Short sales gone awry have become a recurrent theme in real estate circles.
Here’s the common narrative: A home goes on the market as a short sale – priced at less than is owed on the mortgage, so the lender must approve any sale. The bank either declines offers as too low or takes months to decide, which drives away potential buyers. Either way, the short sale never happens. Eventually the lender forecloses on the home, the owner or renter is evicted, and it is put on the market again by the bank.
“It’s maddening and infuriating and everyone loses,” said Peter Harris, a Realtor at Bradley Real Estate in Novato.
He has exactly such a story to tell.
He listed a Santa Rosa duplex for sale in January for $499,000. By spring the price had been cut to $449,000, and it drew an offer for $420,000 from an investor. The bank, Countrywide, took three months to decide, according to Harris. It countered at $425,000 in July. The investor agreed but with an inspection contingency. The inspection “turned up all kinds of stuff – rot here, fungus there, termite damage, asbestos falling down, foundation weak,” Harris said. “It was substantial; anyone buying would want some credit back for these damages.”
The investor asked for $24,000 credit for the repairs, essentially making the offer $401,000. Countrywide said no dice.
The house went through foreclosure in late August. The owners and a tenant in the second unit had to move. The bank put the home on the market a couple of weeks ago, after spending $7,500 for painting and new carpets, according to the new listing agent, George DeSalvo, a Realtor with Frank Howard Allen in Greenbrae.
The new price? $374,900 – about 6 percent less than the rejected short sale offer.
“I wish I could say this was unique, but I had three other properties with the same situation,” Harris said.
A Countrywide representative said it followed due process in weighing the short sale offer.
“At the time the offer was considered, the market value of that property was shown to be somewhere closer to $425,000,” said Rick Simon, a spokesman for Countrywide, which is owned by Bank of America. “The value is determined by appraisal.”
Unlike most of Marin County, Novato is an area where foreclosures are increasing and prices are on a downward spiral. Did Countrywide consider that the property’s value might be falling by $10,000 or more every month?
“We don’t try to engage in speculation as to where the market is going when considering the offers,” Simon said.
Trying to keep up
While real estate agents, buyers and sellers say they are frustrated with the short sale process, Simon said banks are working as hard as they can to keep up.
“The volume of short sale requests is at unprecedented levels,” he said. “More than ever, buyers are making low-ball offers just to test the pricing levels. Each requires the same time and trouble to review as offers that actually will be accepted. A lot of offers are being reviewed that are not going to be in the ballpark for being approved.”
Nationwide, 1 out of 7 homeowners is underwater – owing more than their home is worth, according to real estate information service Zillow.com. In the Bay Area, the figure is even higher: 1 out of 5 is upside down, as the situation is also known. An underwater borrower who needs or wants to sell will generally be in a short sale situation.
Theoretically, a short sale should be a win for the borrower and the bank. The homeowner’s credit isn’t hurt as much by a short sale as by a foreclosure. And the lender doesn’t incur all the costs and holding expenses of a foreclosure.
But although no one keeps firm statistics, according to many real estate experts, the reality seems to be that banks are extremely reluctant to approve short sales, and often let properties go to foreclosure, even when there are decent offers on the table.
Besides looking at the price, lenders consider whether the homeowner can show financial hardship that he or she cannot meet the payments.
“You can’t ask the investors (the actual owners of the mortgage, for whom Countrywide and other lenders act as servicers) to take the hit on the property just because someone is looking to walk away and doesn’t want to make payments anymore,” Simon said. “They need to demonstrate, make some declaration that they are in a situation where they cannot continue to make payments on that loan. If they are capable of making those payments, there may be other alternatives that need to be explored.”
Simon said Countrywide tries to determine whether a loan modification or work-out plan might make it possible for borrowers to stay in the home.
Countrywide, like other lenders, has added employees to meet the increased volume, Simon said. In October, the lender completed 3,000 short sales – triple the number from a year ago, he said.
Richard Orloff has a short sale saga that stands out. His Rohnert Park home drew a dozen offers over 18 months – each progressively lower.
“It was an unbelievable calamity of errors and faux pas,” he said. “It was like a horror story: Short sale hell.”
Orloff, a loan officer who moved to Southern California to live with his girlfriend, put the house on the market in May 2007 at $495,000 – what he owed on the mortgage. His lender was also Countrywide, although he had a second mortgage with Citibank.
Foot-dragging by lenders
Orloff faulted both lenders for foot-dragging on the offers, which started at $450,000 in June, although he said there were also some problems with the house and with some of the five real estate agents he used.
After losing about eight offers because the buyers got tired of waiting for an answer, he went to Countrywide headquarters in Calabasas (Los Angles County), wearing a suit and tie and carrying a picket sign. He got to speak to a senior executive who approved the offer then on the table. It ended up falling through because the house had fungus.
The property finally sold in October for $333,000.
“I learned so much, I could do short sales myself,” Orloff said. “You’ve got to hit the phones really hard (calling the lender). You’ve got to have a boiler-room mentality. I was fortunate to have a beautiful house that I kept getting offers on. Imagine houses that aren’t that nice – they lose one deal then wait four or five months to get another one.”
Darryl Woods, a Realtor with Re/Max Gold Coast in Camarillo (Ventura County), sold the house on Orloff’s behalf. He’s a veteran of about 15 short sales over the past two years.
“I would characterize it as a full-time job” contacting the lender for approvals, he said. “You have to stay on top of them every day, you have to be really persistent; you cannot accept them putting you on the back burner. You have to create urgency and make your file a priority.”
Woods also suggests trying to “get as high on the totem pole” as possible, communicating with vice presidents or presidents. And, he said, mentioning that you might come and sit in the lobby can sometimes get the right person on the phone.
Orloff said he would never again subject himself to a short sale.
“If I were to do it over again, I would let it go to foreclosure,” he said.
E-mail Carolyn Said at csaid@sfchronicle.com.
