Cumbersome short sales often the only route for a home seller in trouble
After years of strong sales and of owners using their homes as ATMs -- only to see it all come falling down in the biggest housing crash in recent memory -- it has come to this.
If you want to get a home in trouble sold in today's market, there's a strong likelihood you'll have to go through the complex, time-consuming short sale route to get it done. And if you're a homebuyer, it's almost impossible to avoid this growing portion of the homes listed for sale.
It didn't take Alesha Sumsion and her husband long after they started house hunting to notice just how much short sales have proliferated along the Wasatch Front. 'Most of the homes we looked at ended up being short sales,' she said. Not surprisingly, the couple ended up buying their dream last month, a 6,000-square-foot home with all the bells and whistles, via a short sale at a sizable discount in South Jordan.
In Salt Lake County, for example, nearly one-quarter of all residential listings are short sales, which involve properties being offered by those who owe more than their properties are worth, known as being under water.
Many sellers in this situation can't keep up their monthly mortgage payments. Rather than let the properties fall into foreclosure, they try convince their lenders to accept less than they are owed in order to get the property sold.
Short sales gain momentum in bad economic times and when home sales and prices begin to stagnate or fall. They often peak when the market bottoms, which most economists agree could happen by the end of this year or in early 2011.
It's all in the timing
Buying at the height of the market in 2006 and 2007 -- and having to sell in a down market -- is a big factor in a lot of today's short sales. Just ask Jeremy Stroup of West Jordan, who purchased his three-bedroom, two-bath rambler in a new subdivision in 2007 for $362,000. He has watched it fall in value by more than $100,000, and after a divorce late last year, Stroup began to worry not only about how under water his home was, but about making mortgage payments over the long term on only his salary.
After efforts to work with his lender on a loan modification failed, Stroup opted for the short sale route. Months later, the bank has approved a selling price of about $250,000, and he could be out and living with his mother by the end of the month. Although there's some relief he will soon move past his predicament, 'there is definitely disappointment and stress in losing your home,' he said.
Ill-gotten gains
Another generator of short sales is mortgage fraud, which has become a growing problem in recent years. A 2,000-square-foot starter home in a quiet West Jordan neighborhood illustrates some of the shady deals that have ended up badly.
The owner of record claims his identity was stolen and that thieves purchased the home with his personal information. The scammers cashed out of equity gained during the housing boom by taking out a second mortgage and later rented the property before skipping town. But the victim, who found out a home was purchased in his name only when he was denied credit, is still on the hook for the fraudulent mortgage while authorities sort out the mess. Olsen has been hired and found a buyer willing to pay $199,900 for the fixer-upper with a weedy lawn, a missing stove and in need of a host of repairs.
The weight of multiple loans
A few years ago 'everybody was using their homes as an ATM machine,' taking out home-equity loans to buy new cars, motor homes, new furniture says Realtor Mary Olsen of Keller Williams South Valley Realty. In Riverton, she shows a home that's part of a deal complicated by the fact that two banks are involved. Although the owner is upside-down on her mortgage and wants out, and buyers have made offers, Olsen has yet to get both banks to agree on a selling price. So she waits.
An owner in this situation often tries to unload properties via a short sale because they generally damage credit less than a foreclosure. But a bank has to figure out if a short sale is in its best interest. Such sales often can be beneficial to lenders because they typically result in losses of just under 20 percent of the loan amount, compared with losses of as much as 40 percent for homes sold after foreclosure, according to various estimates. That's because the costs of foreclosure can include not only legal fees, but taxes, insurance and the expense of maintaining the home until the property is sold. Also, there could be costs for repairing property damage that sometimes occurs when a homeowner is kicked out in a foreclosure situation. But banks, though moving faster in short sale situations than they were just a year ago, still can take months to approve and complete one. That can dramatically stretch out the homebuying process to many months.
Why does it take so long?
Financial services companies are in the business to lend and service mortgages, not to dispose of real estate assets. Simply put, many aren't very good at dealing with problem loans. And right now, banks are swamped with short sale requests.
'They are buried,' said Lyman King with Security National Mortgage in Midvale. Plus, after mortgages are originated by a bank, they often are pooled and purchased by investors, which must sign off on short sales, as must companies that are servicing the loans. Much time also is spent analyzing a borrower's financial status to determine whether they should even be allowed to walk away from part of their loan obligation. (If you have sufficient assets, a bank may require instead that you bring cash to closing.)
Financial institutions, too, must analyze whether a short sale is in their best interest and that of investors. Will it result in less of a loss than if the property fell into foreclosure and was later sold?
If a borrower has taken out a home-equity line of credit or loan, this adds even more time to the process because two companies and related investors must work together to sort out their losses.
Once a short sale has been approved, a Realtor must be found to list the home and help determine an asking price. The lender also must decide whether to accept or decline offers.
All this can add up to months of time, as was the case of South Jordan homebuyer Sumsion. She first saw the home she eventually purchased a year ago, but initially passed because the price was too high. As months passed and her search proved fruitless, around the holidays she and her husband noticed that the South Jordan property was still for sale.
After a six-figure markdown, and a bank's willingness to let the property go at a huge loss, the Sumsions finally closed on the property last month.
'If we were going to buy a new home, it had to be something we really, really, liked,' she said. 'And we liked this house. We feel lucky we were finally able to buy it.'
lesley@sltrib.com
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