Short Sales Often Not So Sweet

This LA Times story from the weekend highlights the difficulties of buying or selling a home as a short sale.  It applies in all times, but is particularly tough in today’s imploding housing market.

A short sale, to recap for readers, is the sale of a home for less than the amount the seller still owes on it.  The trick is that the lender has to be convinced that the market for the home has declined markedly and permanently, that no better offers are likely, and that the buyer can no longer keep up the payments – the only alternative being foreclosure.  Then, the lender may be willing to accept a loss rather than foreclose and wind up with not only a certain loss but also a property on their books that will incur even more expenses for maintenance, marketing and property taxes.house4sale.jpg

Like foreclosed properties, short sales have a reputation for possibly being great bargains, and many buyers actively seek them out, hoping to score big discounts off “market price” at the expense of disadvantaged banks and other lenders. 

When the stars align just so, that reputation can prove to be deserved, and the transaction is a blessing for both the seller, who narrowly escapes financial ruin (destroyed credit rating), and the buyer, who in fact may get a good buy, undercutting the market 10% or more.  Only the bank takes a hit, and few outside parties sympathetically feel their pain.

But far more often than not, that scenario turns out to be a fairy tale, a dream that would-be buyers and sellers both buy into, but banks – who ultimately have the decision-making power – shatter with a cold dose of reality either by rejecting the offer outright, or by ignoring or delaying it endlessly.

The Times’ story illustrates many of the pitfalls and illusions inherent in the short sale process.  If you are considering this option either as a seller or a buyer, I urge you to read it to dispel any unfounded notions you may have.

But the story does offer some hope of success when pursuing the short sale option, and so do I.  Mine stems from personal experience during the bursting of the last regional real estate bubble in the ’90s. 

I bought a modest house in North Hollywood at the top of the market in the early ’90s.  Shortly thereafter, Southern California began experiencing an economic downturn and distress in its signature industries, such as aerospace.  Serious job losses contributed to the decline of housing prices.  Then, in 1994, the Northridge earthquake dropped a seismic shock on top of an economic one.  My home, like countless others, suffered physical as well as financial damage.  My house was deep underwater; my 10% down payment had clearly vanished along with any other equity I’d built in the house, and then some.

I desperately searched for a way out, and from somewhere, the unfamiliar “short sale” concept appeared on my radar.  But my mortgage lender, G.E. Capital, would have none of it.  They told me I would have to continue making payments as agreed, no matter what.   They were not based in Southern California, and seemed to have no recognition of real estate realities here. 

Then someone put me in contact with a real estate attorney who claimed to have expertise and experience in negotiating short sales.  His advice:  stop making my payments.  It’s the only way to get the lender’s attention and put some teeth in the negotiation with them, he said.  I was hesitant and fearful for my credit record, but I was also desperate and, frankly, almost broke.  I stopped writing checks to G.E. Capital, paid other bills instead, and put the house up for sale with a local realtor.

Two or three months later, I presented G.E. with the offers I’d received on the house.  Apparently, they were convincing evidence of its decline in value.  And my failure to keep up the payments must have convinced them that I was no longer in a position to service the debt.  The bottom line:  G.E. accepted the best offer, and a significant loss.  The foreclosure process was halted, and my credit record was spared the most damaging hit. 

There’s no reason to believe that lending institutions are any less obdurate today, or disinclined to negotiate with their borrowers.  But there’s every reason to believe they are still open to the same tools of persuasion.  I strongly recommend using them when necessary.

  • Jonathan Christopher

    The truth is most people believe that a qualifying financial hardship is enough convince a bank to accept a short sale. It can be enough at times but nothing motivates a lender more than the loss of money. Once an asset becomes non-performing, a bank becomes highly motivated to remove it from the books.
    Jonathan Christopher of Short Sale Way

  • http://andI Me

    Im in the process (in escrow) of a sale . The owners bank (two banks) one has signed the other has given a verbal OK.

  • http://andI Me

    What does this mean. Everyone guarantees me everything is OK but I worry. Should I?