Waiting Out a Short Sale (Or, Why Real Estate Sucks, Part 3)

Previously, I blogged about our initial frustrations buying a home, which largely were due to the delays brought on by my townhome's buyer (who missed his contracted closing date by nearly two months). The good news is that my wife and I found another home to buy, one we actually liked better than the ones we'd missed out on due to my negligent buyer. The bad news is that the home is offered as a short sale.

A lot of people got into the real estate market during the bubble years. Lenders began issuing mortgages with 100% financing and no PMI (private mortgage insurance--the buyer pays to insure the bank, not the buyer, against a loss on the loan), coupled with low teaser-rates on adjustable-rate mortgages (ARMs). Many banks apparently felt unconcerned with the risks this raised; in part, they planned to (and usually did) sell the mortgages quickly, leaving themselves untouched should the buyer default and go into foreclosure. And, with skyrocketing home values, what problem for the bank would a foreclosure be, anyway? They could take the home and sell it at a profit that satisfied the mortgage balance... until, that is, the mortgage bubble burst.

Even worse, many banks allowed loans on a "stated income and assets" basis, meaning buyers didn't even have to prove their income levels. Appraisers were fudging property values, too. And because many of these loans were to people with either poor credit or were otherwise considered risky, the banks had to charge higher interest to be able to sell the loans to investors (because investors rightfully want a higher return, reflected by the higher interest rate, to account for the added risk). A general economic slowdown combined with resetting ARMs going to higher rates--often over 10%!--meant a good many people suddenly found themselves unable to pay their mortgages, and the real estate slowdown meant their homes were losing value, making them very difficult to sell since many people now owed more than the homes were worth. Finally, some banks came up with a totally dreadful idea: allowing borrowers to pay less than the interest accrued each month, backloading the difference onto the back of the loan (meaning the balance owed actually grew over time!)

Banks can foreclose on defaulting buyers and in millions of cases have; however, foreclosures can be costly and time-consuming for the bank (depending on the state), and the loss of market value virtually guarantees banks will not be able to sell homes they now find themselves owning at anywhere near the amount they (or the bank they bought the loan from) originally loaned the former owners. Banks don't like being homeowners; most have to keep up to several times the home's value on-hand as reserves while they try to sell the home, in addition to spending money on property taxes, maintenance, and so forth--and that's money the banks could be lending out and using to generate revenue.

This is where the short sale comes in. In a short sale, the bank chooses to allow the owners to sell the home for less than what is owed on it, usually dismissing the remaining balance owed as a loss. By doing so, the bank avoids the time and expense of a foreclosure and avoids keeping on-hand potentially millions of dollars per property while they try to sell the home they now own (many of which are damaged by disgruntled owners or by apathy toward maintenance by the stingy banks now owning the property). They still take a loss, but--and this is key--often nowhere near the magnitude of loss they'd eat in foreclosure and subsequent sale of the home.

The chief problem is that the people handling short sale approvals for banks--the loss mitigation departments, their asset managers, and ultimately the portfolio managers overseeing large packages of multiple mortgage-backed securities--are absolutely swamped by the real estate crisis. Some loss mitigation reps get literally thousands of faxes a day.

With all that lengthy preamble out of the way, let me get back to the specific situation my wife and I found ourselves in after the purchase of a new home fell through. We compiled a list of around a dozen properties for our agent to take us to see, and one really caught our eye: a great location (on a cul-de-sac near a county park, not too far from my office), in good shape (several places we viewed needed a ton of work--some to the tune of tens of thousands of dollars!), and within our price range. The downside: it was a short sale, and the listing agent seemed difficult to work with right off the bat.

Beth and I did a lot of research on recently-sold and still-on-the-market comparables in the neighborhood and put together a spreadsheet of comps, finding the property value to be right in-line with the asking price (but around $100k less than the mortgage by county property records). Plus, several of the comparable homes which had been foreclosed upon languished on the market, enduring several price cuts without selling. We put together a good offer and sent it to the listing agent.

Making an already-long story short (the particulars of which I may blog about sometime), Beth and I have had our offer for a short sale purchase in front of the bank for approximately a month now and have not yet gotten word on any approval or counter from the bank. Unfortunately, that's par for the course these days; some of the larger banks and loan servicing companies are taking over a month and a half just to get to a given short sale package, with some taking up to four months to approve or reject a short sale!

That leaves us moving to an apartment given our home lease is up later this week, as apartments seemed the only option for a short-term, renewable lease while we wait (hopefully not for long) to hear back from the bank about our short sale purchase offer. As we're offering above the current market value and within 90% of the tax-assessed value, we think our offer is good enough to win approval, but the wait is killing us, no matter how many "just be patients" we get from the listing agent. If the house weren't perfect for our needs, we'd have moved on and bought another place (likely a foreclosed property, which usually takes only a week or two on which to gain bank approval) already--but this place is worth waiting for, assuming we actually are able to get it.

And assuming mortgage rates don't go up to the point we get priced out of the market--a distinct risk these days with the Fed worrying about inflation and banks tightening lending rules and raising rates left and right to discourage what had once been bread-and-butter purchases.

Well, wish us luck. I'll post more on our home buying (mis)adventure as developments warrant.