Emotions Can Run High
There’s one great reason to buy a home that’s a short sale. Fewer bidders to compete with. That’s the complete list of reasons to be in the short sale market in Sonoma County or anywhere else. Apart from that, a short sale process puts you in touch with emotional hot buttons that can be painful to touch and communication delays that drive even the calmest people crazy.
Let’s back up and start with a definition of short sales. We’re all familiar with the slang use of “short” for not having enough money. Whether it’s your split of a shared lunch, digging into the couches for change to pay the pizza delivery guy, or not having enough in your checking account at the end of the month, you have probably said, “I’m short”. Well, in real estate a short sale is the equivalent of trying to talk the pizza guy into leaving the pizza even though you didn’t pay the full amount. With pizza, it’s not going to happen. With a house, there’s so much money at stake that the lenders are reluctant to tell the owner to take a hike. The owner might take them up on the offer (cash for keys). So we end up with a situation in which the lenders agree that the house is going to be sold for less than is owed on it; a short sale. How did we get into this mess?
California Median House Price
In the olden days of ancient housing history, like five years ago, nobody ever said, “Don’t buy a house, it’s a bad investment.” The common wisdom was that houses would remain the bedrock investment for everyone’s retirement. After all, since the end of World War II, residential prices in California have seen a steady 8% or 9% appreciation year after year. Sure, there were hiccups and downturns, but the overall trend was upwards. Well, guess what? We were all wrong. House prices can get too high. What we have lived through since 2003 is a bubble; an unsustainable run up in price. There are only a few ways to get back to a normal price level (as shown on the chart), and that retreat in prices is the dilemma for people that bought or refinanced during the market peak.
- If they have great incomes and a good loan, they can hang on until prices recover to the level they purchased at. There’s going to be a big chunk of the next decade in which their investment will be performing badly, but this is the “save your credit” option that honors the contract to purchase.
- If they have lost income or had a loan that adjusted to a high rate, their choices are more limited. It’s likely that they will not be able to stay in the home. Unless owners had put a large down payment on the house, chances are strong that it’s worth less than what they owe on it. That’s being “underwater” or “upside down”. At this point, if people can’t continue to make payments, the options are going to be a short sale, the foreclosure process, or simply deeding the house to the bank in lieu of foreclosure. More on the foreclosure and deed in lieu process in another post. For now, let’s get into the short sale in more detail.
The short sale process is a painful exercise for everyone involved. Without getting too melodramatic, from the owner’s point of view, losing a home is a wrenching, emotional roller coaster. There’s guilt and shame from the usual reasons about money and responsibility. There’s depression from looking at future prospects including retirement and credit scores. There’s panic at trying to balance keeping a roof over their head today in a house they can’t pay for and tomorrow when their credit will suck and their tenant history will be bad. If there is a family to take care of, explaining all of this ranges from hard to impossible. The only blessing in this sea of sorrow is that millions of other people are on this journey. Buying a house in the midst of a bubble was not a moral failing, it’s just a crappy hand that life dealt.
Short Sale Paperwork
The banks are a little more emotionally detatched from this process. It’s not their home. It is their money, however, and they want to keep as much of it as possible. The reality is that a short sale is usually a better deal for a lender in first position than a foreclosure. That leads to the logical question of why we don’t have more short sales. What often makes short sales too complicated to happen is the presence of a second lender, often unrelated to the firm that holds the first mortgage. In all likelihood, the second lender is going to get wiped out completely in a foreclosure, so their only option to recover any of their money is in a short sale. The sad reality of the market today is that the house’s value in a short sale will still wipe out the second mortgage holder. That’s where the short sales can fall apart.
The dance plays out when an owner running out of time and money decides to list their home with a real estate broker. They have often waited until they are in default on their loan(s) and they may be gettng sternly worded letters or phone calls. The pressure is intense to get out from under the burden. Complicating this even more, the property in question isn’t just any property; it’s their home. They may have remodeled the kitchen, built new decks, fixed the roof, or any number of other home improvements that are now essentially devalued completely. When they meet with the listing agent and hear market realities for THEIR home, it hits home in ways the general foreclosure crisis can’t.
For the real estate agent listing the property, the communication process with the bank is a new experience. Getting answers to your questions in a traditional sale is usually a matter of hours. With a short sale, it might be days. For potential buyers (and their agents, including me), putting in an offer on a short sale property is an exercise in patience. You can wait days or even weeks to find out if an offer is accepted. The normally fast and efficient agent-to -agent communication process breaks down when the listing agent is as much in the dark as anyone. With two lenders it’s an especially complicated and awkward experience. It’s no wonder that very few short sales are completed. It’s a complex process, loaded with emotional entanglements, and a distortion in the normal real estate transaction model.
By comparison, purchasing a bank owned property is a day at the beach…if you can ignore the circling sharks.