Friday, July 11, 2008

Longest escrow ever, or when bad escrows happen to good sellers

Here’s the story of my client, Marc, who was caught in the crossfire of this transitioning market. Marc bought 1210 N. California (pictured above) in Burbank in 2002. Subsequently, he and his fiancée bought a home in a new development in February 2007, with a closing set for June 2007. They planned for the sale proceeds from 1210 to cover much of the cost of the new house.

So far, so good. The r.e. market was still humming along at this point, and we put 1210 on the market in March 2007 for $780,000.

By early summer 2007, we had lowered the price twice and had negotiated three low-ball offers. No sale. Marc refinanced 1210 to cover the down payment of the new house, and the new place closed as scheduled. A qualified buyer for 1210 soon appeared and we opened escrow with a purchase price of $700,000 in mid-July. The buyer wasn’t putting much down, but neither were any other buyers at this time.

Then August 2007 came, and the real estate lending market screeched to a halt. The buyer of 1210 couldn’t get a loan. Neither could anybody else. Marc was now making two mortgage payments, with no end in sight. What to do?

Marc rented the house to the would-be buyer on a lease-option deal. The buyer would then pursue getting a purchase-money loan in early 2008. Why the wait until then? Because we all hoped the lending market would loosen up by then.

Spring ’08 came, and the buyer began to work on getting another loan. The lending market had indeed loosened up. Sort of. Loans still aren’t that easy to get, and this particular one was no exception.

And, by this time, housing prices had come down. The house re-appraised at $630,000. Although he wasn’t happy about the price reduction, seller Marc is a realist. He didn’t want to be stuck paying two mortgages forever. Plus, he and his fiancée just wanted to get on with their lives. The Realtors involved (me, my brokerage and the buyer’s agent and brokerage) shared some of the pain by reducing our commissions (gulp).

The almost-a-year-long escrow finally closed last week. My seller took the hugest hit, obviously. I think this story is instructive as an excellent example of the pain absorbed by individual sellers in this new real estate market.

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