Short sales for desperate sellers, patient buyers

As the housing crisis deepens, more desperate homeowners are trying to sell their homes for significantly less than what they owe, often listing the properties well below market value.

In these transactions, known as short sales, the seller avoids foreclosure while the bank usually forgives the debt gap between what is owed and the sale price.

But short sales can take months to complete — if they're even completed at all.

To make them happen, distressed sellers and their brokers must navigate bank bureaucracies to get approval, a stressful and confusing process that often lets deals slip through the cracks of the housing crisis. Very few short-sale offers turn into purchases.

"We are seeing about 15 percent of the contracts actually close," said Shelly Gallichio, an associate broker with Long Realty Company. "The others have either been foreclosed on or loan modifications are coming into play."

Despite the long waits and failed bids, short sales have a potentially huge upside: Distressed sellers can avoid foreclosure and might take less of a credit hit, lenders can get some kind of a return without having to take over properties, and buyers can score cut-rate deals.

All of which begs the question: Why are short sales so hard to close?

"The short-sale process is much more complex than the traditional buyer-seller transaction," said Gwen Oberg, vice president of Wells Fargo's loss- mitigation group. "Not only is there the homeowner, the buyer and the agents, but we have to bring in now the investors, private mortgage insurance companies, and junior lien holders" to approve a deal.

And by the time that happens — if ever — many prospective buyers have moved on.

No short-sale shortage

Short sales are not new, but they are a unique outgrowth of the housing crisis.

During better years, when housing values were on the rise, homeowners facing foreclosure would most likely sell for a slight profit and move on. It was relatively rare to see an owner upside down, meaning that person owed more than his property was worth.

But in a market with declining values, at a time when jobless claims are rising, short sales have become increasingly common.

As of early last week, the Tucson Association of Realtors estimated there were about 1,500 short sales out of 8,857 total listings. But that number could be higher if brokers haven't advertised a property as a short, and it doesn't include people trying to sell short on their own.

By comparison, foreclosures, which grab most of the attention and sell much faster, make up 856 listings.

One of those short-sale listings is 1215 E. Edison, a charming two-bedroom home just north of the University of Arizona.

With its fresh tile, new cabinets and central location, the home could be ideal for a young family or as a student rental. But for the last four months or so it has sat vacant while the lender, IndyMac Mortgage Services, considers an offer.

And that's where things get curious.

The home was listed for $159,000, and the offer under consideration was $175,000 in cash from builder John Lee, who owns Rincon Investments LLC.

"I looked at it and figured it was a fair market value," Lee said of his offer. "If I was dealing with a person, or I was dealing with anybody who can take action, it would be a done deal."

Indeed, documents from the Pima County Recorder's Office show the seller, who is based out of California, owes about $188,000. So, Lee's offer isn't that short, and it's well above the home's assessed value.

While Lee waits, the broker listing the property, Charlie Spaulding, of Long Realty, struggles to connect with the bank.

"I have contacted the bank 32 times . . . and we still don't have an answer," Spaulding said. "They tell me they are just overwhelmed, and they are understaffed."

Efforts to reach IndyMac Mortgage Services, which is now OneWest Bank Group, were unsuccessful. But several large banks said they have added staff to handle the mounting number of short-sale requests, although they wouldn't say how many requests they are processing or how large their staffs are.

"We have literally tripled the staff of that group (loss mitigation) over the last two years," said Tom Kelly, a spokesman for JPMorgan Chase.

Kelly and Oberg, of Wells Fargo, both said the biggest reason for the lengthy delays is getting approval for short sales from investors, who own most of these loans in the secondary market. Things get even more complicated if there is a second mortgage because that lender also must approve the sale. And, of course, the lenders have to evaluate the agreed-upon price.

"Sometimes there are things that complicate that (decision), and there are things that we just can't help," Oberg said. "The offer might be too low. The investor might not accept."

For a prospective buyer like Lee, these kinds of delays make no sense. What he sees is a perfectly good house that has sat vacant for months doing nothing for the neighborhood, lender or investors, while its rosebushes out front die.

"At this point I really don't care," he said. "I've kind of moved forward."

Lee's experience is a curious part of the short-sale process. Usually the first contract, which allows the approval processes to begin, is not the one that closes. And it's very likely the seller goes into foreclosure as the process starts over.

"Very frequently we do not close the deal with the first contract, the buyers run out of patience," said Don Vallee, a Re/Max broker specializing in short sales. "Most people who want to get in the house aren't going to wait 120 days, 150 days. We try to make sure we have backup offers in the file."

Seller strain

While a prospective buyer, like Lee, might see a missed opportunity in the short-sale process, the long waits can create serious strain for sellers feeling the pressure of a pending foreclosure.

"There's a lot of tension in the process," Vallee said. "What the banks will do is they will leave that foreclosure out there to keep the heat on you."

Carol and Mark Campbell recently sold their Marana home short, but it took months and several offers to get there.

The two had bought their home at 7959 N. Rondure Loop in Continental Reserve in 2003 for $237,335, and then they watched as housing prices soared. Homes began selling in their neighborhood for more than $400,000. They refinanced and put the money toward an upscale patio add-on, but they were still well below area values.

"We always felt kind of safe because we were still under what everybody else was selling theirs for," Carol Campbell said.

Mark Campbell used to direct American Home's furniture stores in Arizona, earning a salary that was roughly six figures. But American Home filed for bankruptcy in November and he lost his job soon after.

Faced with a monthly mortgage payment of about $2,350, he called his lender, GMAC Financial Services. They told him they couldn't help until he went into default for three months.

"I said, 'Are you kidding me? I am calling you to see how I can be proactive on our home,' " Mark Campbell said.

They put their home on the market in January for $369,000 hoping to get out from under it. There wasn't much interest. Meanwhile, they continued making payments for three months. Then the payments stopped and the short-sale process began.

They dropped the price to $215,000, and a stampede of prospective buyers followed. It seemed one would show up every 15 minutes.

"A lot of them wouldn't even call ahead," Carol Campbell said. "It was like, we do live here. It's still our house. We kind of resigned ourselves to the fact that we are losing it, and it's not really their fault that they were looking for a great deal."

But the experience felt ugly.

Their highest offer was $260,000, which they submitted to GMAC. It took about three months to have the deal approved, but by then the buyers had moved on. So, they had to start all over again, and recently closed at $235,000.

"I was tempted to sell the landscaping out of the yard. I was ready to roll up the artificial grass we put in that cost us $8,000," Carol Campbell said. "I was ready to do all that, take all the blinds, do stuff like that just to be spiteful like that. But we didn't because that's not the kind of people we are."

Jeannine Bruin, spokeswoman with GMAC Financial Services Mortgage, couldn't speak to the Campbells' experience, but she acknowledged the short-sale process has plenty of inefficiencies, which GMAC is trying to improve.

"I can understand on the surface how it can appear illogical for the investor not being more timely with accepting the first bid," she said. "But this is due to the stages of negotiation between the servicer and the investor."

The Campbells are adjusting to life after the short sale. Mark Campbell has a real estate license and continues to look for work. Carol is in nursing school at Pima Community College.

They now live in an apartment on the west side, which they chose largely because of a month's free rent and a $99 move-in special.

They've sold or given away many of their belongings. They might lose one of their cars. The change has been hard on their two young daughters.

"It's not ideal, as you can see," Carol Campbell said. "But whatever, you know, it's temporary. And the way we looked at it was it was tough to lose our home, but it's tougher to lose everything."

A happy ending

Despite all of their challenges and heartache, short sales can bring about a lot of good.

Emily Areinoff and her husband, Michael, recently closed on a three-bedroom home in Poets Corner in midtown for $350,000.

"We just loved the house, and it happened to be a short sale," she said. "We wanted to buy one and take advantage of the tax credit."

The process was smooth, which Areinoff said was mostly because the sellers had strong, clear communication with the bank. "They had all of their ducks in a row," she said.

It took two months to close, and Areinoff said she and her husband would have waited one more month before looking again. And while she acknowledged it was a little sad to buy from people facing foreclosure, in the end it was probably a good deal for everyone involved.

The sellers are free of the house, the bank gets something out of the deal, and she and her husband have a new home.

"I do think buying a short sale is such a better alternative to going into a foreclosure, and in another month they (the sellers) would have," Areinoff said. "It's just a shame that the banks aren't moving faster."

The Anatomy of a short sale

1. Upside down.

A short sale will only work if the property owners are upside down, or owe more than their property is worth. Borrowers will have to prove to their lenders that they cannot meet their obligations and the agreed-upon sales price is at market value.

2. Pursue a loan modification.

Borrowers who want to stay in their homes should pursue loan modifications before turning to short sales.

3. Contact the lender.

Borrowers need to gain approval from their lenders. They will need to send a letter of authorization to their lenders, giving permission to speak to others about the loan. This is where they would contact an agent.

4. Make your case.

Borrowers will have to submit an extensive loan mitigation packet. Proof of income and a hardship letter will also have to be submitted to the lender.

5. Find a Buyer.

Once a prospective buyer and seller agree on a price and terms, a copy of the proposed deal is sent to lenders for approval.

6. Wait.

It can take months for a decision on a short sale to be made, especially if more than one lender is involved. There is no guarantee a lender will approve a short sale.

7. It's a deal.

If all goes well, the seller will avoid foreclosure and likely take less of a credit hit, the buyer will likely get a great price on a home, and the bank will get some return on the property without having to take it over.