Now that our attempt to purchase a short sale property has come to a disappointing conclusion (see this item from Monday for full details), the catharsis of sharing a few parting thoughts on the subject seemed to be in order so as to, perhaps, help others who might be in the middle of trying to buy a short sale property or thinking about doing so.
In contrast to the plight of underwater sellers, there appears to be little positive to relate from the buyer’s end of the transaction which consists of varying degrees of uncertainty, frustration, delays, and disappointment in what is an emotional roller coaster ride that no one deserves but, as was the case for the two of us, people are all too willing to give a shot because the house that they really want became available as a short sale at a reasonable asking price.
But, there is good news for short sale sellers – those who borrowed and spent way more than they should have – in that you can probably live there in your own house rent free for quite some time while the banks, real estate agents, and doe-eyed buyers stumble through this process that only seems to serve one purpose – “extend and pretend” for the banks, delaying the realization of losses for as long as possible.
Sellers can play the “extend and pretend” game too. Ideally, you’ll want to try to get your mortgage modified for about a year and, after that fails, then see if you can keep your home listed as a short sale for another year, bolstering your personal finances by tens of thousands of dollars during that time since you’re not making any mortgage payments.
If you think I’m bitter, you’d be absolutely correct.
Here are a few thoughts from an unsuccessful buyer’s perspective that might be helpful to anyone involved in or interested in trying to buy a short sale property.
1. The Process is Entirely Unpredictable
Don’t listen to anyone who tells you that you should get x result in y amount of time. Real estate sales agents don’t make money unless they sell a house and they can’t sell a house without getting an offer, so, you are unlikely to get anything other than an optimistic outlook from agents who have not already been sufficiently tortured by going through the process of trying to get a short sale deal done.
The listing agent in our deal said that he just closed a short sale in about a week. Others will tell you that short sales can take over a year. If your listing agent doesn’t know what he is doing (see number 3 below) it could take much longer than it might otherwise and, since buyers are not familiar with this process, you are likely to be hopeful at first as we were.
Second liens, the bank’s ability/willingness to move forward, the government’s foreclosure alternatives program, the relationship between the bank and the homeowner, and a host of other factors make the short sale process entirely unpredictable. If you get a response to your offer from the bank within three or four months, you’ll have done well, just don’t expect that response to be the one that you were expecting after having waited so patiently.
2. The Process will Drain You, Emotionally
Prepare to be disappointed. The ups and downs will take their toll and after a few months or so you might tell your realtor what we told ours the other day – “At this point, we’re more interested in the process being over than we are in getting the house. If we get the house, fine. If not, fine. We just want this to be over”
Words do not do justice to how draining this can be on your psyche and, the sad part is that the banks couldn’t care less because the offer for your dream home might be file number 11,369 out of about 40,000 short sale offers that they are working their way through at the moment. Among the many other things that will forever change Americans’ views about housing in the aftermath of the burst housing bubble will be that hundreds of thousands of homebuyers like us will become just as jaded as the housing bubble losers have become (also see The Case Against Homeownership in this week’s Time Magazine).
Unfortunately, an innately optimistic set of responsible buyers will no doubt go down the road that we did, not understanding the realities of short sales and venturing forward only to learn the hard way as we did. That’s life I suppose. We were warned early on (not by anyone involved in the transaction) but did not heed those warnings, thinking that we didn’t have anything to lose. Little did we know that a little bit of our emotional well being has been lost over the last four months, a very bitter taste now left behind.
3. Without a Good Listing Agent, You’re Screwed
This item should probably be number one, however, for buyers who happen to get lucky with a listing agent who is experienced and good at short sales, it could be a complete non-factor. Put simply, if the listing agent doesn’t know what they’re doing, you’ll be screwed and, after each month that goes by, you’ll be more screwed, but you probably won’t realize just how screwed you are until you’ve become overly invested in the process.
In our case that was when we entered month five.
A reasonable guess might be that half of all failed short sales are due to the listing agent being unable to effectively deal with the system that banks have put in place to handle their short sale volume and, more importantly, the listing agent being unable or unwilling to effectively communicate the progress that has or has not been made to the buyer’s agent and the buyer who, when they reach their breaking point, ultimately throw in the towel as we did the other day.
The bank – listing agent -buyer’s agent – buyer chain of communication is, basically, designed to fail. If you can get a better read on how the bank – listing agent part of this relationship works, then, you might at least know to pull the plug early rather than later.
The most important thing to understand about the entire short sale process is that the listing agent is key to being successful. If we had known how incompetent our listing agent was earlier, we’d have been long gone by now.
4. You May or May Not Get a Bargain
If you thought that short sales sell at 5 to 8 percent below “market” price, think again. Depending upon your local market and the difficulty in determining fair market value, your fate may not lie in the hands of the bank or the listing agent but in the palms of a hungry real estate agent who was paid $100 to provide a BPO – Broker’s Price Opinion.
The bank doesn’t know anything about the house that you are trying to buy – they are located hundreds or thousands of miles away. Whether or not there are comparably priced homes that failed as short sales and will emerge as bank owned properties in the months ahead or how sales have virtually stopped after the homebuyer tax credit ended with dozens or hundreds of sellers having hugely inflated ideas about what they can get for their property that is now on the market probably won’t make any difference at all because, in the end, the bank looks at the BPO number and then they make a counter offer.
In our case, the first aborted counter-offer (see the update from August) that was based on the first BPO in June was about $20,000 below the asking price and, last Friday, after another BPO was completed last month, the counter-offer was raised by $19,100, to just $900 below the asking price.
If you happen to be lucky enough to get the bank to respond to your offer within the first four or five months, understand that, unless the home’s value can be correctly valued by a monkey (e.g., like condos with lots of recent comparable sales), the agent providing the BPO can screw you just as badly as the listing agent.
5. Banks are Heartless and Evil
While you may think that there is a real person on the other side of the negotiating table at the bank, you should be disabused of this notion very early on because, at the other end of the deal is a banker. Worse yet, it is a banker who is doing the worst job in banking – realizing losses on a grand scale for his employer.
This is not the sort of bank job that earns big bonuses and, by and large, they are dealing with two realtors who are trying to make sales commissions of thousands of dollars along with a buyer who wants to get a deal on a house, so, you too might become heartless and evil if you were doing that job.
As a buyer, you really want to be dealing with a motivated seller and, one thing that has become crystal clear to me over the last four months is that, despite the attractive asking price (again, see item 3 above), banks are not in any hurry to realize losses any faster than the current snail’s pace and, unfortunately, that’s not going to change anytime soon.
Short sales appear to be phase two of the bank’s “extend and pretend” game that is portrayed as trying to do something helpful for struggling homeowners. First there were the various loan mod programs that put things on hold for about a year while the banks continue to carry these assets on their books at full value as they borrow at nearly zero percent interest and buy Treasuries that yield a few percent more.
Then comes phase two – short sales -where another year is added to the amount of time that banks can delay realizing losses as they work slowly on the growing backlog of short sale offers. Of course, short sales are a pretty sweet deal for the bank because, instead of foreclosing on these properties and then having to maintain them until they are sold, the homeowner is living there rent free, keeping the place in shape to show at a moment’s notice – a relative win-win for the bank.
That’s the real lesson here – for those banks that were good, big, or lucky enough to have survived the 2008 crash, everything seems to be a win-win.