It seems like it’s a lot easier to buy a house today than it was just a few years ago. Home prices have plummeted, more homes are on the market, and fewer people are looking to buy a home due to the sluggish economy. Washington D.C. has made buying a home easier by extending through 2010 the maximum dollar amount for “conforming loans,” which should increase availability of loans for buyers in expensive real estate markets such as New York, Chicago, and the San Francisco Bay Area. Pres. Obama also just signed an extension and expansion of the first time homebuyer tax credit, which now applies to anyone who hasn’t owned a primary residence in the past three years and includes a new $6,500 tax credit for buyers who have lived in their home for five years or more.
Unfortunately, for each barrier that comes down, it seems another is quickly erected. Many potential homebuyers are getting lost in the black hole known as “short sales.” A short sale is a sale of a home for less than the combined debt owed on the home. Because the mortgage lenders are not getting fully repaid, the banks need to approve the sale in order for the sale to go through — a process which can take months and dozens of follow up phone calls, emails, and faxes. Many sellers have been turning to short sales because a short sale does much less damage to one’s credit rating than allowing a home to go to foreclosure. I often tell my clients the difference between a short sale and a foreclosure is: a person who had an “A” credit rating may go down to a B or a B- with a short sale; a foreclosure will take you from an “A” credit rating to a D-.
One young family, the Thomases of Santa Rosa, was recently profiled in a newspaper article because of the difficulty they’ve been through trying to get a short sale approved. The couple have one young son and another child on the way, and six months ago his parents put in an offer to buy a two-story house in Santa Rosa, California for the growing family. The parents bid $315,000, far less than the $550,000 paid for the home by its previous owner in August 2006. Still, the seller wanted to sell them the home, and the buyers were ready to buy, but they’ve been waiting since May of this year for an answer from the banks as to whether they will allow the sale to go through.
Unfortunately, the Thomases’ story is becoming more commonplace. Many banks are either unable or unwilling to deal with the massive number of homes which are “under water” with owners who can’t afford the home anymore and want to sell.
Before embarking on a short sale, there are a few things you should know:
* Because short sales are so difficult and require so much additional work, just 45 percent of short sale agreements end in a sale.
* Short sales can take much longer than non-distressed properties. Short sales take an average of 172 days — almost six months — from listing to actual sale.
* Since the passage of SB 94 last month, it has become harder for buyers or sellers in a short sale to find an attorney willing to take them on as a client. However, SB 94 does not prevent attorneys from advising buyers or sellers in a short sale, and obtaining competent legal advice is highly recommended.
* When a short sale involves two lenders (a first mortgage lender and a second mortgage lender or home equity line), then the short sale will require the two lenders to approve the sale price. The second mortgage lender can hold up the entire sale by refusing to release their lien, even though they would be wiped out entirely in foreclosure. As a result, second mortgage lenders commonly accept 10 percent of the home’s value in a short sale.
Whether you’re buying or selling a home through a short sale, you will need a tremendous amount of patience and a willingness to follow through. It is a good idea to consult an experienced real estate agent and a real estate attorney before attempting a short sale.
John Corcoran is an Associate with Plastiras & Terrizzi law firm in San Rafael, California (Marin County). He advises clients on real estate matters, small business issues, estate planning, and general civil litigation. He may be reached at firstname.lastname@example.org or (415) 472-8100 x211.