Time is running out on homebuyers interested in buying hundreds of thousands of affordable homes, as much as 20 percent of the inventory in high foreclosure markets, and still qualify for the homebuyer tax credit, which requires the property be under contract by April 30 and must close escrow by June 30.
Homes sold as “short sales,” sales where the proceeds from the sale fall short of the balance owed on the loan secured by the property being sold and the lender agrees to take a lesser amount than is currently owed, are an increasingly popular alternative to foreclosure. However, they are complicated transactions and requiring the approval of a number of parties. Many take as long as 120 days to complete.
The popularity of short sales mushroomed last year. The number of short sale requests has doubled on a national level in 2009, according to Bank of America. In Las Vegas, short sales averaged about 7 percent to 8 percent of total existing-home closings in early 2009, but averaged 22 percent of the market by the end of the year and in early January.
They are less damaging to homeownersâ€™ credit and are less costly both for borrowers and lenders — one study found that loan losses average 19 percent with short sales, compared with 40 percent with foreclosures. In certain cases, a seller no longer is liable for paying taxes on the difference between the amount owed on the loan and the short sale price. Lenders have become more accepting of short sales and last spring the Treasury Department enacted regulations to encourage short sales by owners who owe more on their property that it is worth.
Despite their growing popularity among sellers, many short sale deals never close, even after months of effort. In fact, only 23 percent of short-sale offers that homeowners receive from potential buyers actually close, according to a February 2009 study of 1,300 real estate agents by Campbell Communications. More than 90 percent of agents cited a slow response from the lender as the reason short sales were lost. The National Association of Realtors reports only three percent of sellers reported that their home sale was a short sale, compared with 5 percent in 2008.
Short sales take a lot of time to negotiate and the close. During October, the average market time needed to sell a foreclosed home in Chicago, for example, was 117 days, while Chicago homes offered as short sales spent 245 days on the market before going under contract.
Moreover, there is no way for the buyer to know in advance how long a sale might take. Bankers have been slow to sign off on short sales because homeowner associations, mortgage insurers and second- lien holders may not agree to the terms of the deal. Second lien holders often hold up the transaction to exert the largest possible payment, in exchange for releasing their lien, even though in foreclosure they will get nothing.
Even should buyers make the April 30 contract deadline, they could easily fail to close in two months. In general, lenders are becoming more adept at short sales, but they are complicated transactions. Having the right lender is critical. Some banks require 30 to 60 days just to review the transaction. Others lack the staff or the experience to do it in less time. The fact is that not all banks are equal in developing short sale procedures. This is why short sales do not have a timely procedure in place or sometimes produces a result we are not looking to gain. All banks claim to be working diligently on a procedure to make the process smoother but buyers and their agents have no control over the process.
For buyers planning to take advantage of the tax credit, pursuing a short sale may not be wise, even though they are writing off a significant portion of attractive inventory. However, avoiding short sales may be difficult. Short sales compete with foreclosures and populate many of the price points attractive to first-time buyers. MLS online listings open to the public do not screen out short sales. Buyers may spend precious time pursuing a short sale and not even know it unless they are working with professional agents.