Why Short Sales Are Taking Off…
Five years ago short sales were a microscopic part of the real estate marketplace but today they represent about 10 percent of all existing home sales.
"The short sale market is new, different and changing," said Wendy Forsythe, executive vice president and head of global operations with Carrington Real Estate Services, a full-service real estate brokerage licensed in 25 states plus the District of Columbia. "It's a market where owners sell homes, buyers get discounts but transactions are tough because lenders want to protect their interests."
Short sales involve financially underwater homes. An owner wants to sell but the property value is less than the remaining mortgage amount. There could be a sale without lender approval -- but only if the owner has enough cash to cover any unpaid mortgage balance. Since most owners do not have such funds selling is not possible unless the lender agrees to take a loss.
Given a choice lenders want a fully-repaid loan and not anything less. The problem for lenders is that without a short sale the property could wind up as a foreclosure.
"While lenders never want a loss, the loss from a short sale might be substantially less than the loss from a foreclosure," said Forsythe. "Also, a short sale can be far quicker than a foreclosure, especially if a foreclosure auction fails and the lender winds up owning the property. One result is that short sales are attractive to lenders because they're less risky than foreclosures. A second result is that owners have leverage in the marketplace."
To make a short sale work we also need a buyer. Buyer demand comes into the picture because short sales are widely available at a discount, 14 percent below comparable existing homes in early 2012 according to the National Association of Realtors.
How Short Sales Work
All short sales are different but in general terms they work like this: The owner's broker locates a buyer and then the parties agree to a sale subject to lender approval. The offer package is then submitted to the lender.
Under new federal rules governing loans owned by Fannie Mae or Freddie Mac, the loan servicer must respond within 30 days to a short sale offer and make a final decision within 60 days. That final decision, however, need not be yes.
Before the transaction can close lenders will want to make sure the sale price reflects the best-possible market value and that the property is not being sold back to the borrower. "Typically there will be a pre-qualified buyer with a solid down payment," said Forsythe. "The lender will review the owner's situation to determine if there's a hardship or other factor which justifies approval. The price will reflect such factors as the condition of the property and the realistic alternatives available to owners, buyers and lenders."
Another factor which can impact the sale is demand. Because short sales have become more popular it's possible to have multiple offers for a single property.
Short sale agreements are designed to prevent owners from getting their homes back at a discount. The result is that short sales routinely include language where all parties swear they are unrelated, not in business together, and that the transaction does not involve any hidden side deals.
An additional headache can include multiple lenders with a financial interest in the property. In some cases a short sale requires the agreement of not one lender but two. This can happen when the property secures a home equity line of credit or there is another lien such as a second mortgage.
"Part of the reason short sales are complex is that there are often requirements and terms you just don't find in typical transactions," said Forsythe. "Sales professionals at Carrington Real Estate Services have experience with a wide range of short sale situations and that's a big plus when there are so many issues to resolve."
The lender never wants to get less than the remaining loan balance and often will see if there are other assets held by the owner which can be used to offset the debt. In some cases the lender may be able seek a "deficiency" judgment against the seller to recover some or all of the debt. However, in some jurisdictions and under certain circumstances a lender may be prohibited from getting additional payments.
A related issue concerns taxes. Traditionally, unpaid mortgage debt has been regarded by the government as "imputed" income. In other words, if the seller owes $200,000 and pays back $175,000 then the missing $25,000 is seen as taxable income -- even though it was not physically received by the owner.
Under the Mortgage Debt Relief Act of 2007 the rule was changed. Unpaid mortgage debt -- as much as $2 million in some cases -- is not regarded as income and thus is not taxable. The catch?
"The rule will end this year unless Congress okays an extension," said Forsythe. "It's one of the issues owners considering a short sale should review."
For more information about the short sale market, contact your local Carrington Real Estate Services sale professional.