In my April MONEY magazine story explaining how to snag a bargain purchasing a short sale or foreclosed home, I reported that the process can be both frustrating and time-consuming. Well, now I have first-hand knowledge of how slow and irksome these deals can be.
Wanting to take advantage of my own advice, my husband and I recently decided that the South Florida market where we live had sufficiently busted to make a cute three-bedroom townhouse nearby a pretty good investment. In February, we made an offer on that townhouse, which was listed as a short sale. Three months later, we don’t have a response to our offer, and we’ve only just started hearing from the bank.
Not that I’m surprised. I heard all kinds of horror stories about short sales taking months when I was reporting my story. Just down the street from me, a house has been on the market for more than a year. The agent handling the sale, Toni Reeder, told me she had a buyer and an offer. But the bank took so long to approve a deal that the potential purchaser got discouraged and ended up buying another house in the neighborhood. So the first house still sits — now with a lower listing price.
Of course, there’s more to the short sale mess than lenders dragging their feet. Banks complain of low-ball offers from buyers who aren’t really serious, sellers who don’t submit their documentation on time, and more. Experts say it’s important when shopping for a distressed property to work with an agent experienced in short sales. What I learned is, even if your own agent has experience, you can still get held up.
Let’s look at my situation. We made our first offer on Feb. 9. The seller had already moved out and was behind on his payments. It was up to the seller and his agent to submit the offer to the bank, along with a bunch of paperwork his loan servicer would need to approve him for the short sale.
We waited and waited. Nearly two months went by. My agent told me she’d been trying to get permission for our title company to deal directly with the bank — it always goes smoother that way, she said. Finally, she got it. Turned out that the seller apparently had not turned in the correct paperwork. So we started from scratch. We’ve had to redo much of our own work — the bank wants updated proof we have the cash to buy the home, for example. That’s annoying, but at least something is happening.
Each one of these homes — the townhouse I’d like to buy, the other empty house down the street, and the stories I covered in my article — helps explain why the housing market is going to stay depressed for a while. “Short sales are not working at a very big-picture level, and more people are going into foreclosure than really should,” says Ray Mathoda, a former IndyMac executive whose firm, AssetPlanUSA, now works with lenders to improve their systems for managing distressed properties. Her experience, she says, is that six out of 10 short sale contracts which get submitted to lenders never close.
This happens for a variety of reasons, she says: The buyer gets frustrated and walks. The seller doesn’t get approved for a short sale, perhaps because the lender views it as a “strategic default” (the buyer can afford the payment but wants to ditch a home because it’s fallen in value). Fraud. A poor process — the loan servicer loses paperwork, for example. Perhaps the investors who purchased the loan have unrealistic expectations about what the house is worth, or there’s a second mortgage holder complicating the situation.
Government programs, such as Home Affordable Foreclosure Alternative (HAFA) should be working better than they are, and they’ll have to if the country ever wants to get out of this morass of distressed properties, says Mathoda.
As someone who hopes to have one of the 40% of short sale contracts that successfully close, I have a suggestion from the buyer’s perspective. When I see a home listed as a short sale, I have absolutely no certainty that the seller will qualify for a short sale or that the bank will accept anything near the listing price. It would be so much easier if the seller could work with his lender FIRST, before listing the house on the market, to get approved for the short sale and establish a price the bank has agreed to. Then I can make my offer knowing there’s a reasonable chance it will be accepted. Maybe I’ll even offer a higher price because I can feel confident of a quicker, simpler transaction.
Taking some of the uncertainty out of the process, seems to me, would go a long way toward luring wary buyers from the sidelines and, just maybe, getting our housing market back on track.