to yourself to talk with the BVO Luxury Group @ Keller Williams Arizona Realty to determine whether Tony and Suzanne Marriott are the best real estate Brokers in the Phoenix and Scottsdale metropolitan area to help you with the Successful Sale of your home.

Tony and Suzanne have personally Listed, Sold and Closed more than a hundred Short Sales with the highest list to close rate in the Phoenix Metro Area!

Tony Marriott - Chief Operating Officer - BVO Luxury Group @ Keller Williams Arizona Realty

Suzanne Marriott - Chief Technology Officer - BVO Luxury Group @ Keller Williams Arizona Realty

Associate Brokers, REALTORS
BVO Luxury Group
Keller Williams Arizona Realty
Strategic Default Vs. Strategic Short Sale And "Verifiable…
share
Strategic Default Vs. Strategic Short Sale And "Verifiable Hardships" The new "buzz phrase" in our industry is "Strategic Default". Recently, University of Arizona professor Brent White wrote an article… more
MILESTONE | 200th Blog Post in 4 months
share
Kudos to Captain Bill! MILESTONE | 200th Blog Post in 4 months Reaching the 200 blog posts in the four month time frame sneaked up on me today because I hadn't been watching that statistic. However, it is an… more
Prayer Vs. Credit Repair? You Decide!
share
Recently I encountered a situation with a very nice client and what he said to me took me off guard. I had a client that had some major credit issues. His best option to buy a home was going to be credit repair. I gave him all the normal… more
Paradise Lost
share
“You mean, it’s ours? It’s really ours? ” They were so excited. Even after I handed them the keys, they were slow to believe that the modest Spanish bungalow was now in their adoptive custody. Over the course of four exasperating… more
Blogging for Business: Free NAR WEBINAR Prospecting for Today's…
share
Blogging for Business: Free NAR WEBINAR Prospecting for Today's Market July 13 with Anna Banana Calling all REALTORS®! Looking for a new approach to acquiring clients & customers? Effective prospecting changes with the times and this… more
How DID They Find You?
share
Another post well worth re-blogging by Jeff Dowler! Knowing how your prospects find you is important. Whether it's from print, on-line activity, or other means there is tremendous value in understanding how your marketing and visibility, or lack… more
How Would You Handle An Agent Who Refuses To Deliver Your Buyers…
share
Just had to re-blog this one! Yesterday was one of the most interesting days of my real estate career… I was told that my buyers counter offer to a seller was not going to go back to her! I had written it in an email and was told he would not… more
Carnac's 2009 ActiveRain Predictions
share
Although a few of the links are now broken, Carnac is as hilarious as ever! 1. In addition to their regular salary, the 100 paid bloggers of ActiveRain (you know who you are) will receive a bonus equal to 2. 87% of their point total in… more
Hey! Look Me Over! : The Buyer Broker Agreement
share
I constantly remind our BAND (Buyer Agent Network Division) of the value in using Buyer Broker Agreements. Here is a very well written "reinforcement". Earlier this week, I wrote Hey! Look Me Over! with advice on what to look for in a… more
How to Increase Your Agent Referral Business in 7 easy and fun steps
share
One more reminder of the value of ActiveRain! How to Increase Your Agent Referral Business in 7 easy and fun steps Yesterday I received a check in the mail for over $3, 000. I could not figure out what it was for at first. I thought it… more