Accepting the Short Sale as a Fact of Life Today

 

By Bill Primavera

The Home Guru

 

The short sale is anything but short and certainly isn’t easy. It can be a long process that is complicated, frustrating and fraught with peril along the way. But if a homeowner is in a tight situation and in arrears on mortgage payments, it can be a lifeline. And, if the buyer is very patient, a property can be secured at a bargain price.

 

What it takes to navigate a short sale is a trusted realtor engaged by the seller, experienced in the process, and a lawyer with the same kind of expertise. And for everybody involved, it involves fortitude, and a healthy dose of it.

 

Here in upper Westchester and Putnam, we see more and more short sales listed in the Multiple Listing Service, to the point where a new subject line was added recently to the listing form specifically indicating whether the listing falls into that category.  Following the subprime mortgage crisis of last year, caused by lenders awarding mortgages to unqualified buyers who expected surging home pricing to continue forever, is the secondary mortgage crisis we now face, based on the wounded economy and increasing unemployment, where once-qualified buyers, now unemployed, can no longer make their mortgage payments.

 

Technically a short sale is one in which proceeds fall short of the balance owed on the property’s loan. The lender can decide that selling the property at a loss is better than letting it fall into foreclosure, which would incur a larger financial loss for the bank and a poorer credit report outcome for the borrower.

 

While neither side is doing the other a favor, a short sale is simply the most economical solution to a problem for both parties.

 

Almost a year ago, a lawyer came to my real estate office to discuss short sales and, at that time, he advised that we realtors stay away from them if we could because of the gigantic amount of paperwork involved, the multiple levels of approvals required, and a high level of risk that the sale would not go through.  Now, with the combination of many more short sales in our market and with buyers looking for bargains, it’s not so much a choice.

 

Just recently, I figuratively earned my Master’s degree in short sales as the agent for a seller who was more than six months behind in his mortgage. Luckily, my partner in the process was David O. Wright, a lawyer with great skill in the process. “I would say without exaggeration that a short sale requires as much as 10 times the effort and time expected for a typical transaction,” David estimated.  “Add to that the strong possibility that the sale may not get the approval of the bank and that the property will fall into foreclosure, and it makes for a much higher risk factor.”

 

I would agree with that estimation.  David had received authorization from the seller to deal with the bank, and I was the daily contact with its loss mitigation department.  From the time we received an offer from a stout-hearted buyer until we were able to close involved more than six months, rather than the typical 45 to 60 days.  “An added risk is the fact that the buyers’ mortgage company will not give the buyer an approval until after the seller’s lender approves the short sale, and this is just another step where the deal can fall apart,” David noted.

 

Much of the complication, as I observed it, was that the lending institution itself was in crisis, dealing with an avalanche of short sale applications and foreclosures, and many times representatives would take days, even weeks to get back to me.  I was required to send in all documentation by email three different times, with the first two deliveries having been “lost” as the case was moved from one disappearing bank representative to another.

 

But assuming that the transaction can go more smoothly than the one I experienced, buyers do not have to shy away from the possibility of acquiring a property though short sale, especially if they really like the house and the price, which the bank will typically determine from an appraisal or a broker price opinion.

 

Given the unprecedented number of losses that mortgage lenders have suffered during 2009, they are more willing now to accept short sales. When I applied on behalf of my seller in the third quarter of 2009, it was estimated that only 30 percent of short sale applications were approved. That number is improving, with short sale success rates varying from state to state and from bank to bank, but the process is still not easy.

Multiple levels of approvals and conditions are still very common with short sales. Junior lien-holders – such as second mortgages and special assessment liens – may need to approve the short sale as well, which adds additional time.

 

The most important aspect of getting a short sale approval is gathering a mountain of information to be presented by a particular deadline date set by the lender. This material includes:  a sales contract signed by both seller and buyer;  mortgage pre-approval of the buyer;  a letter indicating why the seller fell into hardship since the loan was written, such as a lost job or disability;  bank statements from the seller for the past two months;  W-2 and 1099 forms; a personal budget sheet for the seller, indicating all personal finances, from car payments and insurance to gas required to get to work; the broker’s price opinion; and finally, a preliminary HUD1 statement with all final closing numbers, including the broker’s commission. 

Depending on the bank, there may be other requests for information, such as costs for needed repairs.

 

“The lawyer must be very careful to include every cost involved with the short sale, because somebody could get stuck with the cost of anything not included,” David said.  “Another thing I always disclosed to the seller is that after he’s off the hook with the mortgage company, the amount of the loan forgiven by the bank can be considered income to the seller, and, until very recently, the IRS could come after him for it,” he continued. “But there are still many pitfalls along the way, and that is why it’s very important for a short sale seller and buyer to ask prospective lawyers and real estate agents what their experience is with short sales.”

 

David further indicated that lawyer must charge higher fees for a short sale because of the extra time involved. A legal fee for a traditional transaction might be $900 to $1200, but for a short sale, that can escalate from $1,500 to $2,500.  If the short sale is approved, the brokers on both ends of the deal receive full commissions for their work, which is formidable compared with a regular deal.

 

While this report may seem dire, it looks as though the short sale is with us for some time to come, and looking at it more positively, over and above the hassle of getting the approval, it can be an odd sort of win-win situation.  For the bank, it helps them capture as much of the loan amount as they can and, for the seller, it helps put this experience behind them by being forgiven a portion of the mortgage.  It is estimated that with a foreclosure, a home owner can expect to lose 300 points from a credit score, but with a short sale, this is reduced to between 80 and 100 points, and the seller can leave a home with greater dignity.

 

A short sale is better than a foreclosure for the neighborhood as well.  With a short sale, the owner will probably stay in the home until it sells while, with a foreclosed home, the owner must leave the property, and an abandoned property, not properly cared for, can reduce the value of other homes on the block.

 

All of this can be hard to accept when we’ve come off a long joy ride where our homes could be used as an ATM machine with ever-escalating values.  Now, for some of our residents who are stuck with a higher mortgage than their home can capture in a sale, this is one way to navigate eventually to a happier, more secure time.

 

Anyone contemplating the necessity of a short sale can reach David Wright for advice at 914-245- 0455.

 

Bill Primavera is a licensed Realtor® (PrimaveraHomes.com), affiliated with Coldwell Banker, and a marketing practitioner (PrimaveraPR.com). He can be emailed at bill@PrimaveraHomes.com or reached directly at 914-522-2076.  Follow him on Twitter for housing market updates at Twitter.com/HomeGuruNY.