Good Morning from Chicago, folks!
Five years ago, as the Chicago Real Estate Market was rambling robustly, in Seller Market Mode, a colleague of mine in Cincinnati mentioned to me he was supplementing his own business by helping homeowners in financial trouble. During this dinner conversation, I first heard the words Short Sale, and found out what they meant.
In a nutshell, a Short Sale occurs when a property sells for less than what is owed on the outstanding mortgage or mortgages, and the lenders agree to settle for a reduced payoff to avoid foreclosure.
Back in those heady days, Short Sale Transactions were few and far between. Equity was ever-growing, and refinancing money was easy to come by. Get into a financial tight spot - sell the offending real estate, and move on, likely with a few bucks to spare. Or, name your own Home Equity Line of Credit (HELOC) limit, and re-fi. Problem solved . . . yes?
Well, as we understand now . . . NO!
The skyrocket of equity stopped, and, in many cases, fell toward earth, often crashing into the ground. Re-finance money - haah! Falling home prices often make it impossible to come by.
And the processing of a short sale transaction, once an embarrassing but somewhat civilized affair, has often become a long, long nightmare, as banks with reduced levels of administrative staffs now handle tens of thousands of new short sale requests every month.
For the distressed homeowner, Short Sales provide a far more attractive alternative than simply walking away, and enduring foreclosure. A completed short sale provides a blemish on one's credit score, but not the seven-year death penalty on borrowing that a Foreclosure or a Deed in Lieu of Foreclosure would result in.
Should the lender instead foreclose on the property, their potential income from a foreclosure sale is far less than if the homeowner sells short while occupying the home. Vacated homes must be weatherized and secured, and often fall into disrepair, fetching a far lower price when they eventually do sell.
Today, the process is often a long waiting game - with emphasis on the word WAITING - as reported by Mary Ellen Podmolik in the September 20th Edition of The Chicago Tribune. The largest lenders, including NC-Based Bank of America, often take nearly two months to even receive a file for review, another two months to actually review the file by a Loss Mitigation Specialist, and several more weeks to finally approve a sale.
Often times, after weeks of consideration, the lender counter-offers the patiently-waiting buyer. This, in and of itself, often squashes the deal.
These days, Buyer's Real Estate Agents often stay away from Short Sale Transactions in droves, out of fear that they will never close. Those that do sell often fail to close, as buyers often lose their patience for the long wait, and walk away from the deal. And when short sales in process often fail, the next step for the unsuccessful seller - foreclosure!
Some Real Estate Practitioners tounge-in-cheek postulate that banks are DELIBERATELY keeping the Short Sale Approval Process slow - so that homeowners in just a bit of financial trouble become afraid of investigating a short sale, and stay away from it. Likely, not the intent of the lenders - but it seems to have become a far-too-common outcome!
Here in Chicago, our Team presently has two eager first-time homebuyers awaiting Short Sale Approval, in advance of the November 30th Closing Deadline for the $8,000 Federal Income Tax Credit for First Time Buyers. Both buyers have been waiting patiently for an approval since early July. Neither have been bank approved, or even assigned to a bank loss mitigation specialist, after more than eight weeks of waiting. If this waiting game continues too far into October, both buyers are likely to walk away.
During the Second Quarter, 2009, 14% of all homes sold nationwide were Short Sale Transactions, according to a survey by research firm Campbell Communications. Many short sale transactions involve first-time homebuyers. Here, the fact the buyers have no current home to sell affords them the flexibility to endure long approval times, without the financial burden of the need to release equity in their current home in order to buy a new one.
However, Campbell estimates that two out of three Short Sale Transactions never get to the closing table, so a buyer and seller's time investment is often for naught.
Typically, the short sale approval process involves bank and investor review of a thick package of documents pertaining not only to the potential buyer, but also the financial condition of the current owner. In addition to the contract for sale, along with their estimate of net, the lender reviews the sellers bank statements, pay stubs, tax returns, financial worksheet, as well as a Hardship Letter written by the seller, where they describe in brief how they got into tis financial predicament.
Campbell Communications estimates it takes an average of 9.5 weeks to get a response to a Short Sale Offer from the bank - and longer to get that offer approved!
Some lenders, such as Wells Fargo Home Mortgage, are trying to slash that response time. For loans they service, their current average response has been cut from 60 days, to 45 days, according to Tamara Swain, Senior Vice President of Real Estate Owned and Short Sales for Wells Fargo. Ms. Swain wants to slice approval even quicker - to no more than 20 days.
In Washington, President Obama and U.S. Treasury Secretary Tim Geithner understand the frustrations and long time lag with short sale approval. Last Spring, they began to discuss proposals for streamlining approval, and incentivizes banks and investors who accept Short Sales. Months later, however, these proposals have made little headway.
So, in September, 2009, the process continues slowly, buyers get discouraged and often walk away, and sellers are too often faced with foreclosure as the only option.
Although not a logical outcome, as it is one that burns everyone involved - the home seller, the buyer, and the lender - a workable solution here still seems beyond reach.
What have you seen?
Please read our post today via BlogChicagoHomes.com.
DEAN & DEAN'S TEAM CHICAGO
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