For buyers, short sales are a way to get a bargain. For upside-down homeowners, they are a way to avoid foreclosure. But for pretty much everyone involved, short sales are not a way to buy a house quickly.
But short sales can be anything but short. Unless they work with highly skilled agents, buyers and sellers can get frustrated if the process is protracted, which may lead to the deals simply getting abandoned.
Short sales—when houses sell for less than the mortgages owed on them—and foreclosures rise during tough housing markets. For example, they now account for more than half of the home sales in the Orlando area, according to the Orlando Regional Realtor Association. In the spectrum of home sales, the deals fall somewhere between a regular transaction and a foreclosure. Sellers faced with foreclosure may opt for a short sale because it does not mar their credit as much as if the bank took over the house. They typically contact a real estate agent and set a sales price, based on an appraisal. Once the property sells, the bank must approve the sales price. Getting banks to approve a sale for less than the mortgage amount is what takes time. The process can become so complicated, with different lenders setting different rules, that short sales take about a month longer than other home sales to complete, according to the association.
Once a buyer signs a contract, foreclosure sales take five weeks to complete, traditional home sales take seven weeks and short sales take more than 10 weeks. And the time it takes to complete a short sale has only grown longer as the year has progressed, with the bank-approved transactions taking up to seven weeks at the moment.
For sellers, the process can be a tortured farewell to a home that has lost its value. Wanda Gibbons’ 4,000-square-foot Florida home that she purchased at the peak of the market in July 2007 for more than $510,000 was just days from “going to the courthouse steps” to be sold at an auction when she contacted attorney Justin Clark to explore a short-sale option.
She hired a real estate agent and got an appraisal that showed her five-bedroom pool home with the brick pavers was worth about half what she paid two years earlier. Once Gibbons had a contract on her house, Clark submitted to her lender a package that included everything from the appraisal and a hardship letter to a sales contract. And then the waiting began.
“The problem is, it depends on the bank, the people the bank has and how many mortgages they have,” the attorney said. “These banks, they’re so inundated.”
Banks typically take 45 to 60 days to even acknowledge they got the paperwork and to assign a negotiator to work on the sale, Clark said. At that point, they get a broker’s price opinion on the value of the home and whether the sales price makes sense. If the sales price doesn’t measure up to the broker’s opinion, the lender may tell the seller the price should be higher. In some cases, Clark said, the buyer will agree to pay more, the seller may have to throw in a few thousand dollars or the real estate agent may agree to cut his commission.
In Gibbons’ case, the process was somewhat easier because unlike many sellers going through the process of a short sale, she had no second mortgage. Some lenders refuse to share any of the sales proceeds with the bank that holds the second mortgage. In some cases, homeowners face getting their credit rating dinged for not paying the second mortgage. That becomes part of the negotiation, Clark added. At that point, the deals can fall apart.
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