The ABC's of Short Sales
Is the post–housing-market-crash crop of affordable short sales as good as it looks? Yes. And no.
By Noela Hueso 06/01/2011
It was January 2007 and the overheated housing market was smoking, when brothers David, 38, and Joseph, 40 (not their real names), decided it was time to claim their piece of the American Dream. Taking note of rising home prices and the ease with which first-time homebuyers were qualifying for loans, the brothers decided to take the leap from renters to owners. In Altadena, they found a charming 2,100-square-foot, three-bedroom Spanish-style home built in 1929 on a 12,000-square-foot lot. An added bonus? Modern upgrades in the interior. By June, thanks to an interest-only loan, the brothers were able to move into the $760,000 house without putting any money down.
What they weren’t aware of was that the Southern California real estate market had already started to correct itself, with both home values and interest rates starting to fall. And when the recession hit in 2008, the brothers’ service-oriented business was socked. As the months went by, paying the $4,800 monthly mortgage proved increasingly difficult.
“People make up my business, so when people are affected, I get affected,” David says. Though their property was now worth less than what they owed on it, “we couldn’t even pay any more on top of the principal and we couldn’t refinance,” David says. “So what do you do?” After hanging on for another two years, by October 2010 the brothers knew they had to get out. A short sale seemed like the only viable option.
It’s a familiar story, played out thousands of times since the ’08 crash. In the housing bubble years of 2004–07, buyers were enticed by loan options that made it all too easy to purchase homes they couldn’t really afford; a couple of years later they found themselves underwater, at a time when loan requirements had become much more stringent, making it difficult to refinance. Homeowners with adjustable rate mortgages were also in a tight pickle, faced with balloon payments that were more than they could afford.
“If you’re able to get a loan modification, you have a home to live in and you still have a tax write-off,” says Coldwell Banker Realtor Mike Trujillo. But for many, that hasn’t been possible. Instead, they’re opting for a short sale, in which a property is sold (to buyers or back to the bank) for less than what is owed on it –– a better option than foreclosure, which can severely damage a homeowner’s credit and prevent the purchase of another home for five to seven years. Homeowners who short sell their houses are almost immediately eligible for an FHA loan and can purchase another property (although their credit score still takes a hit). Likewise, under Fannie Mae and Freddie Mac guidelines, they can buy another home within two years.
In early May, “about 30 to 35 percent of the market in the San Gabriel Valley [was] made up of short sales,” Trujillo says. Of those, 17 percent were in Pasadena and 15 percent were in Altadena. In the past 12 months, 150 out of 370 short sale homes on the market closed escrow in Pasadena — from a $165,000 condo to a home on Country Lane that sold for $1,232,000. Although some of the remaining 220 may have sold after being relisted, many never got to the finish line.
While the term “short sale” suggests a transaction that takes place in almost no time at all, there’s really nothing short about the process, which can easily take 120 days just for banks to respond and 30 to 60 more to complete escrow, according to Realtor Pete Whan, who handles short sales for the Pasadena office of Keller-Williams Realty. That’s because banks are understaffed and feel no sense of urgency.
“From 2008 to 2010, most banks were laying people off,” Whan says. “They were doing fewer loans, so there were fewer jobs for underwriters and loan processors. Then, when a lot of the foreclosures started hitting the market, the banks weren’t properly staffed or prepared to handle short sales.
“Part of the situation too, is a lot of these banks got bailout money and are being subsidized by the government for handling some of these short sales and foreclosures,” he continues. But “are they really motivated to make these sales happen?”
Trujillo is more blunt in his assessment. He says banks often would rather foreclose than go through the short sale process, despite federal incentives to cooperate with homeowners. Foreclosing can be less costly for banks and, as the holders of the property, they have more control over it. “Banks are looking at the bottom line,” Trujillo says. “They actually prefer to foreclose but they can’t say that publicly. That would be nasty. So they go through the motions [of a short sale].”
What that often means, he says, is that if even one small element is out of place, the whole process can be delayed –– or even cancelled. “I was working on a deal this past April where we were in the process of getting some minor documents signed going into the weekend, but our deal expired on a Sunday. We wired money to Wells Fargo and asked for a 48-hour extension. They said, basically, ‘You close on our terms or we’re just going to foreclose. We will refuse the wire, cancel this contract and sell the home with no exceptions if you do not close by end of business on Monday.’ I spent the next three days doing some fast footwork,” he says. “That’s how they treat us.” Fortunately, he was able to meet the bank’s terms.
From the seller’s perspective, though, a short sale is still preferable to foreclosure. “For a home seller, it’s all about not having a foreclosure on your credit report,” Whan says. “A short sale will show up on your credit, but it also has some language in there that says that it has been paid in full.”
What if you’re not looking to sell your home but rather purchase one? Are short sales good options to consider?
They can be –– if you can afford to wait it out and then start over if the bank decides not to play ball. “Buying a foreclosed property isn’t necessarily a good deal,” Whan says. “Most of the time the property has been trashed and/or gutted; by the time someone buys it they’re paying fair market value — because in the San Gabriel Valley, particularly in the Pasadena area, the demand for housing is greater than the supply — for a property they’re going to have to put money into. A short sale may be a better option because maybe someone’s been living in the property and maintaining it.”
But according to a report compiled by Carlsbad-based real estate–training firm Buffini & Co., while distressed homes made up 36 percent of North American sales in 2010, only 6 percent were short sales. The main reason: The majority of buyers couldn’t find the right home among them or thought the process was too difficult and too complex.
For David and Joseph, the process wasn’t terribly complicated, just stressful. Nonetheless, seven months after their short sale journey began, there’s a happy ending on the horizon. They still have another four weeks to go before escrow closes, but they have a buyer and all parties have agreed to a $500,000 sale price. David says going through the process was a hard lesson, but he is wiser for having gone through it. He even hopes to buy another house again someday.
“Owning a home is great,” David says. “If I can afford it, I mean, why not?”