Buying homes through short sales can lead to long waits

The San Francisco Chronicle reports:

Jamie Schmitt and Valerie Azinheira liked the two-bedroom house in San Francisco's Merced Heights. It was near a nice park where their 3-year-old son, Gabriel, could play. They made a no-contingency offer for the full $629,000 listing price on June 20.

Then they waited. And waited. And, well, waited some more.

It took a full five weeks to find out whether their offer was accepted. (It was.)

The offer "just fell into the abyss," said Schmitt, 38, a handyman/remodeler who also lends his expertise to several fix-it shows on the Home & Garden TV Network.

That's because the couple was buying in what's called a "short sale," in which a house sells for less than - or "short" of - what is owed on the mortgage. Almost unknown for the past two decades, short sales are making a comeback as a way out for cash-strapped homeowners who can't keep up on their mortgage payments.

Ordinarily the person selling a home gets to decide on offers. But in a short sale, the mortgage holder holds all the cards. Because that lender will be taking a loss, it may choose to turn down short-sale offers, and instead allow a property to go through foreclosure.

Even though Schmitt and Azinheira paid the full asking price on their home, the previous owner owed $685,000 on the mortgage - and had spent heavily on rehabbing the house. The owner originally listed the house for $720,000, but in the softening market, had to keep dropping the price to less than she owed.

Buying from a gargantuan financial institution means numerous roadblocks.

"It was like the seller wasn't even there," Schmitt said. "They were being pushed off to one side, and this big bank was coming in and being the seller."

Stuart Wilson, an agent with Paragon Real Estate Group, who represented the couple, said he finally galvanized a decision by telling the listing agent that his buyers had lost confidence the sale would close and planned to withdraw from the contract if they didn't get lender approval by July 25. "That did the trick," he said. "We got approval that day."

A prior buyer had grown impatient with the protracted wait and bailed.

Wilson agreed that it is frustrating dealing with lenders in short sales.

"The lenders (seem) not prepared to act in a timely, resolved and professional fashion on a short sale," he said. "They just don't get it that they have to get rid of this property, that every day they have it costs them more money. They are overloaded, overburdened, confused, unable to deal."

Schmitt and Azinheira have a month-to-month rental so they could wait for a decision. But for buyers who need to move quickly, such as people who just sold a home, a short sale would be more difficult.

Two increasingly common factors converge to create the circumstances for a short sale:

-- Homeowners have no equity or negative equity. Generally that's because they bought with 100 percent financing (or took out extra loans after buying) and the house is worth less than they paid for it.

-- The homeowner can't make the payments. These days that's probably because an adjustable-rate mortgage has reset at a higher rate, perhaps adding hundreds of dollars onto the monthly payment. In the first half of this year, lenders sent 14,426 notices of default to Bay Area homeowners for missing mortgage payments, according to DataQuick Information Services. An untold additional number may be scraping to make payments but eventually will fall behind.

For beleaguered homeowners, a short sale is better for their credit rating than going through a foreclosure. Still, they may end up owing extra taxes on the deal. In many cases, if you owe $600,000 on your mortgage and the lender allows a short sale for $500,000, the IRS expects you to pay taxes as if you "earned" the $100,000 forgiven on the loan. Legislation is pending in Congress that could change that rule.

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