Short Sales: Most Times, Everyone Comes Up Short...

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I heard an interesting statistic the other day: Only twenty percent of all short sales that have been approved by the banks ever closes escrow. 

Let me start at the beginning.  A short sale refers to a home or condo that is being sold, where the purchase price being paid by the Buyer (the market value) is less than what the Seller owes on the property.  When a Seller places their home on the market and they know that the value is less than what they paid (selling for whatever reason--wanting to avoid foreclosure, needing to sell to relocate for a job transfer, etc), then they disclose that this is a short sale to prospective buyers.  Ideally, they have spoken with their lender, and working with their agent and lender have received approval for selling their home and having the bank willing to participate in the short sale.  Bonus points for agents, sellers and banks who agree on how the transaction will work and for getting speedy approval for the sale.

What usually happens is that short-sale properties are placed on the market.  They sit for weeks while the listing agent collects offers and sends them along to the bank.  At some point (often several months later) the bank will approve an offer.  The Buyer of the approved offer may no longer want the property or they may no longer want the property at the approved price.  More time passes while the Buyer and Bank renegotiate (usually downward).  The Original Approved Buyer and the Bank will either reach a deal, or the property will go back on the market.  

Assuming the deal was reached.  The Original Approved Buyer begins their escrow period and starts their due dilligence.  They will hire property inspectors and start the loan process with their preferred lender.  Assuming they won't face any difficulties with their appraisal or loan approval, and they are willing to accept the condition of the property, then it is likely that the deal may move forward.  But remember, according to a recent survey of SF escrow companies, only 20 percent of these deals that are in escrow ever close escrow.  

[Sometimes appliances and fixtures disappear during this process, too, so what the Buyer thinks they are buying may not be what they are actually purchasing when the deal is done.]

According to an article in this morning's SF Chronicle, although foreclosures in SF City and County have declined by 3.5% in the last year (2nd Q statistics, year over year), the number of Notices of Default, the first step in the foreclosure process are up by alomost 41%.  This is probably because of people not able to afford their loans as they adjust upward.  Or perhaps because homeowners have lost their jobs or taken paycuts given recent changes in the economy. 

When a homeowner can't afford their loan, it is probably best for the bank to work with them to modify it.  Why not reduce the monthly payment so that the loan amount is affordable, and extend the number of months that the homeowner must make payments beyond the 30 year mark so that the bank gets repaid?

If the homeowner must sell (perhaps lost their job in this economy and must relocate for work, or divorce or some other reason that forces them to sell at a loss), it might be better for the Bank and their shareholders and the US tax-payer (if TARP relief funds are invested here) to approve short sales quickly and allow the new Buyer to complete the transaction quickly.  The consequences of not fixing this situation are systemic: the homeowner will likely let their home go to foreclosure, the shareholders of the bank will suffer losses, the bank may fail, or since their funds are tied up in a real asset (a home) may not be able to lend money to another worthy borrower (an entreprenneur starting a new company that may create jobs, perhaps?, the homeowner may end up in foreclosure and homeless, crime in the neighborhood might go up.  Well, you get it.

[I started reading the comments attached to the article.  Many are venemous towards the homeowners profiled in the article.  They tried to get their loan modified when it adjusted.  They couldn't. Then they faced other hardships.  While I do strongly believe in personal responsibility, I think that our society and our economy will return to economic health and vitality when we move to fix some of these problems quickly. And, remember, the homeowners credit will be impaired for a very long time if they don't repay their loan in full or if they face a foreclosure.]