Tale of a Short Sale

Short Sales are frequently considered a bargain but that assumes they are approved
and go through without a hitch. Unfortunately, short sales come with a lot of hitches.
Read this cautionary tale before you consider bidding on a short sale property.
Note: This article was originally written in 2012 but first published in 2023.

In 2012 I was looking for a home in New Jersey and found a nice 4 bedroom colonial on two acres with a huge detached garage I intended to use for automotive maintenance. Nearly fourteen months after I first signed the contract on the home and several months after receiving what I thought at the time was approval to purchase the property, the deal went south. This is the story of what happened.

My first sign of trouble was after a title search revealed another lien on the property in the form of a second mortgage held by Springleaf Financial. Short sales require the approval of all lienholders so negotiations began with Springleaf. For whatever reason they came into negotiations expecting to recoup nearly 90% of the second mortgage loan. The first mortgage lienholder (Bank of America) rightly told them to pound sand and offered the industry standard 10% of the original loan amount. This is actually a gift since the first mortgage lienholder is in no way obligated to give subordinates anything, and particularly so if the home goes to foreclosure, yet this second seemed adamant they would not accept less. Dick waving at its finest.

Thanks to the process of securitization (a fraudulent activity cooked up by the too-big-to-fail banks and the bloodsucking parasites on Wall Street to transfer the risk associated with poorly underwritten mortgage notes to unsuspecting investors) BoA could not make the call themselves -- they had to submit the proposed settlement to all the investors in the note. Every reply took weeks. We finally got BoA to come up a bit, but Springleaf still wouldn't come down.

Determined to get the deal done after years of trying (there were people working on selling this house long before I came along), the realtors negotiated directly with Springleaf and asked them to be reasonable. They finally agreed, but there was still a gap between what they were willing to accept and what BoA was offering. By this time I had had enough of the entire process and was ready to lick my wounds and move on but I ultimately agreed in conjunction with the realtors to contribute the funds necessary to bridge the gap and get the deal done. What did BoA say to our deal on a silver platter? An unequivocal NO.

Our assumption was that BoA did not want to set a precedent that would influence negotiations with other banks in the future. And while I can see their point it seemed stupid to kill a deal for less money than I spent one year restoring my old BMW. Talk about being penny wise and pound foolish.

I decided to cut my losses and told the sellers that I would be terminating the contract at the end of the month (about three weeks hence) if an agreement was not reached by then. A week later my attorney notified me that the 2nd finally agreed to take BoA's last offer. They suggested I restart my mortgage application process and do some stuff in prep for closing. I did as requested and thought I was in the clear. When I realized I would need access to the property to complete the appraisal, I requested the sellers provide that authorization. I heard nothing but crickets for close to two weeks. When I requested a reason for the delay I was told that the BoA's original approval to sell the property had expired and they would need to seek yet another approval from them.

I waited another three weeks before I decided to give the parties another ultimatum: get an approval by the end of the month or I'm done. My agent begged me to hold out just a bit longer so I did. Then she started asking me to send them updated information, which I found to be a preposterous waste of my time, considering that I didn't cause the delay that ultimately caused BoA's approval to expire. I was about to kill the deal right there, but decided to give them the two documents they wanted and wait and see.

A few more weeks passed. I called my agent to ask for another update and that's when she told me: the reason the sellers had been unusually quiet was because Springleaf had sold the debt. That meant the approval that I had waited months for was now null and void. I made it known in no uncertain terms that I expected the new company to agree to the prior terms outlined by BoA immediately and that if they balked and tried to start negotiations with BoA I would kill the deal.

Another week went by before I learned that the new company had agreed to accept the prior terms but in what must have been a face-saving measure they insisted we close within two weeks. Even the seller's attorney laughed at them and said that would never happen. More dick waving. A few days later the company capitulated and agreed to the closing date we requested.

I thought at this point that the deal might actually happen as I was assured the BoA approval was expected within a day or two, and sure enough, it came. The only problem? They changed the terms of the deal – they wanted more money from me due to “market conditions” and (here's the kicker) wanted to give less money to the new second lienholder. And all of this after the seller's attorney, who was coordinating the negotiations, made clear to BoA that the second had agreed to the original terms. I reluctantly but quickly agreed to throw in the few extra thousand they wanted from me, but I knew from experience BoA would not allow me or anyone else to bridge the gap that now existed between what BoA wanted to pay the second and what the second had agreed to pay.

For what must have been the third or fourth time in the last year I wrote off the deal and started looking at other homes again. The market had noticeably turned hotter over the last year, particularly since Hurricane Sandy sent all the shore people inland, so at least two of the homes I inquired about were already under contract. With the prospect of another housing bubble on the horizon I began to think that maybe someone was trying to tell me something.

The next time I heard from the attorney it was after I said that I would cancel the contract at the end of the week. They told me that BoA had once again lowered the amount of money they would give the second. I couldn't believe my ears. From $6000 the number was now $2700 and change. It appeared that every time the attorney submitted the paperwork to BoA they'd get farther away from making a deal with the second. It was at that point that the attorney declared the deal dead and I did as well. 14 months and roughly $900 in wasted fees later, I was done with this mess.

The morals of this story?

You should not even think of buying a short sale if:

• You are in need of a home right now and do not have the time to wait. Short sales are too unpredictable and take far too long to complete – easily 6+ months under the best of circumstances.

• You have to sell your home to qualify for the mortgage on the short sale property (i.e. you are subject to a house sale contingency), because if you fail to close before the agreed closing date, the short sale approval is null and void and you will need to go through the entire approval process all over again. And if you think that the approval will be faster the next time through because it's already been approved before, THINK AGAIN. It's not. Bank of America tosses the entire file every 45 days whether they like it or not. The computer systems are designed like this. Really.

If you do decide to proceed:

• Determine up front if the property has more than one mortgage lien on it. If it does, reconsider proceeding because you are guaranteed to lose control of the negotiations as the banks duke it out. And if they don't agree, your sale won't happen.

• A short sale approval, if it does come, typically requires a very quick closing – 45 days in the case of BoA. That is typical for an average Condo or Townhome in my area but those properties are easy to close because you're basically only buying the interior walls of a common structure. There are typically no land issues to deal with, well or septic headaches, etc. 45 days is not a lot of time to close on a normal single family residence – to say nothing of a distressed property or something that's been vacant for any length of time. Be ready to move quickly.

• Make sure you (or your attorney) inserts language in the contract to protect your financial interests as I did. Having a good attorney, some experience in writing business contracts, and a pessimistic attitude in general gave me the upper hand here and allowed me to minimize my out of pocket costs when the deal ultimately fell through. I only lost $400 to a mortgage application fee (only initiated after BoA first approved the deal and before I knew there was a second mortgage) and $500 to my attorney. Keep in mind that sellers will likely present you with a standard form contract that will typically require that you perform inspections, seek mortgage approval, conduct an appraisal, etc. after the contract is considered valid (in NJ that is three days after the contract is executed). Make sure your contract specifies you will do NONE of these things until approval of the short sale is provided. If you invest any money in the property you will lose that money with no recourse if the deal goes south. To put it another way, why give the guy who buys the property at the foreclosure auction a new water heater?

• Don't make the assumption that a short sale is equivalent to a “good deal”. It's not. If the home you're buying has been vacant for any length of time or is “distressed” you need to allocate more time and money to bring the house back up to speed before some inspections or a certificate of continued occupancy (CCO) may be approved by your town. My home was missing smoke detectors, the heating system didn't work, some windows were cracked and required replacement, the rear stairs did not have railings per code requirements, etc. My estimates were in the thousands to correct these issues. If the sales price plus the needed repairs or improvements exceeds the market value of nearby homes or – heaven forbid – the cost to build a new home...the short sale makes no sense.

This experience taught me that the entire banking industry needs to be far more strictly regulated. The top banks should be split up as they have too much power and are clearly getting in the way of legitimate buyers and sellers from conducting business. Here are some regulations I'd write if I were in a position to do so:

• Banks would be required to approve or deny a short sale request within 30 days. If the bank agrees to a short sale, the terms of that approval would be provided in that same time frame. It does not take 2-3 months to figure out the value of a property.

• The money provided to subordinate mortgage companies would be fixed at 10% of the sales price or 50% of the value of their note outstanding, whichever is less so they are not included in the negotiations. 10% is an industry convention at the moment but subordinates are clearly given too much power in negotiations. I'll be the first to admit that BoA were acting like a bunch of spoiled children in these negotiations but, frankly, if they didn't need to consult with the subordinate lienholder my deal would have gone through.

• Once the terms of a short sale are provided they would be fixed and valid for six months so buyers and sellers have more than enough time to complete the sale, deal with construction approvals, etc., without concern that the deal will be killed by a bunch of greedy bankers who change their mind simply to maximize their profits.

• Once a short sale is approved by the first mortgage company, the terms of the approval would be attached to all notes so even if one or more notes are sold the buyers of those notes are bound to the existing terms of the sale and cannot alter the terms or terminate the sale for any reason. Had this been the case the new second mortgage company would have been forced to agree to the terms negotiated by the prior owners and this deal would have gone through.

If there is any upside to what happened here it's that I'll likely consider any future traditional real estate sales process a walk in the park.