Short Sale Advantages in Distressed Situations

During the GFC in 2008-2009, the majority of our sales business involved representing big banks in the sale of their non-performing loans. These were predominantly construction loans that never got off the ground. This may have been before lenders became more sophisticated, requiring pledges of membership interests in mezzanine positions. Such pledges allow for UCC foreclosures, which, after a default, now take months to take back the title, as opposed to the years a traditional foreclosure (with or without a bankruptcy filing) could take in the courts.

Lenders were much happier to sell the loan and let a more aggressive buyer navigate the legal process or ultimately strike a deal with the borrower to get the keys back, often in exchange for releasing the borrower from their personal guarantees.

Today, we’re back to providing dozens of BOVs (broker opinion of values) for lenders and special servicers alike. We are handling some loan sales, but it seems the floodgates have not opened yet. Some of our most active clients tell us they are purchasing NPLs (non-performing loans) directly from lenders who don’t want to market and “air their dirty laundry.” The exception, of course, is the FDIC sales that include the most publicized Signature loan pools.

That being said, for every loan sale we handle today, we are listing many more short sales on behalf of borrowers with full transparency and cooperation with the lender. We run a full process and report to the lenders along with the client so everyone is on board with the process and pricing. Thus, when a property is underwater, a short sale might be the best option for lenders and borrowers alike. Here are some of the reasons:

1. Benefits of a conventional sales process: Although some might think that a lender sale might maximize price, a distressed asset sale brings out distressed buyers who are looking for bargains. Marketing timetables are often tight, as are the closing terms. A more traditional marketing program allows for a full marketing process and a flexible time frame to help maximize price. Further, purchasing a property through a short sale reduces the uncertainty of the cost and time it could take for a purchaser to take control of the property. This uncertainty results in a lower purchase price and, ultimately, a lower recovery for the bank.

2. Broadening the buyer pool: Many outlier buyers of real estate, such as high net worth individuals, foreign buyers, and end users, will not consider a loan purchase or understand how to approach an auction process. They are not interested in a legal process and just want the collateral.

3. Borrower cooperation: Borrowers will be more likely to cooperate if they feel they have a chance to recover some of their equity. Many borrowers today still hope they have some equity left in distressed situations or hope that an uptick in the market will save them. A traditional marketing process can help borrowers maximize their likelihood of any recovery while also allowing for planning for what happens if the ultimate sales price does not clear the debt.

4. Continued operation of the property: Many lenders do not want “the keys back.” We see this especially in office where lenders are not equipped to run buildings.

5. Doing the right thing: Most borrowers want to maintain relationships with their lenders. Sometimes borrowers have other borrowing relationships with their lender, and sometimes they are simply trying to establish themselves as borrowers lenders will want to do business with in the future. And, in many cases, they simply don’t want to enter into a costly and contentious, and sometimes public, legal battle with their lender.

6. Less public process: Most borrowers don’t want their name dragged through the mud and publicized through a foreclosure process. The press is very keen to pick up on these stories. In a short sale, the news is not relayed until after the sale and is viewed as an amicable solution.

7. Tax considerations: Here, borrowers and lenders should consult with their accounting and legal professionals, but mortgage and transfer tax savings should definitely be considered.

In all, with Covid, hybrid work, and unprecedented rate increases, the consensus is that this current distress is no one’s fault. When a property is underwater, borrowers and lenders alike will be well served to work together to try and recover the most proceeds on a sale in an agreeable process. A short sale is not the only solution but is one that should be closely considered.