Short Sales vs. Foreclosures in San Diego County

Well I apologize for the lengthy delay in this second installment. The market has actually heated up way more than I anticipated; and I have been scrambling to assist buyers score some of these incredible deals that we are currently seeing here in San Diego County. I got a call from an investor from New York telling me he wanted a "hot deal" as he heard San Diego was "on sale". I replied that just about everything is a "hot deal" here in San Diego! Even some of the areas that appear to be "bullet proof" (like La Jolla and other coastal cities) are on sale. While you would be hard pressed to find many short sales or REO listings there, the rest of the county has some incredible values. It's hard to turn down 4,000 sq. ft., built 2003 on 1/3 acre (listed at $522,000) inland...and some coastal die hards are actually saying good bye to their beloved ocean breezes and moving inland and into North County to take advantage of the absolutely incredible buys. It is a life style change for sure. But when you are "roughing it" in a 3,500 sq. ft. home built 2006 on 2 acres with an entertainer's backyard to die for, some adjustments can be made. So while homeowners are expanding their scope of acceptable living quarters, this forces "bullet proof" communities to adjust somewhat in their pricing as well. So, yes, all of San Diego County is on sale!

Now on to the fine print. The "sales" I'm speaking of are typically short sales and REO properties. So strap in and I will give you a little Short Sale and REO 101 class so you can start scooping up those bargains like a pro. First of all, a short sale is when a homeowner needs to sell his home because they can no longer keep up with payments. Perhaps they got caught in an interest rate adjustment or maybe a personal set-back (job loss, illness, etc.) They list their property with a Realtor, garner an offer, and then the Realtor negotiates with the bank to try to get them to accept this reduced amount and wipe out the loan they have with that bank. Simple enough, right? If only it were. First the banks need to establish two factors: what is their hardship (the reason they can no longer keep up with the payments) and will the market allow them to sell their home for a value large enough to cover the entire loan debt. The answer to the second question is always NO in San Diego County at this time. Our peek pricing hit 2005/2006 and we've been losing ground since that point. Prime example. A client of mine purchased a new construction property for $550,000 in 2005. Nine months later I sold it for him for $860,000. Now granted that's an extreme case, but we did have this swift upswing in home value that was obviously not sustainable in any economy. And since then, we are adjusting to a more balanced market. If you think about it, home prices have never NOT returned to where they once were...and so, too, will we hit that high point again...and even surpass it. Speculation has it we are looking at 5-7 years for recuperation and the beginning of another upswing. But ask 100 people and you will get 100 answers. We just know it's not happening in the near future. And so there are some fabulous deals in this lull.

Back to my first point. Now the borrower needs to prove a hardship. They submit a letter to the bank stating their case. Usually it is a viable reason and the bank accepts it. Prior to that time the lender works consistently in the hopes the borrower can create a little magic and make up the lost payments and get back on track. Some banks have all but wiped out the second loan to reduce the monthly debt. Some have stretched the payments to a longer time period to ease the burden. But typically, this is a lost cause and the borrower is left with a short sale option only. One of the biggest problems blocking "restructuring" the loan is that the borrower needs to requalify for the new loan structure. Many times their savings and even retirement have been tapped to keep up with the payments thus far, and they have no reserves left. Additionally, their credit score has dipped considerably due to the credit card debt that tends to mount when used for daily purchases and not just occassional luxuries. In my experience with my clients, the bank's position is that they are no longer credit worthy, have no money down and (by the way) you've already proven you are willing to walk away from your responsibilities by contacting us and asking for a short sale, so the bank would rather take their chances on a new buyer. One with better credit and money to invest in the property which makes it a little more difficult to walk away from than those that used 100% financing and nothing invested in the home. (This is the transparent problem that began this entire mess. Why, in God's name, would a bank loan money at sometimes 105% of the purchase price, with no money down, stated income, stated assets when a market is on a huge unsustainable upswing? The minute the market falls $5, the bank is in the hole...but then you know what they say about hind sight).

Onward through the short sale process. The bank will require tax returns, pay stubs, bank statements, monthly expenditure list, etc. to create a "packet". Some banks will take this up front, others want it when there is an offer. Once the Realtor has attained an offer, the fun begins. Since the banks won't typically talk with the Realtor until there is an offer, the Realtor needs to place a hot price on the property to bring in lots of showings and multiple offers. This is why the market is a bit tainted right now. The prices you see on homes are not to be in any way suggestive of an actual purchase price. When the rock bottom prices are listed, the feeding frenzy begins. Multiple offers are absolutely essential to keep this circus going. The reason is simple, those that have the bucks to play this crazy game, don't necessarily have the patience. They write offers on every property they feel might suit their needs. With 17,000 homes and condos on the market in San Diego County, they DO have options! They see which offer gets results first. And to make matters worse, even while they are in escrow another one of their offers gets accepted and they jump ship mid escrow chasing their new rainbow. As a Realtor, I don't have any choice BUT to continue to garner interest in my listings and continue to take offers. Each listing is just one giant revolving door of offers. When the bank finally gets around to taking a look at our file, it's usually a game of last man standing. He who still has an offer in play usually wins. The bank's (and I mean ALL banks) response time is usually initiall 60+ days before it is in the hands of the negotiator. I've had offers in for at least 4 months with no response from the bank. I call twice weekly and can pretty much recite the response verbatum. "Your file has not yet been assigned to a negotiator, call back in another week". The negotiator is nearly the last step in the short sale lottery. They then have to open your file (the magic words) look through the entire packet and then decide to accept or reject the offers-or counter them. The negotiator usually has the file for an additional month before it is magically opened. After negotiating the final terms they will accept, the Realtor crosses their fingers and HOPES they have made a deal. Now the "deal" is then presented to the final decision maker-the invester (dun dun dunnnnnnnnnn). They can choose to accept, reject or counter or decide to pass on everything and take their chances with foreclosing on the property. So let's examine the time frames...they process start to finish is typically 3-5 months long. The delay is specifically that the lenders all state they are back logged and don't have the staff. After all, it's been since 1991 that we had the last short sale market, so these departments had to be restaffed and retrained and most of the last group probably isn't around to do it. So they've been learning on the fly. Frustrating? Oh my God, yes. Exhausting? Unbelievably...for all parties concerned. Humorous? Hardly (although sometimes we just have to laugh at how freaking ridiculous this all is. If there were just a SYSTEM...and they would all follow it...there are more than enough buyers for these properties. The sickening thing is after all this work, many homes are just sent through to foreclosure...even with offers waiting to be accepted. "We just didn't have enough time" cries the bank. I could fill a thousand blogs with the horror stories, the lack of communication between bank departments, the tears from agents, sellers and buyers alike. Everyone outside of the bank just wants to put the deal together and have another good soul profit from this lending fiasco and get on with their lives. But the lack of organization within the bank's infrastructure prevents that from happening. In my opinion, that's where the government's intervention is warranted...make these damn banks straighten up, create a 30 day system and let the buyers get a deal, and let the homeowner get on with rebuilding their life and finances. And that's my only political comment!)

To further compound the situation, many homes have a second mortgage on them. So even though the Realtor gets a thumbs up from the first lender, the second still has to agree or the deal is off. The catch? If the second does agree, they will typically walk away with $1,000-$5,000 for their total pay-off. And the loan balance is usually $60,000+. If the second doesn't agree, all of that effort is wasted. And honestly, I understand their position. If they don't agree to the short sale and the home is foreclosed upon, they can still go after the borrower for their payment. California is a "one action" state. If their one action is to accept the short sale, they give up their other options. Now is it likely the borrower has much to even go after at this point? Probably not. So many short sales are actually accepted by the second lender and the deal is done.

I have to say in the bank's defense, some of them are stepping up their process a little AND they are getting flexible with the offers they accept. I've seen them offer buyer's incentives, pay closing costs and accept VA and FHA financing conditions. We just need more of that. ALOT more of that. I'm just not sure the cure will come in time. The short sale market was created mainly by the adjustable mortgages (many with teaser rates) that began in July 2005. They mainly began to adjust in July of 2007. That creative financing arena (100% financing, stated income & assets) began to slow in the fall of 2007 and was all but gone by the beginning of 2008. So by my calculations, we should be done with those adjustable mortgages around the beginning of 2010. There will still be short sales that need to shake out after that. Hopefully by the end of 2010 this will all be in our rear view mirror and we can get on the road to recovery.

So have I totally turned you off to short sales? I really hope not. But more than anything you deserve the truth. If you are a seller and need to do a short sale then it is what it is. Your credit will be dinged on average 75-150 points. For a foreclosure: 200-300 points. A short sale seller can typically rebuy in another 3 years if they keep up their credit and payments (although they will likely pay a premium in interest rates). For a foreclosure the consequences are much more dire. I believe they both stay on your credit for ten years. Obviously, list your house a.s.a.p. with a Realtor experienced in short sales. Your Realtor really is the key. They must possess the knowledge to push through the convaluted lending sytem, negotiate all points of the transactions and be organized with the mountain of paperwork they need to wade through. Give them a fighting chance by calling them in the early stages. You can do this simultaneously while trying to work out a loan restructure with the bank. That way if you hear the bad news from the bank that it just isn't possible, you won't have lost any valuable market time. Knowing that it takes 3-5 months for all of this, calling a Realtor after you've missed 6 payments is a bad idea. The timing of the process is that once you've missed a couple of payments, the bank will file a notice of default. This is a matter of public record and starts the foreclosure clock. From the filing of your "N.O.D." it takes 3 months and 3 weeks before they can legally take your home. Your Realtor will need every day they can get to try to get your offers accepted by the bank before your foreclosure.

From a buyer's perspective, the biggest benefit to purchasing a short sale is the tremendous value you will realize from your home buying dollar. These homes are lived in and still typically cared for by the seller. You will get the benefit of all of the disclosures the state requires a seller to provide once in escrow. You will know the history of the home and it's ins and outs. You just need to pack your patience. The perfect short sale purchaser already has a comfortable place to reside (a rental) does not have a home to sell first (no contracts contingent on your own home selling allowed) and has time to spare. You will likely be involved in multiple offers on the property you choose. Make your offer as attractive and strong as possible. It won't help to stomp and demand a response, either. You will get your response when the bank is ready to give it. As one lender put it, this whole environment is like finding a hot special at Walmart...stand in line and wait your turn. If you want better service and are willing to spend the much bigger bucks, then go shop at Nordstroms.

Next time I will discuss foreclosures and REOs!

As alway, choose a savvy, full-time, professional Realtor. For more San Diego County information, visit my website at www.ViewKimsHomes.com. For excellence in lending, call my choice, Jim Auten with American Capital Home Loans. (760) 975-0255. jim@achlinc.com If I can further assist you, don't hesitate to call me: (760) 580-9195. Let me be your last stop before home.