Jan082012

Report from the trenches: Short sale purchase experience

I often get emails or comments from people sharing their homebuying experiences. Sometimes, they allow me to share these with everyone on the blog. Next weekend, I will report on a borrower’s experience with Farmer’s and Merchant’s Bank. Today, I will share a story posted in the thoughtful remarks this week by mofa.

Real experiences from real people

I’ve been meaning to follow up on the short sale I was trying to purchase in south Redondo Beach in the spring. It went through, and no one was strangled, which I believe should be the criterion for “successful” short sales. It was visible as an active listing for about twelve hours on Redfin and the MLS, but I’d known that the property was in distress for several weeks prior. I’d paid for a realtytrac subscription and was vaguely trying to figure out if I had the gumption to approach someone in the foreclosure process to suggest a short sale purchase, but I didn’t end up doing that. However, I noted a few properties scheduled for auctions that I really liked, though I wasn’t inclined to attempt to buy at an auction.

One day it actually showed up on redfin, so I contacted my real estate broker immediately. We looked at it that day and I put in a verbal offer for the list price that night. Unfortunately, it had already gone pending, which I assumed meant that an all-cash buyer had jumped in at list or higher. However, my broker suggested I put in a written backup offer just in case, which was pretty good advice.

Over the course of about 18 months, I’d gradually gone from wanting a condo (e.g., Brookside Village) to wanting a townhouse, to wanting a detached townhouse, to deciding that the stories of HOA’s running out of money were scary, so at that point I was really looking for a house, hoping for some of the nicer areas in Torrance. Over this long period, I’d continued adding to my savings, and my actual criteria were ever-evolving, though there were two at the top that didn’t change — commute time to work needed to be within 35 minutes and it needed to be a place I would not mind living in _forever_.

However, prices were still a little out of reach for houses that met my “forever” criterion, and my broker’s “high pressure tactics” went along the lines of telling me not to settle, that this was a lot of money and I’d have to live in it for a long time. (I never know who’s reading things, so I’ll clarify that there was no pressure whatsoever; my broker is a fellow engineer I’ve known for ten years, and he maintains his license because he and his wife just like touring homes for sale to get remodeling ideas).

Two months after I put in my backup offer, the listing agent contacted my broker, saying I was up as the current buyer of the house. The previous buyer had not been able to get financing, which surprised me, because I’d assumed they were all-cash. In any case, I was at the top of the pile because my down payment was in cash (so I wouldn’t have a contingency based on selling an existing property) and I’d gotten pre-approved for the purchase price several months earlier. Then they said I needed to re-submit my offer for $20K less than my original offer, and that I’d get a 3% kickback at the close of escrow from the mortgage holder. This seemed strange, but I was told that it took so long to get JPM Chase (which held both the first and second mortgages) to agree to terms that it was literally worth $36K (the difference) for them to not have to get the various parts of the bank to agree on my higher offer. (Minor note: here’s one way things are being gamed — my official purchase price was $16K more than I effectively paid, keeping prices that much higher than they should be. At least that’s my perspective).

Long story short, the house was nice, but a little ramshackle, but when I sent in a good home inspector, he found big issues — the roof was nice looking and completely porous — the roofing guy we called to double-check was literally laughing as he described the problems, there were also remnants of “tube and knob” wiring (from just after the Cenozoic era, I believe), as well as other issues (outlets with reversed polarity, outlets not actually grounded, etc. Also, the the floor furnace didn’t seem functional and the water heater would need immediate replacement. It basically meant that I was going to need to spend my $36K savings on repairs. After the mold inspection turned up nothing meainginful, I was fine with buying it and making the repairs, because (this is a big deal to me) the housing market is not a continuum; you’re dependent on “quantization effects,” basically needing to find an actual house that’s actually for sale at the time you want to buy it. The only control I had was my savings and my not being desperate to buy.

In any case, escrow eventually closed, with some drama, some name-calling and my waiting until two days before escrow closed to pay for the termite repairs that the seller (in bankruptcy, with no available money, living with her parents in another state) had technically agreed to pay for. I’d known from the time we changed our offer per their instructions that there was no way she’d be able to pay for that, and that I would likely have to pay. I’m leaving out some friction between the listing agent and my broker because the Internet can bite you in the ass occasionally, but suffice to say there were some trust issues.

So if I’m not talking about juiicy arguments, what’s the point? Well, the process is just so strange. After the close, we checked the MLS, and the dates it was listed as “active” don’t make sense — it looked as if the house had been active for several weeks before my first offer, when in fact it was only “active” on my broker’s MLS (and redfin) for the one day; after that point, it was just “pending” for several months, mostly with the first buyer, with the last 26 days with me. Also, how sane is it to tell someone willing to pay X+$20K to lower my offer to X? The events seem exactly the same as they might look in a completely different, hypothetical situation with a different agent who low-balled a bank and didn’t make them aware of a higher offer (Internet/bite/ass; see how defense contractors learn to speak?).

In any case, I spent about $22K on repairs before moving in. I had all of the wiring pulled and replaced with new wiring, replaced the roof, replaced the water heater, removed the floor furnace, installed a wall heater and, because of all of the holes in the drywall from the electrical work, had the drywall repaired and the interior professionally repainted. That last was not a repair, but it upgraded it’s physical condition from “meh” to “wow,” and I’m glad I spent that money.

As the dust settles, my take-away is that, as irritating as the process was (given that the short seller gets nothing other than a little cash from the bank for not trashing the place), I got through the easy version of a short sale; I can’t imagine how difficult it would have been with the added headache of negotiating with the bank. So, here’s the value added part of this post:

I suspect that the likeliest way to get a reasonable price on a short sale is to put in a “clean” backup offer on a pending short sale and hope that the (possibly hand-picked) buyer in line ahead of you can’t get financing.

I also want to note that some Realtors(tm) don’t like dealing with short sales; I have some friends who’ve been looking for awhile, and they’ve basically been “fired” by their various agents for holding out for “perfect” deals. Given that my broker is a high-earning engineer whose SAHM wife pores over listings as a weird hobby, they didn’t give a crap how long it took and agreed that my waiting for a “perfect” place was appropriate, given that I was in no rush to buy.

I don’t know if I will someday regret this purchase, but with the price and the downpayment, I’m below rental parity, living on a block that’s “optionally historic,” which seems to have resulted in the block remaining mostly SFRs instead of 2- and 3-on-a-lot townhouses in nearby areas, and my primary criteria have been met: I’m 18 minutes from work, living in a pleasant, remarkably quiet neighborhood. If I can manage my $2600/mo PITI, I’ll be okay with this place forever. An unexpected benefit: though I continue to read this blog, patrick.net and dr housing bubble, I no longer pore over zillow and redfin listings for 1-2 hours a day, and in retrospect it’s amazing how much time I’d been spending on these sites. Also, my broker’s wife (who is a terrifying, pit bull of a negotiator) reports that she continues to not see any houses on the MLS with comparable deals — they pop up as pending and usually close rather quickly.

This story is fairly representative of what people go through trying to buy a short sale. Short sales are the most emotionally difficult transactions a buyer can enter into mostly because they are fraught with disappointment.