Thinking about buying a short sale in Phoenix (or anywhere else)?
It’s not for the faint of heart.
Or anyone that wants to apply logic, reasoning, common sense or business fundamentals to the decisions that banks make on short sales.
Here is a real life situation that is coming to fruition today in the wild and wacky world of real estate short sales.
The Scenario
Almost 10 months ago, someone offered $172,000 on a short sale listing in Chandler (a suburb of Phoenix). Six months later, the lender finally accepted the offer. Problem was, the original buyers had grown weary of waiting on the bank and found another home ”“ they had already purchased another property (and shame on their agent for not withdrawing their offer at that time. Welcome to my world).
So the property goes back on the market. Two days after that, we had clients that submitted an offer. They offered $175,000, with $35,000 down and a 30 day close. That’s a strong offer by any measure.
The lender, apparently ignoring everything that happened in the preceding six months and having already approved an offer at less than what our clients were offering, basically started their ridiculous approval process all over again.
Fast forward 3.5 months to today. Despite the extra $3K our clients were willing to pay, despite the previous approval, despite all logic, our clients offer is still not approved.
And roughly 20 minutes from now the home will be foreclosed on.
What’s the opening bid set at, according to the Trustee’s web site?
$150,450.
Yes, that is $24,550 LESS than the offer the bank has had in their hand for the last three and a half months.
The listing agent for this property has tried to get the foreclosure auction postponed. All the players (except the bank) have done everything possible to extend the foreclosure so our clients can purchase the home.
The bank’s response to why they aren’t extending the foreclosure in an effort to sell the home at $175K?
“The short sale process has taken too long, so we won’t postpone the foreclosure date.”
Well no kidding. 10 months is absurd. But check me if I’m wrong Sparky, it is YOU THE BANK that have caused this interminable delay. It is YOUR PROCESS that completely and utterly sucks beyond all comprehension.
So today you might sell the home for $150K. Sure, I suppose it could be bid up over the amount either buyer already offered. Good luck with that. Most foreclosures in Phoenix don’t sell at auction and end up reverting back to the bank. Then they’ll sit on it for months before they put the home back on the market ”“ probably at a list price of $150,450.
“But wait Jay, I don’t understand. They had an offer for $175K. Why would they foreclose on the home and take a bid at $150K?” the astute reader may be asking themselves.
I don’t understand it either. It’s incomprehensible. It makes zero sense. Then again, we’re trying to apply logic, reasoning, common sense and fundamental business practices to a bank. And that my friends, is an exercise in futility that will drive you insane, or make you want to buy t-shirts like this for all the banks and short sale department employees:
(My apologies if you find the above graphic offensive. I find the bank’s short sale processes offensive and it was the best expression of their apparent attitude that I could find.)
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The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Jay, this is a great and timely post. FWIW, the Obama Administration’s new proposals re: housing finance does contain some very strong language about servicer failure as it comes to short sales and loan modifications. Plus, there’s some evidence that industry is doing something about it. I wrote about BofA creating a special servicing unit to deal with precisely these issues over on 7DS. So things may improve… not that that helps your clients.
This property — was it bank-owned, or pooled into MBS trusts? Do you know? There’s a huge difference in how short sales/loan mods may be handled depending on that. Seriously, the short seller might have a pretty good lawsuit claim against the servicer in question.
Not bank-owned, it will become bank owned today at the Trustee sale (unless someone actually buys it on the courthouse steps). We had the buyers, so aren’t privy to much on the owners loan situation.
I meant the underlying mortgage. Is it owned by a single institution, or has it been sold to be packaged into MBS?
-rsh
Single institution. Not one of the major players.
Here’s another example from one of my short sales. House went on market at $120K just below comps. It sat on market with some showings in 45 days. We then lowered the price to $110K with several showings & two offers after 3 days. Sellers accepted $105K offer with 20% down and we submitted to lender.
Lender got an appraisal done fairly quickly and didn’t say anything about it during negotiations over $50 doc fees, etc and whether Sellers could bring money to the table or sign promissary note. Due to valid medical issues & debts this wasn’t realistic and they consistently said no to them. Lender finally agrees to a price after haggling over maybe $1000 of closing costs only to tell me they needed the price to be closer to appraised value of $130K!
We’re arguing over less than $1000 and they never said anything about the $20K that the contract was short on. What the heck?
Buyer walked after trying to get bank to reconsider current market info failed. House is back on market as a “preapproved” short sale at $125K with slow traffic after 25 days.
Great post!. Logic very rarely plays a part in a banks process. In fact I’m sure they all have a secret ‘how else can we pi55 people off and make life difficult department’.
I feel your pain Jay. I just ended a year-long sale of my own property. The bank would’ve saved at least $30K if they accepted the first offer that we got only 1 month after we listed the property… it took so long that we lost 3 more offers. But I’m happy we actually managed to close on the same month, but a year later.
I am the listing agent for a ss. It is a nightmare working with BOA. I have had an offer since the first week of January and can’t even get an appraisal done for the property.
Jay, this post sounds all too familar. I bet the bank was BofA! (sorry if I’m not suppose to post that…) I had a similar experiance. The worst thing is trying to explain this whole insane process to the buyers who want the property and the seller, who are trying to avoid a foreclosure. Nobody wins.
I was surprised it wasn’t BofA Jennie. This time it’s a small bank, not one of the major players.
Bank behavior truly defies any logic. My experience mirrors this insanity. The bank’s institutional incompetence is staggering on so many levels.
After years of this crisis, why can’t any of these banks have effective, streamlined short sale processes? Isn’t a bank financially motivated to get the most out of a sale? If so — after years of practice — why haven’t they changed their practice to sell short sales quickly? Now, everyone knows that short sales are a nightmare, so short sale values are pushed even lower… when a home goes to foreclosure, the return is lower still.
I can only guess that banks are guided by greed and stubbornness. They are so motivated to beat-up on “dead beat homeowners”, that they kill themselves — and our industry — in the process. It’s a f-ing shame.
Greedy banks? Say it ain’t so Bruce! Check this article on bank profits: https://phoenixrealestateguy.com/boo-hoo-for-the-ceo-of-j-p-morgan-chase-52m-per-day-profit-isnt-enough/
Great article and much of what the banks do, defies logic. I absolutely hate dealing with short sales and try to discourage my clients from even considering it. They are getting a lot of airplay in the media and people are hungry for a deal, but when they hear how long the process can take and the stress and disappointment that is around the corner, it doesn’t take too much coercion to get them to reconsider. Deals can be made though, in fact, a local shortsale here was available 2 months ago for 2.6M and now it is a foreclosure, listed for 4M. Quite a difference…
Banks have a mentality all their own, its a no rhyme, no reason, mentality. Oh and yes “we don’t care what you think” mentality.
Yes – this is very common and unfortunate for the seller. I have been on the opposite side of this representing a buyer who waited and waited for short sale approval. The bank did not approve the short sale and proceeded with foreclosure. Then my buyer found the property on the Fannie Mae homepath website and we were eventually able to buy it at auction for $40,000 less than what my buyer had previously offered to the bank. I won’t mention the name of the bank, but it’s been mentioned in another comment above.
My favorite this week — One of our agents had a bank approval letter on a short sale listing. The day before it was supposed to close, they foreclosed. Good news is they are supposedly transferring title back. Bad news is it delayed everything by 3 weeks. One guess who had to pay the extra delinquency fees. (If you guessed agent, you are right.)
Jay – Let me preface this by saying im just a guy that enjoys your website and blogs. This may be a dumb question but perhaps this could work out better for the buyer. Could they not place a bid at the aution? Perhaps they could end up with the house cheaper than the offer they placed on it. Yes I know it sucks they have waited on the other offer and all that..etc. etc.
Not a dumb question at all Justin.
The problem with placing a bid at a Trustee sale is that should you have the winning bid, you have to be able to produce a cashier’s check for the full amount of the bid within 24 hours.
Most folks don’t have that kind of coin in their bank account, or even if they do they’d rather finance at today’s low rates and leverage their money.
A more likely outcome, if they can continue to wait, is that they may be able to get the same home for less when the lender eventually puts the home on the market as a bank owned home.
But odds are that our buyers (most buyers I suspect) will have already bought another home long before that happens. There are about 28,000 single-family homes active in the MLS. No home in this price range is unique. There are lots of choices out there…
Yes the short sale process is completely ridiculous. That situation is repeated across the country hundreds of times per day. Your “insanity” description is bang on.
This just doesn’t make sense….well nothing really does in the short sale world. I have had this and even worse happen to me in the last year. I had an almost identical situation to yours. I had an offer on a home that I was negotiating for over 10 months because the buyers kept backing out and the agent never told me or thought to withdraw their offer, and just like your situation, they kept starting the process over each time. Finally they rejected the offer of $150k becasue they said “the process took too long”. it took too long because of them, but who are we to argue – right? Well ultimately the home sold on the steps for $114,000.
Another home I had was listed at $550k and I got an offer at $575,000. Bank rejected the short sale and 7 months later, the home sold as an REO for $323K. You do the math. If it makes sense, the banks just aren’t doing it……
I have come to believe that the banks MUST be getting something on the side, or on the back-end, that causes them to behave this way. There is NO LOGIC that explains the behavior you describe. None. Banks are profit making enterprises and most of them are making profits, big ones. See above, Jay’s link about JP Morgan Chase profiting $52million per day. Per day!
Maybe banks are denying short sales because they’re getting insurance money when they foreclose? More likely, they’re making so much cash by borrowing from the Fed at 0.25% and lending it back out to home buyers at 4.25% and 5.25% they don’t need to worry about all the money they’re losing on stupid short sale behavior.
Robert Hahn, I hope to goodness you’re right and the Obama administration’s newest crack at this problem will really get tough on banks’ failure to accept short sale offers in a reasonable amount of time. Hoping… but not holding my breath.
Jay, I thought you knew this by now…NEVER use the words WHY and BANK in the same sentence. Never.
The problem is that the same idiots that got us into this mess are still running the show. Its not much better at the foreclosure end. Foreclosure sale this month (I represent the buyer): List price 99K (on market for 6 weeks at that price) buyer offers 90K (cash)bank counters at 94,500. Buyer offers 92K Bank counters at 98K Buyer offers 94,500 and bank counters at 96K. Buyer stops. One week later bank reduces price to 86,500. Multiple offers Buyer offers 90K and gets outbid…..
Dan…you’re not alone on that either! that’s happening all day in OC….You hit the nail dead on…the people running the show now have been the same all along..
Wish we could just yell at the bank operator on the line to get it together but yelling at them doesn’t work :-/ if it did we would all scream a lot louder.
Jay,
I recently had some buyers ask “Well… why would the bank NOT respond to our offer?” after we presented a contract in a short sale situation. I had to advise them that logic and reasoning play NO part in the bank’s consideration of offers during short sale negotiations. It’s really tough to find sense in it all…
This week I was told by BofA, after marketing a property, uploading to Equator, working our way through processing all the way to a negotiator that “this investor no longer participates in short sales.” “What?” Later BofA management confirmed they have a few institutional investors who have opted out of even allowing borrowers to short sell. It’s make good on the loan, or we foreclose.
It is my opinion that the institutional investors have enough data now to show that it is less expensive to foreclose than short sell. When you consider the carrying costs on the non-performing loan, the time it takes to short sell and the LARGER MI REIMBURSEMENT FOR FORECLOSING VERSUS SHORT SELLING, it is likely that more and more investors are going to shut down their short sale processing departments and just take the home back and submit a claim to Fannie or Freddie.
We are going to hear more of this as the year progresses I’m afraid. While I believe banks do make stupid decisions, I believe they make far more decisions that are very calculated in terms of profit/loss. While it may appear stupid to those of us trying to sell these things, when you consider that their payback on their loss from Uncle Sam is higher if they foreclose it doesn’t seem so dumb to me.
There are some very sinister forces at work here in the whole Wall Street/Federal Govt. relationship that is affecting this.
Just my two cents. – Joe
Joe –
As much as it kills me to say it…you are so right! What makes absolutely no sense to us agents trying to help our clients, it must make total sense to the banks, especially on the bank end, otherwise why would they even do it! I mean they are banks for a reason – right? Nothing right now in the short sale world makes sense to me….just when I think I have it down, the rules change!
I’ve never personally come across a bank not participating in a short sale (or even heard of it), but I’m sure after reading this post, I will soon:) All that is happening is an external reality which we have little to no control over, so we just have to keep our heads up and keep trucking forward and do the best we can do with the resources that we have at our disposal.
Your story rings a familiar bell. I had a short-sale under contract for $125,000. The bank dragged their feet for 6 months getting a BPO but this did not slowdown their foreclosure department. Apparently one department did not talk to the other. The bank decided to foreclose without warning and the property was purchased for $87,000 at foreclosure. The took an additional 30% loss for no reason.
I wonder if the sellers of the home that got foreclosed on would have any recourse because the bank refused to accept 2 offers that would have net them more money, and instead allowed it to foreclosure (and who knows what it would net them later).
In the end the seller would get a 1099 for the difference between the loan amount and what the bank ends up netting…. and here is yet another example of the banks screwing everyone by not taking a good offer in front of them.
Just a thought….
I do a lot of short sales in Denver and I have to say the smaller banks are now my biggest problem. I’m having better luck with the larger banks who are getting on board with HAFA and actually have two right now where the banks have done their BPO or appraisal BEFORE we’ve received offers! One is getting me an approval letter so that we can close quickly. I hope that we are seeing light at the end of the tunnel
The main problem I have now is getting buyer’s agents to show their buyers any short sale properties. We can easily exclude them on our multilist system, so all I get are investor offers at half price. Good luck with those!
I hear ya, and feel your (our) pain.
Unfortunately, I had clients today that put an offer in on a short sale here. I warned them….so many times it was becoming too negative.
Here we go….
Sorry to reply to myself but UPDATE: that offer just flamed out yesterday.
The short sale success rate in GA is somewhere between 10 and 20%.
Foreclosures are much better. I had a bank counter offer in ONE day last week on a foreclosure. Good deal too, about $100k under current value in a very nice community.
Can’t we just foreclose ’em all and get this inventory thing under control already?
It seems to be a grossly reoccurring theme in these short sales. The banks operate with no reason or logic in these sales. It would be nice to see some sort of static guide lines in these situations.
I totally agree with you about banks not operating with any reason or logic, but it must make sense to them or they probably wouldn’t do it! there must be something behind the scenes that we just don’t know about! Either way, it is very frustrating for us trying to help home owners avoid foreclosure.
This is really unbelievable. I just had a short sale deal that took about 6 months to pull together. In the end the property ended up appraising for $2,000 less than the sales price. The seller could not contribute and the buyer did not want to pay more than the appraised value (they were willing to walk away). The bank (first lien holder) essentially said that they would rather have the home go to foreclosure than to lose $2,000 more on the home. Here are the details.
– sales price 122K
– appraisal 120K
– recent sale in same neighborhood / same floorplan sold for 116K
– 16 total short sales in the same neighborhood listed between 110K and 125K
– no second mortgage on the property (seller settled with second lien holder)
– No PMI on the loan
– total agent commissions were 5%
I just don’t understand why the bank thinks they will be better off foreclosing. Do they think they can sell it for more than appraised value?
Then short sale process is really a mess at this point. I thought it would get better with time with banks refining their process, but it doesn’t seem to be so.
Its true, Banks literally harass customers in the name of their policies & procedures.
Sell Your Home
As much as I hate short sales..I got 2 new ones about 2 months ago. One with Wells Fargo and another with B of A(which I think is the worst lender to deal with), and I got them both approved within 1 and a half months….thats my personal best. Maybe the banks are getting better at getting these short sales approved. Who knows….this just may be an isolated experience too! Keep on moving forward and good luck to all…..
I would never be able to understand these ridiculous Bank Policies. Wonder, who gave such rights and power to these banks.
Indian Food
Here’s the dirty secret on shorts sales. Owner defaults on a home worth 350k. First mortgage: 200k. Second mortgage: 125k. Bank let’s the house go to auction, buys it back for $200k (first mortgage value) Bank puts the house out as REO and sells it for 300k! How many YEARS will it take a bank to make 100k in interest??? The beans counters know how to make money on the backs of the second and third mortgages. Think about it the next time you present an offer. If there is no spread, they are better of going to auction. Contrary to popular belief the banks ARE in the real estate business.
Many of these situations it is a lack of communication between the servicer’s loss mitigation department and their foreclosure counsel- these files go to outside attorney firms. The attorneys are moving their files along. The investor does not want to lose their rights to foreclosure so they are careful not to cancel sales and get fined by the courts. There is so much more than what we see on a superficial level of what goes on. Nestor and I know a good number of executives, past and present at the servicers and it is not so simple and of course, even less simple to understand.
The humour and venting makes us all feel a little better, yet its quite insane!! The buyer meets the lenders short sale requirements and they still refuse to let the qualified buyer purchase the home within a reasonable amount of time. It seems to happen time and again. We meet the requirements of the bank and than they change the rules. We meet them again and they change again. I am the 99% and this is only another example of how the financial institutions have control.