By early July, instead of celebrating their 34th wedding anniversary, Joseph and Mary Damiani were dealing with hyper stress and a headache-producing pile of paperwork. That’s about all they had to show for eight months of struggling to sell their underwater four-bedroom Colonial in Locust Grove, Va.
And that’s after they agreed on a sales price with a prospective buyer.
The good news is that the potential purchaser has been extraordinarily patient. “This house exceeded my expectations," said Tom Depew, 31, who is single and lives in McLean, Va. “Nothing is pushing me against the wall, so I can wait it out."
The holdout: the Damianis’ two lenders, which the couple says have been putting them through a grinder as they seek a short sale that would allow Depew to buy the property for $100,000 less than what they owe on it. The Damianis are hoping the lenders will view the deal as beneficial to their institutions by helping the couple avoid joining the many underwater owners who have walked away from their properties.
“Get ready to bare your soul," Joseph Damiani said as a warning to other underwater sellers considering short sales.
Without question, experts say, short sales are the most complicated real estate transactions a homeowner can face — and the most prone to failure. The failure rate for short sales locally is 49.4 percent, compared with 17.9 percent for foreclosures and 13.1 percent for traditional sales.
By going through a short sale, though, sellers can avoid having to come up with thousands of dollars at the closing to make up the difference between what they owe the lender and what a buyer would be willing to pay.
Central to being approved for a short sale is the seller’s “hardship statement" filed with the lender proving an inability to repay the loan. The loss of a job, death of the family breadwinner, military deployment, divorce, job relocation or illness and its resulting medical bills would be among legitimate reasons.
The price negotiations
Once that hurdle is crossed and permission is given to proceed with the short sale, an intricate web of negotiation begins. The seller must find a buyer, agree on a price, then wait and wait some more for the lender, which can either accept the buyer’s offer, reject it or counter it. The process can be even more cumbersome when more than one lender is involved.
When a job transfer brought the Damianis to Virginia from North Carolina seven years ago, they bought a four-bedroom, two-bathroom Colonial for $389,000. Built in 2005, the house, located in Lake of the Woods — a water-oriented community 17 miles west of Fredericksburg — is in pristine condition and one block from the community’s golf course.
Unfortunately, like many buyers then, they purchased near the height of the market. Joseph Damiani’s job transfer to Atlanta three years ago prompted the couple’s need to sell. By the end of 2011, the home was listed for $289,000.
When traditional marketing efforts failed, the Damianis said they thought the short sale process would help head off looming financial difficulties so they could avoid falling behind on their mortgage payments. “We were trying to do the right thing," he said.
They qualified for a job-transfer hardship with their first trust lender. But the second trust lender would not talk to them until their payments were in arrears for at least two months, a path that would potentially ruin their stellar credit rating.
“Most lenders require you to be delinquent before they will start the short sale process," said Sara Rodriguez, a lawyer who negotiates short sale transactions between lenders and sellers.
Brian Gormley, the founder of Cornerstone Properties, said: “It’s difficult for banks to know who is being sincere" with their hardship statements. “Honest people are hurt by those gaming the system."
That means that those being responsible, by flagging a potential problem a few months before a projected default, get lumped in with the “strategic default" crowd — those who can afford to make payments but walk away because their homes are underwater.
When the Damianis received an offer of $285,000 from Depew in October 2011, they didn’t know their short sale journey was just beginning.
Who owns the loan?
Once upon a time, you originated a mortgage with your local bank. That bank provided the money for your loan as the investor. It also was the servicer — collecting your payments and paying your insurance and taxes out of escrow.
It rarely works that way anymore. The originator, investor and servicer are often different entities. Mortgages are bundled and sold multiple times. Servicers (where you send your payments) may have hundreds of investors.
“People don’t realize that while you can be dealing with Bank of America or Wells Fargo to negotiate the short sale, they might only be the servicer and not the owner of the loan," Rodriguez said. “The owner of the loan — the investor — is the one that makes the ultimate decision."
That explains why various short sales with one bank can have different outcomes. She noted that most lenders don’t provide their guidelines in writing, which is why it’s so frustrating. “There is no common sense in the short sale process," she said.
“Mortgage insurance, homeowner associations or a second lien make the process more difficult," Gormley said, because each has additional approval rights.
The Damianis’ loans have been sold several times to investors the couple has not chosen. Their first trust is held by an investor rated “F" by the Better Business Bureau. The second trust has no BBB accreditation. Each has its own requirements and time lines. The lack of communication and coordination between the two has led to major delays and the need to resubmit paperwork.
Morgan Knull, a real estate agent with Re/Max Gateway, said, “Have a conversation with your lender" before trying the short sale route. It’s often in the bank’s interest to help homeowners stay in their homes. Owners should make sure they’ve exhausted all options for loan-modification programs, he said.
A short sale is not the solution to all of homeowners’ economic problems. For example, the loss that a lender absorbs — the deficiency — is not always forgiven.
Mary Ann Weaver, the negotiator now working with the Damianis, noted that lenders sometimes require an unsecured promissory note on a lesser amount, spread out 15 years or longer. Some require a cash payment toward the deficiency. Some retain the right to pursue the deficiency in the future.
And, unlike with foreclosures, the short sale seller is responsible for all maintenance and expenses on the property until it’s sold. Other expenses, such as delinquent homeowner-association fees, tax liens, title searches and closing costs may not be covered by a lender, but must be cleared before closing.
Also, short sales may have tax consequences. Although the Mortgage Debt Relief Act of 2007 generally does not count the debt forgiven on a primary residence as income for the seller, this program is slated to expire Dec. 31.
For homeowners, trying to keep up with all the paperwork and constant follow-up required and ensuring that often recalcitrant lenders are doing their part can be a full-time job. That’s why many real estate agents are turning to short sale negotiators — people who are well-versed in the terminology, laws and quirks of the process.
“Short sales get into a lot of lawyerly language and fiduciary duties above and beyond the expertise of the average real estate agent," said Mary Wharton, an agent with Long and Foster. “A specialist can help structure a contract that will be most acceptable to a particular lender."
Efficient, frequent communication between your agent and the lending institution or institutions is vital in the short sale process. Missing documents or looming deadlines, if not addressed quickly, can halt — and possibly derail — all proceedings.
To find the best agent for your circumstances, Gormley, of Cornerstone Properties, suggests interviewing several and asking pointed questions, such as: How much experience do you have with my bank? How many short sales have you done?
(Short sale specialists can be found at agentlocator .bankofamerica.com. Many of these agents work with short sales beyond those handled by Bank of America.)
Keep in mind that real estate agents and negotiators do not make money from short sales, no matter how long the negotiations have been going on, until the deal closes. Their commissions are usually part of the negotiated price the lender approves.
Short sales can hit a snag or come undone at any turn. Whether you are a buyer or a seller, prepare to dig deep into your well of patience.
“Maybe one out of 25 short sales gets approved in two weeks," said Rodriguez. Others can take three months, six months or longer.
One hang-up may revolve around the appraisal. The appraised value needs to be commensurate with what the buyer offers to pay, Gormley said. But sometimes a lender uses a “broker price opinion" (BPO) — which may be a “desk appraisal" by a real estate agent who hasn’t visited the property. The resulting “market value" defined could be way out of kilter with the current economic climate or the condition of the property.
Rodriguez said she was recently issued one BPO based on property values two years ago. “They’re not consistent in placing value," she said.
Moreover, the sellers have to worry about the buyer potentially getting cold feet or being drawn away by a better offer, forcing them to restart the process.
Depew, the prospective buyer, was not required to put up any earnest money and had a clause inserted in his contract stating that after 45 days, he needed to give only three days’ notice to walk away without penalty.
“Don’t put forth any of your own money until all time limits have been met," said Depew, who suggests that buyers continue to look at other properties while waiting. “Bail if something else comes along."
Why not just foreclose?
So why shouldn’t you save the headaches and go the foreclosure route instead?
The applause for short sales over foreclosures comes from three groups: Your neighbors favor short sales because they seem to have a less negative impact on the community. Lenders are glad someone else has to maintain and sell the property. And sellers’ credit ratings take less of a hit.
If the deficiency is waived, the credit report will say something like, “loan paid off for less than owed." It’s still a hit, but not as bad as a foreclosure.
Short sales are one of those “heartbreak things" for the seller, said Wharton, the Long and Foster agent, but for a buyer, “if you can put up with the stress, sometimes you can get a very good deal."
On Aug. 7, the Damianis learned that their short sale journey was finally over. The sale and Depew’s VA loan were approved, the inspection is done and settlement is scheduled for early September.
Depew is delighted. “So the patience and perseverance paid off in the end after all," he said. “Absolutely perfect and I couldn’t ask for a better home."