Recently I wrote a blog outlining the basics of buying foreclosures, short sales and other distress property. (Click here to read that post) I mentioned in that post that short sales are a vast wilderness with many pits, traps and paths leading nowhere. The stories below reinforce that statement. These are real cases I have worked over the last few years. The names and some other data have been modified to protect privacy but the key points are accurate and, most importantly, the timelines are real. The moral of all of these stories is that before deciding to pursue a short sale, make sure you have enough time and resources to wait for the bank to make a decision. If you are one who likes certainty and control, the short sale world is not for you. There is very little the buyer or buyer agent can do to shorten the time between contract and settlement. The pace of the transaction depends on the bank negotiator, the seller and the listing agent.
On to the stories.
WHERE WILL THE WEDDING GUESTS STAY?
Jerry and Melanie were getting married in late July. A big wedding was planned with many out of town guests including immediate family from outside the US. Jerry and Melanie were looking to find a home and settle before the wedding as they had told their immediate family that they would not need a hotel but could stay in their new home. I had already helped other members of Melanie’s family buy homes so when Jerry and Melanie were ready, I got the call.
We started our home search early in 2010. Nothing was quite right so we dipped our toes into the short sale market.
I informed Jerry and Melanie that short sales have a very uncertain timeline and there was no guarantee they would settle before the wedding. One way to increase the odds was to find a short sale that previously had a contract. In these situations, if the home had been under contract for some time, it is possible that the short sale bank completed a substantial part of their research and the wait time would be much shorter.
So mid March we found such a home. The listing agent was an experienced short sale agent (I check the body of work of each listing agent I work with so I can understand their experience and areas of expertise. This often helps in developing a negotiating strategy). The agent stated in the listing that the short sale was already approved and they just needed a new contract with the approved price and terms. We decided to proceed and wrote the contract exactly as instructed. We knew that if we pushed on any of the significant numbers, we would send the contract into another review and time here was important. The wedding day was a little over 120 days away.
So, 30 days after ratification we were told verbally that the bank approved the contract and that it should be about a week or so before we have the official written approval letter. Two weeks go by and no letter. The listing agent frantically tried to get the negotiator on the phone and eventually did only to find that the case had been reassigned to another negotiator who had not yet reviewed the file. I had been telling the listing agent that it was rather urgent that the case get approved quickly – wedding, out of town guests, etc. We decided to send a copy of the wedding invitation to the negotiator to show that we were not playing games.
In May, the same thing happens. We were verbally told that the we should have the official approval letter in a few days. Then the negotiator quit and the case was reassigned. Back to square one. The buyers are now embarrassed that they won’t have a a place for the relatives to stay. They don’t really know what to do.
A similar situation happens in June. I didn’t like the way things were proceeding and was thinking that there may be things going on behind the scenes with the sellers and/or the bank that we were not being told. I suggest to the buyers that we move on to another home but they really liked this home and decided to rent an apartment for the first few months of their marriage while they waited for the bank to approve the deal. The relatives were told to book hotels. They had a spectacular wedding. (I was actually honored to be invited and had a great time.)
Well, by mid August the deal is still not approved and finally the buyers have had enough. We voided the contract and found another home, a foreclosure, and proceeded to settlement without any drama.
Often times, common sense goes out the window with short sales. The history of the short sale home they wrote on shows what I mean It was put on the market as a short sale in in December 2009. It received a contract right away. After tiring of waiting the first set of buyers walk away early March. We write our contract at $308,000 and eventually back out mid August. The home sits on the market for a few months and then the price is reduced to $292,000. Mid December 2010, another contract is received but that one falls out in February 2011. Quickly a 4th contract is written in mid February and that one eventually settles in May of 2011 for $292,000. So due to bank inefficiencies and delays, it takes from December 2009 until March of 2011 to get this home settled. While I do not know the terms of the other contracts, had the bank acted swiftly with our contract they could have settled about 9 months sooner for $16,000 more.
THE COMMUTE IS KILLING ME.
Anthony and Rachel owned a home in western Prince William County on a large lot but their employment was in Fairfax County. The commute was long and getting longer. They wanted to trade acreage for a shorter trip to work. They met one of my past clients who referred them to me and we started to look for that closer in home.
Fortunately for Anthony and Rachel, they were in a position to buy without having to sell their current home. We looked and looked for just the right home and nothing seemed to fit the bill. We then came across a home that had promise. It was close to their work but it was a short sale. However, unlike, newlyweds Jerry and Melanie, Anthony and Rachel were not on a strict timeline and willing to wait. They wrote a contract which was accepted.
As usual we waited and waited for approval and finally 5 months later, we got written approval. The title company updated the title work they started 5 months earlier and a problem surfaced. By definition, anyone involved in a short sale is in financial distress. Well, an updated title search shows that Mr. and Mrs. Seller had judgments against them. After all of this waiting, that could have been a show killer as prior to settlement, a seller must clear all judgments that could possibly attach to the house. But fortunately for Anthony and Rachel, Mr. & Mrs. Seller owned the house as Tenants by the Entirety which is available to married couples and means that only debts signed by both husband and wife can potentially attach to the house. In this case, the title company received documentation to indicate that judgments were individual judgments and thus can not attach to the house so we proceeded to settlement.
The point here is that when a seller is in financial distress, their financial affairs can take a few twists and turns that are unknown to those involved in the real estate transaction. That can put an end to a deal if the amounts are so large that the short sale bank will not reduce the amount they want to collect to to allow for these debts to be paid. If the short sale is a condo with high monthly condo fees, a large balance could accumulate quickly.
HOW LONG MUST I LIVE IN MY PARENT’S BASEMENT?
George had a relatively small geographic footprint for his search. It was the best compromise between the night life and activity of DC and his job in the western suburbs. Again we looked at regular sales but nothing clicked. We then saw this one short sale that was very attractively priced at $250,000.
This home had previously had a contract and the first buyer tired of waiting. The listing agent, a very experienced short sale agent, tells us that the price had been approved and the bank was also willing to pay a significant amount of closing costs. We write the contract as directed and it is ratified with settlement in 60 days. The listing agent said she has worked with this particular bank on many short sales and they process quickly. Well, George was living at his parent’s home so time was not an issue but he really wanted a place of his own as soon as possible.
In 30 days, we do got a verbal that the price is approved and the written letter should come shortly. In another 30 days we got the written approval. Settlement was scheduled for at the end of the following month – a bit later than originally anticipated but, still, all seems fine. Based on receipt of the written approval we moved forward with a home inspection and George’s bank ordered an appraisal. (I structure all of my short sale contracts so that the buyers do not put out money – other than the earnest money – until the short sale approval letter is received.)
Then the seller decided that he did not like the terms of the bank approval letter. The letter had required him to pay back some of the shortfall over a period of years. Upon receipt of the letter, he accepted the terms and passed the letter along to us for us to start our side of the deal. But now he wanted to renegotiate with the bank and see if he could work out a lump sum settlement on the outstanding balance. If he couldn’t work that out, he stated he may not move forward. Somehow he worked out the renegotiation rather quickly but that still required a change in settlement pushing it out another 3 weeks. Now, we are about 110 days between contract and settlement but still doable based on George’s living situation.
Then, an issue with the rental home the seller is moving to surfaced and we neeed to delay settlement another 2 weeks. The bank was getting very upset with all of these delays and threatening that there could be no more delays or the terms of the deal will change. The pressure was on. We settled and George had his first home.
There are two lessons here.
First, I can not imagine the stress and pressure one is under when facing a short sale or foreclosure. Often, there is a sense of relief when things appear to be resolved but once reviewed the terms may not be as attractive as originally thought. Sellers may change their mind at various points in the process and that can delay or kill the settlement. I have a colleague who finally got approval on a short sale after 6 months of waiting but the seller was told that bankruptcy would be a better idea. That seller filed bankruptcy which stopped the short sale.
Second, short sale sellers are behind on their payments and their credit is obviously not good. Some are able to move in with relatives or have other handy housing solutions. But most need to find a sympathetic landlord. Usually that is their one and only housing option so a change in the occupancy date of the seller’s new home results in a delay of settlement on the short sale. In the above situation, we were asked to settle earlier and allow the seller to stay for a week or so. This may have been okay if the buyer was a seasoned investor. However, a very complicated situation could have developed if the short seller’s rental fell through and he had no place to go. A young first time buyer could not be put in that situation so we did not agree to work with the request.
Bottom line, short sales can work. And in many cases, I feel the folks get a home at a very attractive price. I don’t think they can turn these around and flip them for a substantial profit but they are moving in with some built in equity. On the negative side, these transactions are full of surprises that are really out of the control of the agents and buyer. Not for the feint of heart.
In upcoming weeks there will be more “Tales From the Front Line” posts on other topics or issues. Stay tuned.