Monday, October 25, 2010

A Tale of A Short Sale

A lot of people want to understand how short sales work and here is an example of one deal that I had last year.  The numbers and dates have been changed a bit to protect the person to whom this actually occurred but not materially.  The proportions of the numbers and timeframes have been held constant to demonstrate this client's journey through a short sale. 

I had a seller come to me asking if I had done short sales before and I had.  After interviewing me and apparently a number of other agents, a week later, he hires me.  He tells me a tale of how he bought his condo in 2007 (the peak) for about $450,000, had a very high paying job in the city which he lost during the recession.    He paid the mortgage, maintenance and taxes out of his savings for about a year and a half while he tried to sell it on his own.

After about a year of unemployment, he was able to get another job but not at the same salary.  It was literally half of what he was making before.  His income did not fully cover his monthly expenses.  He ran out of savings and he could no longer make his mortgage payments which is when he called me.

He told me about how he tried to sell it on his own and he was always behind the market.  He priced the property using active listings from Trulia and Zillow.  There are some sites that post sale data but here is the thing..... it's dated and not always accurate.  It's usually at least 6 months dated.  An appraiser or a realtor will not use a comparable sale that is older than 6 months.  If the market is changing quickly the way it changed from Q2 to Q3 this year, the realtor will take that into consideration and discount a comp even further, even if it's within 6 months.  What something is listed for it not what it's worth.  It's worth what someone actually paid for it.

A lot of people don't think about this but the Multiple Listing Service is owned by an association of realtors.  When a realtor gets her license, if she is full-time, will more than likely join an association.  A Realtor can join one or multiple associations.  In NJ, there is the NJ MLS, Garden State MLS and the Hudson Country MLS.

Agents who focus their business in Hoboken and Downtown Jersey City predominantly use the Hudson County Multiple Listing Service that is managed by the Liberty Board of Realtors.  The Liberty Board is the name of the association that a realtor must joint to post their listings to the Hudson County MLS.

Why am a I telling you this?  When an agent posts a listing on the MLS, it is accurate or hefty fines apply.  Realtors sign a cooperating agreement which governs certain aspects of this listing.  It must have a photo of the front of the building, it has to be posted within 24 hours of signing the contract.  There are many required data elements to post the listing.  It's our office's policy to use the square footage listed in the tax record.  If it sells, the details of the sale - the sale price and the date must be put in accurately within a specific timeframe.   If it's a short sale, it must state that it's a short sale and so on. 

The MLS has a dozen or so direct employees who among other things police the database. 

Read more after the jump...

Provided by Donna Antonucci
Prudential Castle Point Realty

What's on Trulia and Zillow is not necessarily so.  Prudential has feeds that take our MLS listings and distribute them to about 8 listing search sites such as Trulia and Zillow, therefore our listings on those sites are accurate.  For sale by owners who don't have this service have to enter data themselves into Trulia and Zillow and are not beholden to the same rules (and fines for non-compliance) and can enter what they want and selectively omit things that are convenient. 

The 'biggest' lie on unaudited listings is the square footage.  It's the easiest way to dupe unsuspecting buyers.  Fudge up the square footage and then on a price per square foot basis, the price might be attractive.

How does this relate to the short sale?  He didn't have good data to price his unit.  Plus, I am sure he was sweating and asking himself, 'how much of a loss do I have to take'.  I bet he was not realistic about that either even in the face of whatever data he had.  He consistently overpriced it.  He took the price down slowly over the year and a half and it was always behind the market.

If he sold it when he first put it on the market, he could have sold it, paid the commission, paid far less in legal fees and keep a good portion of his savings not even to mention how this absorbed his life for 2 years.

The best part was, (in hindsight)... he felt the showings that he did get were agents using his unit to show just how much more the client could get at the asking price elsewhere when compared to his unit. 

Bank negotiated short sales deter a good 90% of the buyers especially now as foreclosures are peaking right now.  The banks that own the lion's share of this faultering housing stock - BofA, Chase, Citi only have so much staff and it takes a long time for them to get to your deal.  With BofA and Citi they use a 3rd party system called Equator to accept offers on short sales.  You have to get an offer through attorney review and then scan everything and submit it through this software.  They won't call the listing agent or even the attorney.  You literally submit it and wait months for them to call you.  On a deal that has 2 banks involved v. one, it's longer.  If you have 2 of the banks listed about it's even longer.  A deal with a combination of BofA and Citi is currently expected to take 9-12 months from the exit of attorney review to close.

As a result of scaring off almost all of the buyers, short sales generally don't sell at market value.  On this particular deal, the property was shown, on average, about 11 times a week for 4 months. (Just think of how annoying that was for the seller who was still living there) We received many, many offers some of them ridiculous (I'll talk about that at another time.  Buyers, when they see a distressed seller, think they can get the property for absolutely nothing.  It goes for less, not nothing).  The file was literally 6 inches thick by the time we came out of attorney review.  We had 3 offers in attorney review that fell through because when the buyers came to the point where they were exiting the due diligence and had to hand over 1/2 of their deposit money to sit in escrow for a year, they got cold feet and pulled out. 

The price that we eventually settled on was $100K less than the CURRENT market value at that time.

Now you say, but the bank is going to pay the deficit.  Right?  Yes, that's what we are doing when we submit it to the bank  - if the mortgage is worth $480K and it's sells for $370K, the bank has to take the loss on the $110K and pay the realtor (they'll end up asking the realtor to take less than what she usually gets and far less than what it's worth  given how much more work a short sale is.  They literally are 3 times the work, but if the realtor doesn't agree the bank won't approve the deal). 

However, NJ is a recourse state, which means the lender can go after the client after the sale is complete for the deficit ($110K + certain costs).  My client put it up for sale and cooperated with the banks in the hopes of getting sign-off that the banks will not pursue him.

Lawyers charge by the hour and because this is so much work, my client spent over $15,000 in legal fees. (4 total accepted offers, 3 partial attorney review processes, one full attorney review and this is before the attorney negotiated with the lenders - he may have spent more than $15K in the end in legal fees.

In Summary, he bought for about $450K.  When he first put it on the market it was worth about $380K.  6% commission on a $380,000 sale is $22,800 + about $1,000 for legal fees.  He was fully leveraged on the original purchase price of $450K aka had in ~$405K mortgage balances.  So net, net if he sold it two years ago (or within 6 months of that point) he would have had to come out of pocket about $49,000.  If you count the equity he had in the house his loss would be $22,800 + $1,000 + 70K = $93,000. 

Instead two years later, it was no longer worth $380,000 but more like $340,000.  Because it was a short sale ie deterred ~90% of the prospective buyers, it sold for $240K and he had $15K in legal fees.  He spent 2 years in a place that he couldn't afford.  Yes, he had to live somewhere but he could have moved in with family or reduced his monthly outlay by finding a cheaper place or joined an apartment as a room-mate. On a mortgage balance of $405K at 6.5%, the mortgage payment would have been about $2,600 + about $350 in monthly maintenance.  $2,950 x 18 months (assumes 6 months to sell it back then if were priced correctly) is $53,100 and lets estimate about $5,000 year in taxes or $7,500 in 18 months for  taxes.  Then you have to add the $15,000 in legal fees for a total of $75,600.  If the banks don't agree to hold him harmless, they could come after him for another $165,000 + costs

From purely financial perspective he would have been about $25K better off, on the low side, if he hired a realtor and sold his property quickly.  If the banks don't hold him harmless for the difference between the sale price and the mortgage balance, his loss could be as much as $190K more than if he sold it a year and half earlier using an agent and that's before bank costs and unpaid interest. 

This is all before considering the damage that has been done to his credit and the stress of living under water for 18 months. 

The lesson of the story is this guy needed to sell his property quickly.  He didn't have access to accurate information to price it correctly, nor could deal emotionally with the reality of what happened to  the property's value since he bought it.  He ended up spending way more than if he hired an agent and got the job done before he had to bring in the banks to take the loss.

I know hindsight is 20/20 and he thought he was making good decisions at the time.  Perhaps you know someone who can learn from someone else's misfortune.

Provided by Donna Antonucci
Prudential Castle Point Realty

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