A predicted new wave of foreclosures may not arrive if lenders turn to short sales, which will require them to retrain loss mitigation workers.
Buying a home? Beware of the not-so-short sale
If you want to buy a house in Santa Cruz County, be prepared to be patient.
Short sales, which can take up to 6 months or longer to close, have soared to record levels in the San Lorenzo Valley and Watsonville. They now account for almost a third of of all home sales and show no signs of slowing.
In a short sale, lenders agree to sell a house for less than what’s owed on the mortgage. Buying one typically involves mountains of paperwork, repeated phone calls with bankers, back-and-forth letters with sellers and other seemingly endless frustrations.
The rising short-sale rate comes amid plunging sales of foreclosed homes, which once were a big source of local inventory. But just because short sales now dominate the market, it doesn’t mean they’ve become any faster to process.
It still can take six months to a year — if not longer — to complete a deal.
70 percent of my deals are comprised of Short Sales. I tell my clients that buying a house is a roller coaster ride, but if they’re patient, they’ll eventually close the sale.
“It’s a torturous process,” is the most used comment made by those who have gone through it.
Smaller banks that have paperwork in order can complete a short sale in as little as 30-45 days. But in general, short sales take much longer. More typically, they get bogged down when third parties like second mortgage lenders or mortgage insurers have to sign off on the deal.
Despite the headaches, many buyers don't shy away from short sales. Almost all of the good homes listed for sale in Santa Cruz and surrounding areas get multiple offers.
Cash investors are behind most of the deals. They look for cheap homes to pick up in bulk to rent out for profit.
“With inventory as low as it is, I am taking whatever I can,” said Mike, a seasoned CASH Investor.
Short sales accounted for a record 36 percent of all home sales in my area last month, up from about 14 percent a year earlier. The previous record was 34.8 percent in September, according to the local association.
Because many areas are filled with so many underwater borrowers, whose debt exceeds their homes’ value, the trend is expected to continue.
About 63 percent of these homeowners with mortgages were underwater in the third quarter of last year, according to Zillow. If you live in Las Vegas, you got hit the hardest, as they had the highest rate of underwater borrowers in the country during that period.
Meanwhile, foreclosures made up just 9.5 percent of all sales last month, down from more than 50 percent a few years ago. The drop is due largely to California’s “robosigning” law, which took effect in October 2011 and forces banks to provide more paperwork before seizing a house. Violations can lead to criminal or civil penalties.
Bankers want to unclog the massive pipeline of homes awaiting foreclosure and are discussing how to tweak the law in the coming months, when the CA Legislature is in session. But until changes are made, banks will continue to pursue short sales instead of foreclosures in my opinion.
Short sales are cheaper for lenders, partly because people still live in the homes and keep them in better shape than empty foreclosed houses. Bank-owned homes often get vandalized, raided by thieves or left in various states of disrepair.
Under CA government pressure, banks have been forced to improve their processing, but it’s still a frustrating system for buyers, sellers and real estate agents to navigate. Each major bank has its own requirements for short sales, and there is no uniform set of paperwork.
On the upside, I am a short sale specialist and have closed a large amount and have the battle scars to prove it.
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