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...
