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As housing falls, short sales becoming common
By Alison Markham, Broker-Associate, GRI, Realtor® | April 16, 2008
Buyers can get deals, but process usually takes much more time
By Jane Hodges
MSNBC contributor
updated 7:29 a.m. ET, Tues., April. 8, 2008
The Village at Green River in Corona, Calif., began marketing 19 newly-built townhouses in July 2007, just as the national real estate market began flagging. The average price of the homes, which vary in size from 1,400 to 1,640 square feet, was $505,000 at the time. Three price drops later, the homes finally began selling in March – at an average price of $309,000, says listing agent Dominic Kurtyan.
Sure, it’s another story of home prices dropping in a sour real estate market, by about 39 percent in this case. But Kurtyan says there’s more to it. Short sales have become so mainstream in some markets, such as this region of central California, that during March he and the developer behind the complex began promoting these properties’ status as re-priced “short sale” homes – homes priced below what the seller owes on their mortgage – in order to lure skeptical, price-conscious buyers.
The Village at Green River has hung a banner advertising “short sale” prices, and the complex’s voicemail greeting discusses its status as “a short sale situation.”
“We had a significant response just from changing the sign so that it advertises prices starting at $299,000,” Kurtyan says. “It’s a negative situation for everyone involved, except for the buyer who gets a good deal.”
Indeed, while buyers will get townhouses each boasting a two-car garage, two bedrooms, and two and a half bathrooms, the developer behind the estimated $8 million project will walk away empty-handed at these prices, and the multiple lenders involved will either break even or lose money, Kurtyan says.
Stories like the above have become increasingly common around the US in recent months. Last week Bethesda, Md.-based Inside Mortgage Finance, and Washington-based Campbell Communications released a real estate industry survey indicating that roughly 20 percent of all U.S. home sales in March were “short sales.”
“Our numbers suggest that 20 percent of completed home sales nationwide are short sales,” said Guy Cecala, publisher of Inside Mortgage Finance. “The number would be larger if it weren’t for the fact that one-third of all attempted short sale deals don’t go through.”
So why so many short sales? The combination of falling home prices and homes financed with low down payments means many homeowners owe more on their properties than they’re currently worth. Add to that the population of homeowners who face foreclosure due to resetting mortgages or who must sell for other life reasons (relocation, etc.) in the middle of a bad market, and it makes sense that lenders hoping to avoid more foreclosures on the books will take this alternative.
According to IFM/Campbell research, two-thirds of short sales are initiated by homeowners and one-third are launched by mortgage lenders (as a foreclosure alternative). IFM/Campbell data indicates the top reason for short sales initiated by homeowners is their inability to make mortgage payments, followed by other factors such as the value of the property declining.
In a typical home transaction the seller gets final say on which buyer gets the home, but in a short sale the lender weighs in on that decision, since it’s the lender who won’t recoup 100 percent of the seller’s mortgage balance as in a “normal” home transaction.
This means more complication for both buyer and seller, according to Tom Popik, a Campbell Communications research partner who worked on the study. Many buyers who consider putting a bid in on a short sale abandon the deal mid-way through because it takes so long for a lender – unlike a regular individual home seller – to respond to it.
“If you put in an offer on a short sale, you’ll have to wait on a response for anywhere from four to six weeks,” Popik says. “Our study indicates the average wait is 4.5 weeks.”
Buying a short sale: Time-consuming process
Knowing that the typical short sale is time-consuming for this very reason, Kurtyan said that he and the developer he represents began petitioning the lender for price drops before marketing the homes at their current prices, rather than marketing reduced prices and crossing their fingers that the lender would approve them – a common tactic among short sellers. The process started in December, he says, but it took until March for the new prices to get approved due to the lenders involved.
In the case of the Village at Green River, the developer got a loan for 80 percent of the project from a primary lender, and secured 20 percent more from individual investors, Kurtyan says. But the project, built over a 14-month period between 2006 and 2007, came on the market at the worst possible time. The 80 percent lender had to convince the 20 percent lender group to forgo some – and then all – of its investment.
Since the lender approved the new prices in late March, 11 of the 19 homes have sold, with the first closing next week.
Selling short
How a ‘short sale’ of a home differs from a standard transaction:
Lender as authority
A lender approves the sale, rather than the individual home seller.
Offer response
Lenders take an average of 4.5 weeks to OK a short sale offer, according to IFM/Campbell data. A regular seller usually responds within days.
Deficiency notes
Short sale sellers can transfer a home to a new owner for a price below their mortgage balance, but they may still have to repay the outstanding mortgage balance. Some lenders make sellers sign a “deficiency note,” or repayment agreement.
Seller/lender coordination
Sellers need to file documents and/or secure an OK from their lender to close a short sale. Buyers should investigate where sellers are with this process to get a sense of how long the transaction will take.
Agent commissions
Some lenders will forego paying (or pay reduced) real estate agent commissions on these deals, leaving consumers to pay commissions outright or forcing agents to compromise some or all of their fee.
Short sales now widespread
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