When KaLinn Dishion’s real estate agents started working on short sales a few years ago, the sales were an arduous, cumbersome process fraught with unpleasant surprises.
“It was truly a nightmare,” said Dishion, a real estate broker and chief operating officer of Group One in Boise. For example, Dishion said, agents would get a short sale approved and all the necessary documentation in order, but at closing they would discover that the lender had taken the property back to foreclose on mere days beforehand.
“It wasn’t like the right hand didn’t know what the left was doing; it was like they didn’t even know they had a left hand,” she said.
“Short sales were always disfavored by buyers’ agents because it could take so long to get approval,” said Allan Brock, a real estate agent who specializes in short sales at Group One. “There’s just all these wrinkles.”
The process is now much easier than it was two or three years ago, Brock said.
“The short sale lenders have put in place systems to make the processing of these transactions more efficient,” he said
Group One President Brad Barker said those systems have not only made it easier for a homeowner to sell a house via short sale – in which the bank agrees to accept less than what’s owed on the home – but also for buyers to purchase a short-sale home.
Experience has taught banks how to speed up the process. And improved bank software and guidelines from regulators such as the U.S. Department of the Treasury and the Federal Housing Finance Agency have also made clear who qualifies, what information is necessary, and who will be required to repay deficiencies after the short sale clears.
“We have also made enhancements that have helped streamline the short sale process,” Wells Fargo Home Mortgage communications consultant Jim Hines wrote in an e-mail. “We have reduced document requirements, shortened timelines to decision, and implemented workflow software to assist both borrowers and agents.”
The process used to take six to eight months, Brock said. Now it can take two to three months if there is only one lender, or three to four months if there’s a second lender, such as when the homeowner has taken out a home equity line of credit.
Short sales now make up more distressed property sales than foreclosures do in the Treasure Valley, Barker said. Distressed properties are in poor physical or financial condition; foreclosure proceedings may not have begun, but they are likely imminent.
The trend is apparent nationwide, according to an Associated Press story published Dec. 6. Sales of homes that had started the foreclosure process jumped 22 percent in the third quarter of 2012, according to data from RealtyTrac Inc. Short sales accounted for 65 percent of those sales.
Short sales of homes that were not yet in foreclosure increased 15 percent in the third quarter compared to the previous three months, the AP reported, and were up 22 percent from the third quarter of 2011.
Banks increasingly find short sales an appealing option. When banks accept a short sale, they may not recoup the entire amount owed on the mortgage, but they avoid paying carrying costs, such as maintenance, winterization and insurance.
“In general, short sales produce less of a loss than if the property goes through foreclosure,” Hines wrote. “In addition, the property is usually conveyed in better condition, which ultimately benefits the neighborhood and the surrounding community.”
And with low inventory and increasing home prices in the Treasure Valley, banks command prices very close to properties’ market value, Brock said.
“About a year ago, everything kind of switched,” Barker said. “It really improved dramatically.” In Ada County, inventory is down to a three-month supply on average, he said. “A balanced market … is supposed to be about six months. … We’re getting multiple offers.”
“It is a seller’s market,” Dishion said. She said one of her agents has five offers on a single property. She hasn’t seen that happen for about eight years.
According to the November 2012 report from Intermountain Multiple Listing Service, home sales in Ada County were up 10.55 percent year-to-date in November over the same period in 2011. The median price was up 16.37 percent, from $149,000 to $169,900, and the average price was up 13.06 percent, from $180,877 to $200,823.
In addition to the low volume of inventory, Barker credits the changing mix between distressed and nondistressed properties for the price shift. There are fewer distressed properties on the market, he said, and because those homes generally sell for less than nondistressed properties, the average home sales price is creeping up.
“It’s not so much that we’ve seen real appreciation,” he said.
“I think locally short sales will continue to play a sizeable role … (but) the number of short sales will decline as the market values go up,” Brock said. As the market improves, people who are struggling may be able to sell their homes for what they owe on the mortgage, preventing the home from becoming a distressed property.
“For me, that would be fine,” Brock said. Even though he specializes in short sales right now, he said his favorite part of the industry is new construction sales, and he would like to return to it.
Brock may not have too long to wait.
“The opportunity for builders and developers is huge right now,” Barker said. “New homes are taking up a larger percentage this year than last year of the market. … We need inventory.”
In a short sale, the mortgage lender agrees to accept less than what is owed on the mortgage.
In some cases, the lender will require the homeowner to pay part of the deficiency left over after the short sale, said Allan Brock, a real estate agent who specializes in short sales at Group One in Boise.
For example, if a homeowner owes $200,000 on the property and sells it for $150,000 in a short sale, a $50,000 deficiency remains. The bank will check the homeowner’s finances to determine what – if anything – the homeowner can pay toward that deficiency. The bank will then request that payment (for example, $10,000) upfront or allow the homeowner to pay it over a period of five or 10 years with little or no interest, and forgive the remaining $40,000 of the deficiency.
However, if the homeowner doesn’t hold up his end of the bargain in repaying his portion of the deficiency, the bank may pursue him for the entire $50,000.
“Most short sale lenders are waiving their right to collect on the deficiencies,” Brock said.
Short sales can benefit banks by helping them get distressed properties off their books and avoid paying carrying costs. They benefit homeowners by allowing them to settle their debt and put it behind them. People who complete a short sale rather than going into foreclosure will also be able to qualify for a mortgage sooner, Brock said. Many people can qualify again about two years after a short sale, but not for five to seven years after a foreclosure.