Thursday, October 1, 2009

Short Sales: Equity Takes Its Toll

foreclosed houseWSJ: "Are Distressed Homes Worth It?"

Distressed properties are leading to frayed nerves. Short sales – also called a “short payoff” – when owners are “underwater” and owe more on their houses than they’re worth – are proving to be the thorniest transactions these days, causing many buyers agita.

Foreclosures (bank-owned properties) have stolen the spotlight with mad auctions and whole tracts sold off in bulk making it seem that distressed properties trade with ease at lightning speed.

But short sales are often taking six months or longer. There is an epidemic of sellers who have no equity and no incentive to pay their mortgage or leave their home. Couple this with understaffed banks that are expending resources to write off bad loans. Throw in lenders that have underwriting requirements that are absurdly stringent and you have the challenging formula for a short sale.

No Pain, No Gain

Wealth is hard-earned and short sales are a testament to buyers’ ability to sustain what can often be a long and frustrating process.

Home buyers are finding that the battered real-estate market offers just as many opportunities for headaches as for bargains.

Bidding wars are erupting for the lowest-priced foreclosures. Experienced investors with cash are elbowing aside first-time buyers who need mortgages. And banks generally sell property "as is," without the defect disclosures required of other owners. Short-sale buyers, for their part, often face delays of weeks or months as they wait to hear back from lenders—and from the institutional investors who bought securities based on the mortgages.

Distressed-property buyers also often have to cope with the fallout from the ruined lives of previous owners, such as vandalized properties and liens from second mortgages, taxes, unpaid water bills, homeowner-association dues and court judgments. For all that, final sale prices often aren't significantly lower than average in some areas, because the foreclosure glut has also driven down prices for sellers who aren't in default.

Short sales … are particularly complicated. Lenders require detailed information about both buyers' and sellers' finances, and homeowners generally have to prove hardship. The entire package of documents is scrutinized not just by lenders but by the mortgage investors. Second- and third-lien holders frequently hold up transactions demanding a larger share of the settlement. The average transaction takes four to six months or more, agents say. [Wall Street Journal]
Buyers Make Trade-Offs

If the right constellation of bank-seller-financing-lender comes together, buyers can get a deal. However, some short sales will unravel, and a few will even flame out. Here are some advantages and disadvantages of short sales:

  • Opportunity to buy a distressed property at an under-market value
  • Strong offers with large cash component can command low prices
  • Reduced pool of buyers, many sidelined by the short sale process
  • Minimal earnest money deposit means low risk
  • Low pricing attracts multiple offers and bidding wars
  • Purchase contract is non-binding, terms can change
  • Non-cash buyers are edged out by capitalized investors
  • Seller, lender, multi-party negotiation can delay process
  • Seller may neglect property
  • Lack of information and byzantine process can be time-consuming and frustrating
  • Extended timeline forces buyer to forgo other opportunities
How can buyers prime themselves for a short sale? Have a solid relationship with a lender and a financial package that shows the selling bank you can close.

Also, it may be months before you get any news – practice the virtue of patience, and remember that every party to this transaction is feeling your frustration.

And while you keep your eyes on the prize, keep your eye on the market. Other opportunities may come up that are better than your short sale – without the grief.