Last summer was to be the summer my wife and I would devote to our first home. By May we entertained romantic notions of weekend work parties with friends and family. By June we fancied ourselves qualified to polish the diamond in the rough, to grant a neglected home a vision of its former luster. We pined for pride of ownership, for a yard and a garden, for freshly painted walls. We even chose the colors. Like many first-time buyers eager to take advantage of plummeting prices in the East Bay, we were grateful just to be in the race and figured, perhaps naively, that little could stand in our way.
When we found the perfect North Oakland Craftsman in mid-June and placed a competitive offer, we thought our dream wasn't far off. In short order, our search would reach its inexorable conclusion. At least, we hoped it would; we'd already been looking for nearly a year and were growing somewhat thin on patience. That was last June. Here we are eleven months later, still entertaining the same romantic notions, planning the same improvements, and settling on the umpteenth color scheme. Little could anyone have predicted that after all this time we'd still be striving for the same property. But it's a great home at a great price — nearly $200,000 off its 2007 peak — and we've had no choice but to wait. Like many other disenchanted yet persistently hopeful homebuyers, we owe this to the beauty of that cruelest of misnomers, the short sale.
It's nearly impossible to shop for entry-level homes in the East Bay without stumbling across short sales, a designation given to listings where the owner owes the bank more than the home is worth, but hopes to avoid foreclosure. They're increasingly concentrated in neighborhoods like West and East Oakland, where homes have lost a lot of value and left previously solvent homeowners underwater. According to data from the Contra Costa Association of Realtors, short-sale closings in Oakland jumped in early 2009, from only three in April 2008 to 21 last month. A steady rise in newly pending short sales, including 94 in Oakland last month alone (out of 458 across Alameda County and 978 in the entire East Bay), suggests a hum of short-sale activity leading into the future. A line of bright-eyed young homebuyers will surely follow, perhaps to experience some of the same frustration my wife and I have enjoyed for nearly a year.
Short sales take far longer than traditional sales and foreclosures for two reasons. First of all, there are more parties involved: the buyer, the distressed seller, and the overwhelmed bank — sometimes two banks, if a second mortgage exists. Second, the bank must approve the seller's request to short sell and avoid a credit-killing foreclosure, and isn't always willing or able to do so in any sort of timely fashion. It is real estate's perfect storm, a formula for crossed wires and chronic delay, where a single form or phone call can take two weeks and every error takes twice as long to correct.
But Realtor Sarah Arnold, who has extensive experience working short sales in Oakland — last year they accounted for the majority of her sales — says the average wait time these days from offer to approval is sixty to ninety days. That's two to three months. Not eleven.
"It's unheard of that it's taken that long," she told me, though perhaps not with the gusto I'd expected. When my wife and I first placed our offer, we knew the transaction would be classified a short sale and that it would be up to six weeks before we received a response. I remember cringing like a kid being told Christmas would come a month and a half late, but figured we could bear to wait.
"Half the battle is going through the bureaucracy," Arnold elaborated. Departments within a bank can get their wires crossed. Paperwork can sit neglected on desks for weeks. Agents on both sides can be left out of the loop. "There's a lot of timing issues, a lot of frustration, and a lot of time-consuming work from the Realtor's side."
Then why bother? For sellers under financial duress, it's a far better option than foreclosure. While foreclosures can ding a credit score by 200 points or more, short sales tend to cause a drop of only 100, said Arnold. Likewise, she added, a foreclosure or bankruptcy can forestall future home ownership for up to eleven years, while the impact of a short sale is only about two years.
For patient buyers, a short sale spells a small price, at least versus a traditional sale. Compared to foreclosures, though, they're not always bargains. On one hand, the process of foreclosing alone can drop the price of a home significantly. On the other, East Bay Realtor Albert Bernardo stresses, the buzz around foreclosures and the relative ease of snatching them up can lead to bidding wars that push prices well above asking. "If you really are not in a hurry and you want a good deal, stick with short sales," he advised.
In our case, the first eight months of delay were due to a cornucopia of complications and frequent lapses in communication. By the time we finally made it to escrow and completed an appraisal, the house had lost $60,000 in value. So we submitted a new offer and restarted the process. We're now three months along.
Perversely, every short-sale horror story is unique. Sylvia Jimenez didn't have to wait as long as some to finally close on her home, but she experienced an equally common twist: The short sale she'd bid on was foreclosed upon before she could close the deal. The Oakland home had two mortgages from two different banks that refused to cooperate with one another. The first bank issued its approval, but when the second bank didn't file the proper paperwork, the first decided to foreclose. Jimenez scoured listings every day until the property reappeared a month later as a foreclosure, made an offer, and ended up buying it for $50,000 less than her original bid. "It was a huge, drawn-out ordeal," she said, but at least the ending was happy.
Short sales aren't easy on the seller side, either. Angela Dean-Baham and her husband, Nick, went through three rounds of potential buyers before finally releasing their Oakland hills home to the fourth. Thanks to a second mortgage and plummeting home prices, they owed $620,000 on a home they'd bought four years prior for $518,000: the perfect setup for a short sale. The first buyer became impatient with the long wait and pulled out. The second disappeared for unknown reasons after the Bahams accepted their offer. The third deal, with an investor, died of complications. The Bahams stopped making payments to compel the bank to take them seriously and finally made a deal with the fourth buyer, selling their home for $450,000 nearly six months after they'd put it on the market.
None of this is cause to write off short sales. Even when paired with a hearty side of frustration, they can be an economic boon to both buyer and seller. They demand patience and a sharp eye for market value, but with good luck and a proactive seller's agent, the experience can be almost tolerable. "This is the market, and there's no way to make it easier," said Bernardo. "But there are ways to get a great deal." Today's record-low interest rates will only make those deals sweeter. Just don't come crying if you have to wait a few months.
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