Sunday, December 7th, 2008 at 2:00 PM
No Big Surprise Here
Our friend John Woodall is a broker who has been working the short sale market the last couple of years. He sent over 13 cases where he had a viable short sale deal, only to have the banks turn them down and foreclose instead:
752 Aldea Dr; 92057
$435,000 short sale rejected by WaMu Feb 2008 – $395,000 sold REO 6/5/08
Additional Loss: $40,000 (9.2%) plus 4 months carrying costs
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5402 Balboa Arms #307; 92117
$256,500 short sale rejected by Citi June 2008 – $237,500 active REO 11/26/08
Additional Loss: $19,000 (7.4%) plus 5 months carrying costs, and it’s not sold yet!
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6729 Broadway; 92114
$149,700 short sale rejected by Chase Oct 2008 (BPO was $206,000) – $143,900 active REO 12/08
Additional Loss: $5,800 (3.9%) plus at least 2 months carrying costs, and it’s not sold yet!
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1156 Chimney Flats; 91913
$365,000 short sale rejected by First Fed Bank of CA May ‘08 – $330,000 sold REO 7/18/08
Additional Loss: $35,000 (9.6%) plus 2 months carrying costs
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139 Hillside Terrace; 92084
$338,250 short sale rejected by 1st ASC May ‘07 – $295,000 sold REO 11/21/07
Additional Loss: $43,250 (12.8%) plus 6 months carrying costs
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13122 Leaila Ln; 92064
$318,250 short sale rejected by Chevy Chase Bank, Jine ‘08 – $339,000 sold REO with new carpet/paint
Additional Loss: zero, including 4 months carrying costs
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32587 Luiseno Circle; 92061
$218,500 short sale rejected by 1st ASC July ‘08 – $219,000 pending REO sale
Additional Loss: At least five months carrying costs
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4560 Mariners Bay; 92057
#340,000 short sale rejected by Countrywide (FNMA) Jan ‘08 – $259,900 sold REO 10/23/08
Additional Loss: $80,100 (23.6%) plus nine months carrying costs
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266 Mar Vista Dr; 92083
$408,150 short sale rejected by Countrywide July ‘07 – $325,000 sold REO 2/1/08
Additional Loss $83,150 (20.4%) plus 7 months carrying costs
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427 Merlot Ave; 92069
$417,000 short sale rejected by IndyMac July 2007 – $375,000 sold REO 12/24/07
Additional Loss: $42,000 (10.1%) plus 5 months carrying costs
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632 Raven
169,000 short sale rejected by WaMu July 2008 – $145,900 active REO 11/28/08
Additional Loss: $23,100 (13.6) plus at least 5 months carrying costs
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969 N. Rose St; 92027
$350,000 short sale rejected by First Franklin June 2007 – $189,000 sold REO 9/16/08
Additional Loss: $161,000 (46.0%) plus 15 months carrying costs
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3925 Scott Dr; 92056
$355,000 ss rejected by WaMu June 2007 (wouldn’t pay $19,000 to 2nd) – $290,000 sold REO 7/08
Additional Loss: $46,000 (13.0%) plus 13 months carrying costs
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The average additional loss is $44,492 (13.0%) + 6.3 months carrying costs!
John confirmed that NONE of his denied short sales have ever gone on to sell for more money later. I’ve only taken two short sale listings this year, one was former clients of Jenae’s that needed to get bailed out of the jam she put them in – that one closed successfully. The other was this old favorite in Escondido:
We had found willing buyers at $419,000, $399,000, and $379,000 only to get bogged down in processing and the buyers gave up. Instead the bank sold it for $359,000 in August 2008.
If Hank and the boys want to spend their TARP money where it’ll do some good, they should build their own short-sale processing plant, or insist that the lenders do it.
I did also hear that Countrywide has increased their staffing by 400% so they’re on the right track, but the number of short sales has probably grown faster.
Posted on Sunday, December 7th, 2008 at 2:00 PM in Foreclosures/REOs, Short Sales | 14 Comments » | 
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Jim, as a realtor you probably don’t see the humor in this. I’m sure you’ve had the experience of investing a lot of work in a short sale only to have the bank reject it for dumb reasons.
Never having had that experience personally, I think it’s hilarous. I hope the banks and bondholers continue to take it in the shorts.
greenlander | December 7th, 2008 at 2:31 pmI feel bad for John, but you don’t see me jumping on the short-sale bandwagon – although next year should see me listing more of them by default.
If the REOs quit coming my way, the short sales are about the only other properties that’ll be selling.
Jim the Realtor | December 7th, 2008 at 3:42 pmJim, I’m going to play devil’s advocate here: if I’m a lender, why should I believe that a short sale will necessarily bring me more money than a foreclosure? I know, I know, in all the examples above a short sale would have been better. Point taken.
But, in my humble opinion, the cause was that the market further deteriorated (sharply, in some cases) between the time of the potential short sale and the time of the foreclosure sale. In a “normal” (or “stable”, or “flat” or whatever one wishes to call it) market, a lender’s instinct is to foreclose. This, after all, brings out the true market value. With a short sale, the possibilities for fraud are endless, and the lender could (potentially) be scammed to accept less than market value.
I think that’s the main reason short sales are slooooooow. The lender needs to thoroughly check the papers to be convinced that it’s not being scammed. Unfortunately, in a falling market, this old instinct turns out to be rather counterproductive.
Daniel | December 7th, 2008 at 4:25 pmGood point, and if I were the lender I would insist on having an accurate formula in place.
X = short sale in hand, closing in 30 days
Y = prospects for getting stuck with REO
I’d figure a minimum of:
-1% per month due to market conditions,
-1% per month for carrying costs (utilities, insurance, etc.),
-1% per month for lost interest,
-3% for foreclosure costs, and
-2% minimum for repairs,
Three months later:
Y = X-(-3,-3,-3,-3,-2) = X-14%
If I’m the lender, and the short sale is within 10% of my top-notch appraisals, I’m taking it. But I’d also include a qualifier for the price range too. if it’s a house in San Diego County under $300,000, I might take my chances because that market is firming up. If it’s a million-dollar house, I’m taking every short sale that is close, with preference to those that can close in 2-3 weeks.
They definitely should be checking closely for fraud. I’ve thought of setting up a third-party fraud investigation unit, because I could tell you within minutes if it’s a ripoff.
Jim the Realtor | December 7th, 2008 at 5:04 pmGood idea, Jim! Seriously. The lenders should have agents — who have been carefully screened for past fraud or complaints — who work specifically for them.
The “sellers” (current “owners”) should NOT be able to hire the listing agents. Since it’s the lender’s money that’s at stake, the lenders should have full control over the short-sale processs, including the listing agent.
CA renter | December 7th, 2008 at 5:39 pm“if it’s a house in San Diego County under $300,000, I might take my chances because that market is firming up. If it’s a million-dollar house, I’m taking every short sale that is close, with preference to those that can close in 2-3 weeks.”
Bingo. It’s amazing this doesn’t happen. You would think someone with enough authority at the banks could recognize this and implement such a policy. I mean, they’re BANKS, right? They have financially sound policies, right? . . . Oh, yeah. Never mind. An extra 13% loss sounds about right.
The Blur | December 7th, 2008 at 5:49 pmMy fraud-detection unit would first look at the agents involved, they’re the ones who cook up these schemes. And if the seller is an agent, go straight to the advanced unit – the one set up next door to Carlsbad FBI.
Jim the Realtor | December 7th, 2008 at 5:58 pmAnother thing you did not include is how many short sales continue to make payments while waiting. A lot of time people believe that a short sale will save their credit (not really I can assure you there will be no one lining up to give them a prime line at Paulson’s 4.5% after completing a short sale)
While they are concerned with saving their credit they continue to make payments.
If I was the bank I would make the borrower decide between bad credit and making payments on their luxury cars before any short sale is approved. That being said they could do that a lot quicker.
LV Renter | December 7th, 2008 at 6:12 pmI think these banks aren’t in the short sale REO business so they’re kinda deer in the headlights these days. Also, a lot of these loans have been sliced and diced and the only established contractual way of allocating losses among the various owners is following foreclosure.
Jay Jay | December 7th, 2008 at 8:40 pmThe calculus is hard to do without knowing the number of loans and amount on each property relative to the selling price.
In the above scenarios, depending on where the first lien was at and what the seconds would take to go away each could very well be the best value available for the first lien. Unfortunately some of the variables aren’t obvious even on public records so it would require a lot of guess work. These all may be a function of the seconds wanting saying $10,000 to go away quickly and the first figuring that current value – carrying costs – selling cost was greater than what they were offered minus what the other liens wanted to go away.
If I am a second lien and going to get wiped out during foreclosure and I know prices are falling rapidly my “going away” price will be high enough to present the first lien a break even choice. Other junior liens can get in the way though. This type of thing is also why deed-in-lieu don’t really work because free and clear title can be tough to obtain without a foreclosure. People can mail in the keys all they want but the first lien still has to go through the steps to foreclose and gain title free from the junior liens.
Ling | December 7th, 2008 at 8:47 pmDaniel, Jim, and Ling all bring up the real issues here and why banks end up foreclosing. Foreclosure is often the only way to deal with second liens.
It takes a good amount of due diligence and competence (important!) to avoid getting scammed on a short sale. In an extreme case of lack of diligence, two underwater homeowners could potentially short sale their houses to each other and reset their equity! Not that they would do something so obvious, but OC Renter has documented houses where the house went through a short sale, then a flip, then a short sale.
To be fair, banks let many 0% down “owners” get away with far more in lending to them in the first place. Just go to Vegas and see if they’ll give you a no recourse line of credit to gamble with.
BDiego | December 7th, 2008 at 10:54 pmA friend of mine offered $330m on a short sale,the bank refused. Six months later he bought the same property at auction for $200m. Go figure.
james swain | December 8th, 2008 at 5:05 amBanks need to get out of their own way. Hire good realtors who work the area where the home is(not an agent in OC for a property in Vista) and let them do what they do best. Time is the key here. Why would anybody think you could tell somebody I might get back to you in 45-60 days to tell you if you have it or not. And if you do get it, it might close escrow in another 45-60 days. Time is the key here. Time is money. When the banks start responding in a reasonable time, and close in a reasonable time, they will start getting more and getting it sooner. Banks are NOT your friend.
big wave dave | December 8th, 2008 at 2:38 pmAren’t we forgetting PMI here? My understanding is PMI applies if it’s a foreclosure, but not if it’s a short sale. Don’t the banks end up getting some PMI money back if they foreclose instead of taking the short sale?
Dwip | December 8th, 2008 at 9:01 pm