The dream scenario for most buyers these days is finding a foreclosure or short sale property. The fantasy is this: The buyer makes a lowball offer on a house that’s upside down in value—that is, worth less than the value of the original loan—figuring the bank is eager to cut its losses and unload the property as quickly as possible, wait a few weeks for the offer to be accepted, then move in.
Except it rarely works like that. More often than not, that initial thrill of finding a sweet deal on a property fades as buyers are forced to wait between four and six months to find out whether the bank is even considering the offer, let alone approving it. And it’s an equally long, nerve-wracking process for sellers too. Compared to non-distressed real estate transactions, which typically takes 30 days, six months is an eternity.
What’s the holdup?
To understand why short sales take so long, it helps to understand what a short sale is—it’s essentially a request to a bank to take a loss on a property loan.
How it works: The homeowner initiates the short sale after determining they are “under water”—meaning, the property is worth less than what is owed on it—with the loan. They approach the lender, who has one of three options for dealing with the situation.
Number one, the lender may try to work with the homeowner to help them stay in their home (and keep paying the monthly mortgage). “The owner may be engaged in some kind of modification effort,” says Vickee Adams, a spokesperson for Wells Fargo Home Mortgage. “They may be trying to find a new job. They’re doing everything possible to stay in their home, so we try to work with them.” The bank may even forgive the debt difference between what is owed and what the house eventually sells for—if the numbers are comparable.
Number two, the lender may work out a payment plan with the homeowner until the difference is paid off. Or number three, the lender/bank places a lien on some of the homeowner’s assets for the amount of money still owed. Each case is unique and different. Each one takes time. But in all cases, the bank typically puts this transaction at the bottom of its to-do list since (understandably) it doesn’t want to lose money on its investment.
Another issue slowing the process is whether there is a second lien on the home, typically a home equity line of credit, or HELOC. Since the lender is already being asked to take a hit, it is reluctant to give much to the second lien holder. A typical scenario is the secondary lender requests a settlement of 10 percent on the loan amount. Let’s say it was for $50,000, so it wants $5,000. But the primary lender, already feeling the burn, is only willing to pay $3,000. Both sides draw a line in the sand, slowing if not halting the process altogether.
Then there is the complexity of the loans themselves. Short sales are usually handled by a bank’s loss mitigation department, which is already bogged down with a backlog of similar proposals due to the housing bubble gone sour—every prospective buyer is looking for a foreclosure or short sale house these days and expects to pay bargain basement prices. It can take months for an already taxed department to carefully evaluate each proposal and examine the property and do the research on the neighborhood in question, as well as finding out if the seller really can’t make the monthly payments.
Bottom line, most banks don’t want to act because they’re being asked to lose money; they end up sitting on offers for as long as possible in the hope that a better one comes in.
But it’s a catch-22, because usually in a short sale, the homeowner leaves the house intact. If the house slips into foreclosure, it’s not uncommon for homeowners, humiliated by the turn of events and angry at the lender for dragging their feet, to strip the house—cabinets, light fixtures, doors, free standing fireplaces—right down to the baseboards, thus causing the bank even more grief than if it had been handled as a short sale.
Now the bank is forced to list the property for even less than its already discounted value, because—even if it’s a bargain—not many prospective homebuyers are enthusiastic about buying a gutted house.