Tuesday, September 11, 2007

The Short Sale That Wasn't...

More and more, we hear the term short sale. Most of us are somewhat familiar with the meaning, but for those who have no idea what it means, here's a quick definition: If sellers owe more than their property is worth, they can attempt to negotiate with the lender(s) and hope the lender(s) will agree to a sales price below what is owed on the property. For example, assume the sellers owe $500,000 on their home, yet it realistically can only be sold for $400,000. In this situation, the sellers have four options: 1) Add their own funds at close of escrow; 2) Negotiate with the lender and hope they will take the deed in lieu of foreclosure; 3) default on the loan and let the lender foreclose; or 4) attempt to negotiate a short sale. The first two choices are about as rare as an honest politician. The third choice is as common as a crooked politician.

Now that we understand the terminology, I want to take you through the process I was recently involved in to give you a better understanding of what all is involved in a short sale transaction.

Just over 2 1/2 years ago, I sold a house for some clients and they walked away with about $100. Prices were going up quickly, and their neighborhood was going down quickly. I told them I would seriously consider renting for a while and investing the money they made on the sale of their house. I also told them prices would not always continue to rise. They ignored my suggestions and settled on a 3/2 in Elk Grove priced at $460K for just over 1800 square feet. And instead of putting money down, they went with 100% interest only financing. To make matters worse, it was a 2/28 loan that would be subject to a rate adjustment after two years. The lender was supposedly a friend of theirs, and when I questioned the loan they were receiving, the lender and I got into some serious verbal exchanges.

Fast forward 23 months...I got the call I had been expecting. My former clients had received "the letter" telling them that their payments would soon be going up nearly $900 a month, still interest only. This pushed their loan payments to close to $4,000 a month. I ran some comps for them, and let them know that their $460K home they purchased two years ago would probably go for around $340K. I asked if they could put any of the money they made from their recent sale (around $100K) towards this house at close of escrow. Their response: It's all gone. I then explained to them the short sale process, but told them the tax consequences could be sever and to contact their CPA. (Side note: They didn't contact their CPA at this time. You'll see why this is important later.)

I listed their house at $350K, which was about $30K under similar comps in the area. About 2 months later, we got an offer for $340K. Keep in mind that the sellers have not made a payment for 3 months and have only been contacted by their lenders once. So, we open escrow and I get authorization to talk to the lenders on the sellers' behalf. It turns out there are two different lenders involved, one that is owed about $350K and one that's owed $80K. The first lender has a laundry list of required documentation from me and the sellers. After a week of getting this information, we submit it to the lender for review. Three weeks later, the lender agrees to a short pay off of $340K, minus expense of about $20K.

I then contact the lender with the second and once again I'm given a laundry list of required documentation. However, this time the list is far more extensive for some reason. I tried to explain to him that his company was out of luck in terms of getting any money out of the deal. We were lucky to get the offer at $340K and there simply wouldn't be any money left to pay towards the second. I tried to explain the situation, but he wouldn't listen to my reasoning. Since legally the second mortgage holder has to sign off on the short sale to remove the lien that's on the property, there was no way around this. I faxed him over the required documentation on my end and called the sellers to tell them what they would need to fax over to him. During the call, I could tell they were hesitant to move forward. I pressed further and found out they finally called their CPA and were told to expect a tax bill of about $50,000. This obviously didn't sit well with them, so they contacted a bankruptcy attorney who assured them they could buy another house in a couple years with little impact to their credit. My objections aside, they told me that they were done with the short sale and decided to file bankruptcy. Just like that, three months of my time was wasted. After a month of negotiating with the lenders, when I called the buyer's agent to tell him what happened, he told me his client was ready to pull the plug too because it was taking so long.

At this point, the sellers have been living rent free for about 4 months. They still haven't received a notice of default, which means they've got almost another 4 months before they have to move!

The short sale process is very complicated. I have represented buyers that were successful in the purchase of a short sale, but it's a VERY long and drawn out process, often ending is disappointment for everyone involved. The main reason is that the lenders think the property can sell for more than what the agent has listed it for. What we're seeing now is just the tip of the iceberg...

21 comments :

buying time said...

Very informative AB. Thanks.

It sounds like process from start to finish has broken down in so many small places...it turns into an avalanche when you add it all up.

smf said...

The process has already broken down, it is not well publicized, however.

Think about this. The lender has 20 homes that are upside down.

As soon as they admit that one of their short sales is overpriced and completely upside down, their other 19 homes lose value as well.

So they will then lose that amount 20X or so.

Patient Renter said...

This was a great little story AB, thanks. What boggles my mind is when I start thinking of defaults where it is completely unclear who actually owns the loan after having been sold one or more times.

Rob Dawg said...

8 months of no $4000 pmts, no taxes for a year, bk forgiveness. Free money.

The real problem is the moral hazard if they get away with this.

buying time said...

Moral Hazard is right. If Congress acts to do anything....it should be to make it tougher to walk away virtually unblemished. Something is obviously wrong with this system....

Gwynster said...

I knew short sales were ugly and this just confirmed it. When looking at a house for purchase, either make sure the seller has plenty of room to negotiate downwards or move on. If the seller is dependant on S/S to get out, no thanks.

So people who bought pre-01 and that haven't HELOCed the place to death and REOs are still on my list of properties I'd consider. Everything else is not acceptable. In fact, I had a very frank with someone at an openhouse on Sunday.

(my rant got too long so I blogged it)
http://gwynsters.blogspot.com/2007/09/sunday-funday-in-davis.html

Bubble Sitter said...

AB, very well written. I have been seeing prices drop by 15-20% on some listings lately, only to see the property show up on the NOD rolls. My guess is that they seller and the seller's agent have not clue as to whether the lender will take that price for the short sale.

There are going to be a great many frustrated deals falling out of contract for a while.

Sacto EJ said...

AB - Wonderful explanation of the short sale process in action. The dual lenders sure does mess it up, doesn't it?

It is a pisser how much these folks are sucking from the system for nothing. It makes me sick to think of all the bad behavior that is being rewarded.

Anonymous said...

On a side note... as we move closer to increased lender litigation and regulation, the perspective is always "oh, the poor ignorant homeowner was taken advantage of by all those big-bad mean realtors and lenders..."

What about those of us who do our jobs, make sound recommendations based on experienced-based insight and market inerpretation, take the time to attempt to educate, while homeowners choose the "path of least stability"?

...so much for personal accountability!

--Neon

anon1137 said...

Very interesting story, AB. That's a situation where an agent should be paid by the hour rather than by commission.

I wonder what happened to the $100K? It all went into their 401Ks, right?

Curious said...

AB & Gwynster,

How can you tell if a home is HELOC'd into the stratosphere?

As always,
Curious

AgentBubble said...

curious,

I look in the tax records and see if subsequent loans (liens) were recorded against the property. It's all public information as a recorded document. I can look properties up for you if necessary.

Patrick Hake said...

Here in lies another problem with the current market.

In the 90s housing decline, most people had a 1st loan, with at least 5 to 10% down. When the market tanked, there was one lender to negotiate with and even then the market value may have been 15% below the loan value.

in the 2000s housing decline, most people bought with a 1st and a piggyback 2nd, with little or nothing down.

The 2nds are a large part of why short sales are not working nearly as well as they did in the 90s decline. There is little incentive for a second to get nothing during a short sale and often that is what they will get with todays values.

It basically means short sales are not an option for most of the sellers who bought over the past few years. This is not to mention the countless others who pulled out any equity they had using an over estimated appraisal.

If there is a 2nd on a home that is underwater and it is not owned by the same company as the first, a short sale is basically a huge waste of time.

Gwynster said...

I don't have a good electronic way to look up the liens in Yolo county. I have to go to the county for that in person. But at least it's still public.

Tyrone said...

Sounds like that couple have zero financial sense.

curious said...

AB & Gwyn,

Thanks! I'll have to think on that for awhile. I know you can check the county recorder site online but you don't get details.

I hadn't thought about using the other resources. If I ever "need" to know, I'll remember your offer of assistance. Currently, I was just curious. Of course.

:)

Anonymous said...

Great narrative AB...

Is there any logical best course for holder of second?

Or do they just toss a wrench in the process so they feel better about their loss? (I got screwed so why should I help?)

Did anyone really not see this coming?

Anonymous said...

I suppose there are other real estate salespeople who are willing to give an overly optimistic price to get the listing with the idea of negotiating the price downward once the listing is theirs.

Esther said...

I believe loss mitigation consultants (licensed) are very helpful to the sellers. They come in with the banks blessing and sometimes can help the seller out. The sellers are nervous and afraid and would rather hide or give up. Many have good reasons for their situation. Loss of job, illness, being taken advantage of so its not fair to put them all in one lump. Loss mitigation consultants explain the process, sometimes workouts are provided. Experienced in short sales everything is done up front so that when an offer is made the short sale can run much smoother and in less time.

Anonymous said...

THAT's why it's IMPORTANT to list them at what price you would list ANY other home on the market. Keep it looking nice and sell the thing for a fair price, even then you don't have a fighting chance because the closing costs. the lender wants to see the FULL VALUE OFFER, not a low ball offer. It bungles the market up to have these ultra low prices on the mls and they can't sell at those low prices.

Anonymous said...

ALSO, these "victims" also seem to think it cool to move out of their house in the middle of the night and go buy another home cheaper down the block the following week.