Some homebuyers are forced to sell short
Cary Richards, a 55-year old real-estate agent at Wilson Realty Exchange in Seattle, didn't expect he'd have to sell his Edmonds condo this...
Special to The Seattle Times
A short lessonSHORT SALES, where homeowners expect to sell homes for less than they owe on the mortgages, are more complicated than traditional home sales. Here's a look at what's different:
Lenders must approve the deal: Because a seller won't fully repay his or her mortgages, lender have to approve the buyer's offer and price. A lender can reject an offer or ask the seller to get a higher or amended offer. If a homeowner has a second mortgage or home-equity loan, the secondary lender is likely to receive a lower percentage of what it is owed. It can slow or nix a deal the primary lender has approved.
Lenders take a while to respond: Lenders take an average 4.5 weeks to respond to a short-sale offer, according to Inside Mortgage Finance. If the seller is facing foreclosure, the lender might expedite the process to avoid repossession and having to handle the sale, or it might let the home foreclose. Lenders who sell mortgages may take longer because they have to track down everyone who must approve a deal, said Don Riley, president of Windermere Services in Seattle.
Buyers often abandon short sales: Lender participation slows the sale process, so buyers often walk away because circumstances or financing won't let them wait. To better gauge how long a transaction could take, buyers may want to find out if the seller has had previous offers or if the short sale is "lender-approved," meaning the lender has already green-lighted pricing.
Seller still owes on the home: In Washington, lenders may ask short sellers to sign an "unsecured note" (called a "deficiency note" in some states) for all or part of the balance of their unpaid mortgage debt, says Jillayne Schlicke, a real-estate educator, CEO of CE Forward and founder of the National Association of Mortgage Fiduciaries. Some sellers are deemed unable to repay the debt, but others are held liable. Sellers should discuss their position with a lawyer at the beginning of the process, Schlicke said.
Agents commission reduced or cut: Some lenders will pay lower (or no) agent commissions on these deals, leaving sellers to pay their agent outright or forcing agents to give up some or all of their fee.
Sources: Inside Mortgage Finance, National Association of Mortgage Fiduciaries, Windermere Services
Cary Richards, a 55-year old real-estate agent at Wilson Realty Exchange in Seattle, didn't expect he'd have to sell his Edmonds condo this year for less than he owes on it.
But like a growing pool of homeowners in America, he bought the home less than five years ago, during better economic times, and pulled equity out of it and his house to pay for other projects — in this case, a small residential development in Shoreline that stalled in late 2007 when the market tightened.
In late May, Richards owed $202,000 — $97,000 on his first mortgage and $105,000 on his second — on the Edmonds condo he bought for $120,000 four years ago. While he had kept current on payments, he feared that he eventually wouldn't be able to, partly because of his second loan, which was from a private lender at 12 percent interest. The situation led Richards to work out a short-sale agreement with his second-mortgage lender to sell the condo for less than he owed on it. A short sale requires approval from the mortgage holder because that lender will have to agree to accept less than the amount owed on the loan.
He sold his house last month, too, also in a short sale.
Richards is not alone in a short sale. For many homeowners behind on their mortgages, a short sale is a way to avoid foreclosure.
With delinquencies and foreclosures continuing to rise, short sales are increasing. Lenders are more likely to agree to a short sale when foreclosure rates are high, presuming they'd get more money than they would if they foreclosed and had to sell the homes at auction with so many others.
In April, the most recent data available, Bethesda, Md.-based Inside Mortgage Finance and Washington, D.C.-based Campbell Communications released research-survey results indicating that roughly 20 percent of all U.S. home sales in March were short sales. Locally, about 6 percent of sales are short sales.
Richards says he knew he had taken a risk by leveraging equity in his condo and in his Brier home — and he understood that not all risks pay off. He lost a "chunk of change," he said, because the timing for the Shoreline project was bad.
"I definitely didn't think I'd end up doing this, though," Richards said. "I thought I'd have a half-million in the bank [from the project] about now."
Richards listed the condo at $199,000 for a little more than a month in the spring. He lowered the price to $179,950 in late May and kept it on the Multiple Listing Service even though he decided to try auctioning it. To repay lenders in full and pay sale-related fees and taxes, he says he needed to sell for $215,000.
The condo didn't sell at auction. Late last month it sold for $170,000, far less than Richards had wanted, to a buyer who found it on the MLS. He paid his first mortgage in full but got the private lender to take less than the full amount Richards owed on the second mortgage.
"I don't know if 'happy' is the right word to describe the situation," Richards said. "One of the keys to this going through was that I had worked with a private lender on the second loan rather than a regular bank."
In recent years, many people were buying homes with low down payments or interest-only loans. Others tapped their home equity with second mortgages or lines of credit to pay for home renovations, tuition and other bills.
But some found that when times got tough and they needed to sell, what they could get by selling wouldn't cover what they owed.
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.
Inability to make mortgage payments is the primary reason homeowners cite for short sales, the research says.
In May, the Northwest Multiple Listing Service says, short sales accounted for less than 4 percent of listings in King, Snohomish and Kitsap counties. In Pierce County, the figure was just shy of 7 percent.
"I'd say those numbers sound pretty accurate for now," said Don Riley, president of Windermere Services in Seattle and a board member of the National Association of Realtors. "I'm hearing more and more every day from agents that more short-sale listings are coming in."
Sellers are required to disclose that they are working on a short sale. Some sellers and their agents opt to do that in language visible only to other agents on the MLS system.
Pierce County has been hit harder by short sales than other parts of the region. Some lenders and mortgage insurers have designated the county a "declining market," meaning home prices are flat or falling.
Bill Baker, an agent with John L. Scott Real Estate in Orting, Pierce County, says he estimates that 30 percent of listings in the area are short sales. He estimates that there's one buyer for every eight homes on the market.
Most short-sale listings he's seen, Baker says, are coming from owners who refinanced during the past five years and pulled money out of their homes at the market's peak. Now that the market has slowed, they're underwater, meaning they owe more than the home is worth.
Indeed, Jillayne Schlicke, a real-estate educator in Seattle, says that after the market changed in August 2007, she began to see more demand from agents who wanted to enroll in classes about short-sale procedures.
"The demand for that [short-sale] class has come and gone over the years," Schlicke said. "But right now I'm seeing a sharp upswing in interest. Real-estate agents who are listing homes haven't all been taught how short sales work."
Agents, buyers and sellers need to familiarize themselves with the process in the coming months, she and others say.
"Short sales are going to be part of the market for the next few years," Baker says.
Jane Hodges is a freelance writer
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