Residential Short Sales in Today’s Market
By Chris Livengood, VP of Sales for Intracoastal Realty
One of the consequences of our recent economy and the real estate bubble of 2002 to 2006 has been the significant increase in individuals who can no longer afford their current property. Because they have borrowed heavily against the collateral of their property, they now owe more than their property is valued in today’s market. This has led to a significant increase in foreclosure and short sale properties. In fact, 20 percent of all Realtor- assisted sales in New Hanover County in 2010 were in these two categories, the equivalent of one in five transactions.
Steve Harney, who was recently recognized by Inman News as one of the Top 100 Most Influential People in Real Estate, was in Wilmington last week to speak at Intracoastal’s annual meeting of its Realtors. He shared information from CoreLogic, which reported that North Carolina has 9.7 months of inventory in distressed properties categories, including property on the market as well as those coming to market.
These results place North Carolina 35th on a list of states that is topped by Maryland, New Jersey, Illinois and Florida, all of which have more than 20 months of distressed property supply.
The foreclosure category is probably best understood by the general marketplace. A foreclosure results in a lender taking possession of collateral when a borrower is unable to make their monthly loan obligations.
The short sale process is, until recently, a term that very few had heard. A short sale is simply a situation that occurs when the amount owed to a mortgage lender is more than the market value of the property. An example would be a property purchased in 2005 for $200,000; in 2011, the property is worth $175,000 and will not cover the 100 percent mortgage of $200,000 that was borrowed in 2005. In others words it is “short.” There are three ways a homeowner can address the short sale situation.
One, they can wait for housing prices to recover and resolve the short position. Historically, housing has been a long-term investment with the average person moving only once every seven years. Time often cures market fluctuations. Two, a property owner can sell the property “short” and pay the balanced owed using other assets such as a stock portfolio. We see this happen often when an owner wants to take advantage of the current reduced market prices and upgrade their property. Third, a property owner can sell the property “short” and ask the mortgage lender to participate in the loss of value. As you can imagine, the mortgage lender is a reluctant participant in selling short; although, depending on the personal situation of the borrower, it may be a preferable choice to a foreclosure process. Again, the foreclosure process involves the lender taking ownership of the property. I have yet to meet a lender who wants to own the collateral, the house, for which they made a loan.
If you are a property owner in this third category and need to sell your property as a short sale, one of the best first steps you can take is to employ a Realtor who has experience in short sales. Be very frank with them about your situation.
Good communication is the key to resolving the situation with your mortgage lender. Your Realtor can assist you in your efforts to communicate with your lender and market your property to secure a buyer. Most lenders require two things to begin the process: a letter of hardship and a personal financial statement. The letter of hardship is a simple statement that relates your current position, a recap of the personal situations that created an unexpected hardship, and the reasons that you are currently unable to meet your mortgage obligation. Remember, from the lender’s perspective this is a simple business decision, not personal. The lender will need the facts in order to make an intelligent business decision. The personal financial statement shows your assets minus your liabilities to equal a net worth. In a situation where your net worth is positive, the mortgage lender will ask that you cover the short position, in whole or in part, with the sale of other assets. In a situation where your net worth is negative, the mortgage lender is forced into a position of participating in the loss.
Probably one of the most misunderstood aspects of the short sale process is: Who does the property owner talk to? As a property owner, make that call to the lender, ask for a manager and ask that manager to connect you to an asset management manager. If you don’t tell your story to the right decision maker, you will be delaying the process significantly.
Be frank in your communication and be patient; this can be a long process. Typically a lender will not make a final decision until the seller has provided the personal information mentioned above, an offer to purchase from a buyer, and a lender-ordered appraisal to confirm the current market price of the property. With the sheer volume of requests lenders are getting, it is not unusual for a lender to take from two to six months to make their decision.
Remember, a property owner needs a buyer to complete the short sale process. There are a number of compelling reasons for buyers to buy in this market: great selection, reduced prices, and historically low mortgage interest rates. So if you need to sell, start today and take advantage of a buyer’s market.
When it comes to negotiating a settlement of your balance owed, you must do this personally or employ the services of an attorney for representation. A legal opinion is also recommended to explain the short-term and long-term (and tax) consequences of short selling.