A few years ago, most homeowners didn’t know a short sale from a bake sale.
As the nation’s economic woes continue and the housing market attempts to rebound from its worst downturn since the late 1980s, short sales — selling property for less than, or short of, what’s owed on the mortgage balance — have become a desperate alternative for homeowners trying to stave off foreclosure and an attractive option for homebuyers looking for a good deal.
But too many such sales have either been thrown into limbo or collapsed altogether because of excruciatingly long waits for banks to make decisions, some members of the real estate industry say. Until the logjam of pending short sale deals is broken, the single-family housing market’s recovery will limp along, they say.
“It’s killing a lot of transactions,” said Walter Molony, a National Association of Realtors spokesman.
Lenders acknowledge problems dealing with short sales, but say the housing market’s tidal wave of foreclosures overwhelmed their industry and helped create the backlog of distressed properties they’re trying to work through. The federal government sought to help earlier this year with little success, and legislation recently introduced in Congress attempts to speed the short sale process.
And it’s not necessarily all the lenders’ fault; at least one real estate agent says some industry members aren’t properly versed in short-sale procedures, which lengthens the process.
The surge in short sales is a relatively new phenomenon — part of the fallout from the nation’s recession and housing downturn. When a homeowner falls behind in making mortgage payments, a bank or lender begins the process of foreclosing on the property.
Some homeowners who can’t catch up or work out loan modifications with lenders might opt to try a short sale — selling the property for less than the mortgage balance under a deal banks and lenders must approve. If successful, the homeowner avoids a foreclosure, while some buyers are able to find bargain-priced properties.
Nationwide, 12 percent of home sales this year have been short sales, according to surveys of real estate agent by the National Association of Realtors, Molony said. The association didn’t even start tracking the number until 2008, he added.
Locally, 6.4 percent of home sales in August were short sales, Pikes Peak Association of Realtors figures show. During the same month in 2007, just before the national recession hit, short sales made up 1.8 percent of all local transactions.
Not everybody qualifies, however, said Tiffany Lachnidt a real estate agent with Re/Max Properties in Colorado Springs and who specializes in distressed properties.
Sellers must owe more on their home than it’s worth; demonstrate a financial hardship such as a job loss or divorce; and lack assets that could be converted into cash to make up the difference between the proposed short-sale price and the mortgage balance, she said.
But even for homeowners who qualify, the short-sale process can be a headache for buyers and a heartbreak for sellers, some real estate agents say.
Attorney Jina Koultchitzka agreed last year to buy a four-bedroom, 2.5-bath house in northeastern Colorado Springs and to pay the seller’s asking price of $350,000. The seller, who had received a foreclosure notice, had a loan balance of nearly $375,000, according to El Paso County Public Trustee’s Office records.
It took four frustrating months for the seller’s bank to approve the sale, during which e-mails and phone calls from Koultchitzka often went unanswered by the bank and a third-party representative working for the seller’s agent. Koultchitzka, who specializes in real estate law, was able to help the process along by talking lawyer-to-lawyer with the bank’s foreclosure attorney. Still, the bank waited until three days before a scheduled closing before it OK’d the sale, which left no time for additional negotiations or revisions to the purchase contract.
“I can just imagine what others are dealing with when you don’t have that kind of experience or determination to see the deal go to the end of it,” Koultchitzka said. “It can be very frustrating.”
Salzman, who represented Koultchitzka, also represented a banking executive who relocated to Colorado Springs and who sought to buy a home via a short sale. The irony? The executive’s bank was the lender on the home he was trying to buy, yet the deal still took several months to compete, he said.
Last month, Salzman said, one of his clients who was selling a home via a short sale barely managed to avoid foreclosure. Salzman’s client originally asked $605,000, then came down to $499,000. A buyer offered $450,000, and obtained a Veterans Administration-sanctioned appraisal that backed up the proposed purchased price.
But an employee handling short sales for Citicorp, which held the mortgage, refused to accept the $450,000 offer — even after receiving a copy of the VA appraisal. Salzman said he threatened to e-mail every member of the bank’s board of directors and tell them about the barrier erected by a rank-and-file worker. The next day, the employee OK’d the deal.
Some homeowners represented by Brian Maecker of Re/Max Advantage, however, weren’t as fortunate.
Maecker said a husband and wife he represented moved to suburban Chicago last year to take jobs, leaving their home behind to sell. The Briargate home was listed in April 2009 for $249,000, but needed work and sat for months without a buyer, Maecker said.
Finally, a buyer offered $205,000 for the home in June. A company representing the bank that held the mortgage took two months to consider the offer, then told Maecker in late August that the bank needed at least $239,000. And, the bank’s representative wanted an answer within three days.
“If we could have sold it for $239,000 over the last year, don’t you think we would have?” an exasperated Maecker said.
The deal died, and the couple lost the house to the bank at a foreclosure sale in early September. The house hasn’t been re-listed for sale by the bank, Maecker said. When it does, it will be added to the inventory of distressed properties that’s bogging down the housing market’s recovery, he said.
Maecker and Salzman say they can’t understand why lenders don’t have more and better trained employees to handle short-sale proposals. Faxes, loan documents and other paperwork for each short sale becomes voluminous; Maecker said he’s got files several inches thick.
“Why does it take 10 weeks for banks to give answers?” Maecker said. “What is so hard about saying ‘yes’ or ‘no,’ that this offer is too little or too much?”
Casey Clark, a real estate agent with The Platinum Group in Colorado Springs, said her short sale deals take an average of six months to get an answer from a bank on a proposed purchase price.
But if buyers know it might take months for a bank to get back to them with an answer on their proposal, they’re more likely to submit low-ball offers, Clark and Maecker agreed. As a result, short-sale properties become stigmatized, Maecker said, and home values of neighboring properties suffer.
"Many buyers will pass up a short sale", said Greg Luczak of ERA Herman Group Real Estate. "When they’re ready to purchase, buyers want a quick, easy and predictable process", he said.
“A short sale isn't quick or easy,” Luczak said.
Because of the time involved, Clark said she advises buyers to avoid getting emotionally attached to a home they like. Nor should buyers pay for a home inspection or appraisal until they know their offer might be accepted, she said.
“It dumbfounds me that banks are not accepting short sales,” Clark said. “At the end of the day, you would think the banks would want the negative assets off their books sooner, rather than incurring more costs of pushing it through foreclosure and all the process that it takes to get a bank-owned home sold.”
Banks and lenders acknowledge the problems, but say there are reasons for the delays. Five to seven years ago, large national banks that wind up handling most short sales had relatively small foreclosure departments, said Pete Lansing, president of Universal Lending in Denver and board chairman of the Colorado Mortgage Lenders Association. Now, they’re dealing with thousands of files that flooded their offices over just the past two to three years, and have never caught up, he said.
“It’s as frustrating for us,” as it is for real estate agents and their clients, Lansing said. Robert “Hutch” Hutchison, president of Adams Mortgage in Colorado Springs and first officer of the CMLA’s southern Colorado chapter, said the nation’s borrowing and banking system was designed decades ago to handle a relatively low rate of distressed properties.
“Five years ago, you could have gone to a regional office of a large banking institution and asked for their foreclosure department, and it would have been somebody in a corner office with a desk and a phone and they probably worked part time,” Hutchison said.
Lachnidt, of Re/Max Properties, said some of her colleagues need to share the blame. She said she’s seen incomplete short-sale proposals or inaccurate information submitted to banks by agents on behalf of their buyers.
Lansing and Hutchison also speculated that lenders feel they must be cautious. Some banks are leery that if they act too quickly on a short sale, they might sell a property for far less than it’s worth, Lansing said.
Since banks take a financial hit when they allow a property to be sold for an amount less than the mortgage balance, some might want to make their bottom lines look better by having short sales trickle out slowly instead of being recorded all at once, Hutchison said.
Early this year, the Obama administration added short sales to federal efforts to help troubled homeowners. Under terms of a new program, homeowners and their mortgage companies were offered incentives for completing a short sale.
Molony, of the National Association of Realtors, said the group hasn’t seen any “discernible change” in speeding up the short-sale process under the new federal program.
Last month, the association came out in support of a bipartisan bill introduced in the U.S. House of Representatives that would require lenders to respond to consumer short sale requests within 45 days.
“We have to do whatever we can to try and fix the problem,” Lachnidt said. “Everybody that I deal with, they’re in need. They need help ... I used to call it (a short sale) the least bad choice. Between letting your house go (through foreclosure) and doing a short sale, it’s the least bad choice of the two.” —
AT A GLANCE: FORECLOSURES AND SHORT SALES
Generally speaking, Colorado homeowners who miss three monthly mortgage payments receive a foreclosure notice from their lender, which begins a legal process that can lead to the loss of the property.
Under Colorado law, a home will be put up for sale at a Public Trustee’s auction 110 to 125 days after a foreclosure notice is filed. Those dates apply to residential properties. At a Public Trustee’s auction, the bank that holds the mortgage typically buys back the property, although third-party investors also buy homes with the idea of re-selling them.
Before the Public Trustee’s sale arrives, homeowners can seek to avoid losing their property by making back payments or working out a deal with a lender.
Many homeowners also attempt a short sale — selling the property for less than, or short of, the mortgage balance.
Banks and lenders must approve the short sale. Doing so means they accept an offer from a buyer that’s less than what’s owed on the mortgage. Yet, a short sale also means banks and lenders can avoid the hassles and costs of the foreclosure process.
For homeowners, a successful short sale means they avoid losing the property to foreclosure. But a short sale isn’t a panacea, some real estate experts say. Depending on how lenders report terms of the short sale, homeowners might take a hit to their credit scores after a short sale — although a foreclosure hurts far worse, experts say.
Also, depending on terms of a short sale contract, banks and lenders could come back years later and seek to have the seller pay the so-called deficiency amount — the difference between the short sale price and the amount that was owed on the mortgage at the time of the sale. Some real estate agents say banks and lenders rarely go after deficiency amounts because of the time and expense involved. Still, other real estate agents say they’ve seen it happen, while the debt also could be sold to collection agencies if banks don’t agree to waive their rights to go after the deficiency.