The most overlooked source of homes for first-time buyers

One of the most consistent mistakes that buyers’ agents make today is ignoring one of the best sources of affordable housing available to their clients: distressed properties — short sales in particular.

After more than 40 years in the real estate business and involvement in over 25,000 distressed property transactions, I’ve watched agents make this mistake repeatedly. They avoid short sales because they believe the process takes too long, too complicated or may never close. That thinking is outdated and it’s costing both agents and their buyers real opportunities.

Let’s start with what’s actually happening in the market. Every month, more than 40,000 homeowners receive foreclosure notices. Today, more than 2 million American homeowners are behind on their mortgage payments and looking for a way out. Some of those borrowers still have equity. Many do not. For a meaningful number of them, a short sale is the most practical resolution available and often the only one. That represents a substantial pipeline of inventory that most buyer’s agents are just not pursuing.

Instead, agents continue chasing the same listings as everyone else, competing against multiple buyers and investors on the same properties and treating affordability as an unsolvable problem. Meanwhile, some of the most accessible opportunities in the market are going largely unnoticed.

Distressed sellers operate with different motivations than traditional sellers

Most homeowners want top dollar while a distressed homeowner wants a resolution. They’re navigating financial hardship and their sole priority is moving forward, not maximizing proceeds. In a short sale, the seller isn’t receiving any money from the transaction anyway, which means these properties are frequently priced at or below market value to facilitate a faster sale. That can mean all the difference in the world for first-time buyers struggling with affordability.

REO properties can carry similar advantages. Many are priced aggressively from the outset. In certain government-backed and institutional programs, First Look periods restrict investor participation for a defined window of time. Owner-occupant buyers can make offers without competing against cash investors during that period. For a first-time buyer with a conventional or FHA loan, that’s a meaningful structural advantage usually unseen in traditional listings.

For many buyers, though, short sales remain the larger opportunity, primarily because agent perception of them hasn’t kept pace with how the process actually works today.

The short sale process has improved substantially

Lender systems are more automated. Furthermore, documentation requirements are more standardized and communication has improved at nearly every stage. Most importantly, lenders have a sizeable financial incentive to resolve these files efficiently. Foreclosure is expensive. It requires legal action, property preservation, ongoing carrying costs and eventual resale. A successfully negotiated short sale typically reduces the lender’s losses and resolves the situation faster. As a result, lenders are not looking to foreclose when a legitimate short sale can be approved.

When short sales move slowly, it’s usually not because of the lender. If anything, most delays trace directly back to listing agents who submit incomplete files, use outdated financial documentation or simply haven’t made themselves familiar with the process. When the listing agent knows what they’re doing, short sales close considerably faster than most buyer’s agents assume.

One of the more reliable indicators a buyer’s agent can use to evaluate a short sale opportunity is whether the listing agent holds specialized training. A Certified Short Sale Expert, for example, understands the documentation requirements, lender procedures, and timeline expectations well enough to keep a file moving. In some cases, the package has already been submitted to the lender and a preapproved net figure may already be in place before an offer even arrives.

The business case to consider

Agents frequently cite a two-month approval timeline which causes buyers to move away from short sales. Leaving aside that timelines are often shorter than that now, a transaction under contract represents a future commission in the pipeline. The agent is free to continue working with other buyers in the meantime.

The alternative, spending those same two months showing the same buyer additional properties, writing offers that lose in competitive situations and, in all likelihood, renegotiating repeatedly, is not actually more efficient. All too often, agents who build strong businesses tend to think in terms of pipeline, not just speed to close. But it’s impossible to deny that a buyer under contract is an asset. A buyer still shopping is not.

There’s also social value to be had here. As affordability challenges continue across much of the country, distressed properties represent one of the more accessible entry points for first-time buyers who are being priced out of conventional listings. Properly priced short sales and REO properties offer better value and reduced competition, not to mention access to inventory that most buyers and agents never seriously consider. A substantial service gap is addressed with a straightforward solution.

Agents who develop working fluency in REO and short sale transactions will be helping more families become homeowners. That’s not because distressed inventory is always ideal, but because understanding it expands what’s actually available to clients in a constrained market. That fluency will only grow in importance as  delinquency rates continue rising and distressed inventory builds through servicer pipelines.

When an agent continues to ignore short sales because of assumptions formed during a different market environment are, they’re effectively making a decision for their clients. They’re deciding that the complications of an unfamiliar process outweigh the benefits of an affordable, accessible property, and that’s a trade-off worth reconsidering, especially now.

Michael P. Krein is President of the National REO Brokers Association (NRBA) and Managing Partner of House Karma.