Over the past few years there have been a rising number of distressed sales not only on the coast, but throughout the country. While the situation isn’t as bad here as elsewhere, California ranks as one of the highest states in terms of foreclosures.
Distressed sales fall into two basic categories; short sales and bank-owned (also known as Real Estate Owned). A short sale is a request by a homeowner to sell his home for less than the debt owed on it because the current market value has declined to an amount below the value of the mortgages. A REO is when the bank completes the foreclosure process and owns the property.
For a bank to consider a short sale, the homeowner must fill out a packet describing his hardship and listing all assets and liabilities. The bank will also do an appraisal to determine its current market value. Where things get frustrating is how much time this can take because you are dealing with a large bank bureaucracy that is both short staffed and overwhelmed with a high volume of requests.
Several other complications are that institutions holding the notes on a home may have bought and resold them many times. Your bank, that originated the loan, may be getting a service fee to collect payments and pass the money on to the institution that bought the note from Wall Street or Fannie Mae. So any request for a short sale has to find its way to the end investor for approval. This also takes time.
Where things get complicated is when there are several mortgage holders. Here the junior note holders will also have to approve their discount on the loan. Then there will be a discussion between all lien holders about not only how big a loss they will take but how this will be divided. The first mortgage holder will want the junior holder to take the large share of the loss because the foreclosure process will wipe out entirely the junior debt holders. Of course if the loss is too great for the junior lien holder, there is very little incentive for to cooperate so he will just sit back and do nothing and let the first lien holder incur more losses.
You can see how this process can become very time consuming with no certainty of success. Oh, I also forgot to mention that the bank may think the home is worth much more than its listed for because it wants to minimize its loss from the short sale which includes unpaid property taxes and a real estate commission.
This also means that many Realtors don’t want to deal with these because the process can easily drag on for many months with no guarantee of a sale at the end. Most people want to buy a home and move in and get on with their new lives — not deal with some person who is having financial problems and spending months waiting to see if they ever get it.
It’s impossible to make broad generalizations covering all short sales. Some agents had their clients do all the homework up front and had extensive conversations with the lender about the process and what they will consider. Others haven’t done anything, which means many more months of uncertainty for prospective buyers.
Distressed sales are becoming a factor and actually account for more than a quarter of all our sales this year. In fact, two of the three highest priced sales this year were short sales that took a real long time to approve. There are also many homes at the low end that have been short sales for well over a year. When you see properties like this, you have to wonder if it will ever happen.
While these can possibly be good opportunities, the uncertainty makes them potentially not worth the hassle. You really need to find out the specifics, including numbers of lien holders and where the seller is in the process with their lenders about an acceptable price. Sad to say many won’t sell as a short sale and just let the bank foreclose and deal with it later as an REO.
Steven Hyman is the broker and owner of Century 21 Sunset Properties. He can be reached at 726-6346 or at www.century21sunset.com