Desmond Pessoa is ready to walk away.
Last October, he made what he considered a pretty good offer on a distressed property in Washington Township.
It was a short sale, meaning the owner aimed to sell the home for
less than what he owed the bank. It also meant the bank had to
preapprove the reduced sale price and eat the loss.
The four-bedroom house was listed for $267,900. He offered $280,000 -- because another buyer also was interested. But 10 months later, Pessoa is still waiting for the bank to approve his short sale application.
"I have gotten to the point where my patience has worn thin," the 40-year-old Pessoa said, adding he has sunk $3,500 into the deal on things such as appraisals and home inspections.
Given the worst housing crisis in a generation, short sales have become an increasingly popular out for people who can no longer pay their mortgage. The allure is simple. A homeowner in default gets to sell his home for less than he owes and avoids the seven-year black mark foreclosure leaves on his credit report. The buyer lands a home at a discount and lenders get a faster and less-expensive alternative than a foreclosure.
But for many, the process has become a black hole. Instead of the normal 30-day closing process, buyers often are forced to wait for months to hear back from lenders who may ultimately reject their offer in the end.
Twenty percent of completed home sales nationwide are short sales, said Guy Cecala, publisher of Inside Mortgage Finance. But the number would be far higher if so many didn't fall by the wayside, he said.
"They shouldn't call them short sales," said Frank Wible, the real estate agent at ReMax All Pros Realty in Gloucester County who is handling Pessoa's deal. "They should call them a long sales, because once you sign a contract on that property, the process can take nine months to go through."
A recent survey of 3,000 real estate agents conducted by market research firm Campbell Communications said nearly one third of short sales never make it to closing. Agents interviewed for the survey said mortgage servicers take an average of 4½ weeks to provide answers on short-sale contracts. As a result, scores of potential buyers are walking away.
"Many of the sellers are so far in the hole that the mortgage companies are hesitant to accept what the market will bear, and end up forcing these would-be sellers into foreclosure," the survey said.
Unlike a traditional real estate sale, a short sale requires the approval of not only the buyer and the seller, but also anyone who has a lien on the property, said Dave Bradley, a spokesman for Charlotte, N.C.-based Bank of America, which earlier this year bought Countrywide Financial, the nation's largest mortgage lender.
The process can get further bogged down when homeowners have more than one loan on the property -- a home-equity loan, for example, or a home-equity line of credit. Because mortgage loans are typically packaged into securities, lenders also must get the blessing of the investors who may have purchased those securities, he said.
"Every one of the other entities has to sign off on the short sale or, essentially, the deal is off," he said.
In his experience, Wible said different lenders treat short sales differently. Some are responsive, but others can take up to 45 days just to acknowledge receipt of a short-sale package, he said.
Investors and homeowners interested in short sales also are finding themselves up against some pretty stiff competition these days. That's because hedge funds and big institutional investors are rushing in to buy many of these bad loans from banks and lenders.
Wible works both sides of the fence. He helps homebuyers and sellers do short sales. He also brokers distressed loans, acting as a middleman between banks and a number of hedge funds in New York and China.
Banks often are willing to take a big haircut when dealing with large investors, even when they're reluctant to approve short sales involving individuals. A bank typically recovers more money on a short sale -- about 80 to 90 cents on the dollar -- but they're more inclined to unload their distressed loans in bulk to large investors for half that.
"A quick nickel today is better than a slow dime. My grandmother used to always say that." Wible said.
Jacob Benaroya, president and managing partner of Biltmore Capital Group, an Englewood-based bulk buyer and seller of bad mortgages said banks are not interested in what he calls "one-off's" -- single loans at a time -- because it's not an efficient way to liquidate their massive portfolios.
"Investments banks are stuck with tens of thousands of distressed loans, and for them to sell them in small pieces becomes quite inefficient," he said.
To help finance its deals, Biltmore relies on a clutch of financiers who can afford the minimum $5 million it takes to join the fund. After buying the mortgages, "we take over the problem and we are the ones who may have to go forward with foreclosure now."
Many of the distressed homeowners have dug themselves deep into a financial hole.
"They might owe $200,000 to the bank, but their house is only worth $100,000," said Danielle Brooks, a partner at Biltmore.
A report by Zillow.com, a Seattle-based home-valuation service, recently found 29 percent of owners who purchased their homes during the past five years owe more to the bank than their house is worth. And homeowners who bought during the height of the housing boom in 2006 are in worse shape, with 45 percent of them underwater.
Kathy Chic, a 29-year-old emergency room nurse, recently completed a short sale on her home in June, selling the property for $205,000 -- $23,000 less than what she owed her bank, Countrywide Financial.
The Voorhees resident described the three-month-long process as "a nightmare" and a constant battle with the lender. Still, she said it was ultimately worth it.
Typically, short sales appear on a person's credit report as "Settled for Less" or "Paid in Full For Less," Wible said.
Although the effect is still negative, it's not nearly as damaging as a foreclosure, which could send a borrower's credit score plummeting nearly 200 points. So far, Chic said her credit report has not been hurt, and she was able to rent an apartment with no trouble at all.
For his part, however, Desmond Pessoa has sworn off short sales and is prepared to abandon his dream home in Washington Township if he doesn't get an answer from the lenders soon.
A big part of the problem is there are multiple liens against the property, ranging from unpaid taxes to legal judgments on loans from two different mortgage lenders. Combined, the liens are $750,000 against a home worth only $280,000.
"I entered this process with a blindfold," he said. "I thought it would be wrapped up in a couple of weeks."
Wible said he's seen his share of angry buyers throw in the towel.
"I can't say I blame them," he said. "I should have a Ph.D. after my
initials. The emotional roller-coaster is great. The problem with what
I do is either you're a hero or a scum bag. There is no middle ground.
Once things go bad, darts fly my way."