The property was in need of a few minor repairs but it was listed as a short sale, and being offered "as-is." A short sale is kind of intermediate step before foreclosure. An underwater homeowner comes to an agreement with their lender to sell the property for less than they owe on their mortgage. The lender then accepts the lower selling price as full payment of the home loan. The house is listed on the open market rather than at auction, but the lender - not the seller - decides which offer will be approved.
Short sales, a little known phenomenon at the dawn of the housing crash, are becoming increasingly prevalent and are poised to become the next wave to hit the distressed real estate market. Orange County saw a 30 percent increase in them over the last year as the number of foreclosures shot down by 62 percent.
This is due in large part to the state and federal moratoria on foreclosures, which prompted lenders to favor alternatives like short sales. In April the Home Affordable Foreclosure Alternative program will launch, giving lenders further cash incentives to provide short sales.
But there are still a few kinks to be worked out in what is often an unpredictable and inconsistent process.
In the case of the Williams, the house was slated to close in early March. The Williams had a number of inspections and appraisals done and they began repairing the few problems that were found - a broken garage door, busted toilets and mold and moisture issues in some of the walls.
At the end of February, just two weeks before the Williams were supposed to close escrow on the house, they got a phone call from the seller's agent.
"They said 'We can't sell the house to you,'" said Leslie Eskildsen, the Williams' agent. "They said they have to sell the house to someone who made a previous offer that was already approved by the bank and then he's going to turn around and sell it to you immediately for the same price that was already agreed upon."
The practice is variously called an "A-to-B, B-to-C" transaction, double escrow or simultaneous closing. No matter what you call it, it's no less convoluted.
The idea is that an investor comes in with a low ball offer on a short sale and gets approved quickly by the bank because they usually have cash funding. They flip the property immediately and make a fast profit, and the end buyer still gets a low price with the added benefit of a fast closing. That's a rarity in short sales where buyers can wait months and even years for their offer to be approved by the bank.
Eskildsen said such practices are becoming more and more common in what she calls the "Wild, Wild West" of short sales - an "anything goes" arena where there are no real rules or standard procedures, and no shortage of people looking for creative ways to make a quick buck.
Jessika Williams said when she found out about the "B" party she and her husband considered pulling out of the deal, but they weren't quite ready to walk away.
"We went back to the house and looked at the house and we still felt really good about the house," said Williams. "I think the main reason we stuck with it was because we had invested so much money up to that point that we didn't want to lose it in this house."
The Williams had already spent about $5,000 on inspections, appraisals and repairs. So they drew up new contracts with the "B" party buyer and started restructuring their financing with their lender.
"But the closer we got the more we realized there were things that weren't adding up here," said Williams.
The supposed cash investor insisted that the Williams pre-fund their loan before their sale even entered escrow. This sent up immediate red flags with their lender, which refused to even open loan documents with a seller who did not yet legally own the property.
Eventually the Williams' lender identified five red flags of fraud and declined to approve their loan. These included the request to pre-fund, as well as suspicious links between the selling agent, seller and "B" party buyer.
Most major lenders prohibit such practices and they will soon be forbidden under the new HAFA guidelines going into effect in April. Under the new rules borrowers will need to sign a Short Sale Agreement promising that they are not related, married or in business with the buyer. The agreement will also stipulate that the buyer cannot flip the property and must wait 90 days before re-listing it.
Instead of closing escrow the first week of March, the Williams signed cancellation papers to pull out of the transaction. Jessika Williams said she won't be looking for any more short sale deals for the time being.
"For us they just seem too risky right now," said Williams. "We didn't know how to tell what was really going on and whether there were shady dealings going on or not. There's just too much uncertainty about these types of sales right now."
Ari Afshar, Vice President of the Southern California-based short sale negotiating company Housing Assist America, hopes that as the expected wave of short sales hits, the process will become more streamlined.
"We certainly hope that the new HAFA program will work to standardize the process because short sales are going to be huge in 2010 and probably in 2011 as well, and there's a lot of inefficiencies going on right now."