A new real estate algorithm: Cut your losses
Balancing the 'short sale'
By Scott Cousins
When it comes to mortgage payments, conventional wisdom says there's a simple algorithm about cash flow: If you don't have enough, your home is in real danger. And if you owe more than your home is worth - known as "being underwater" - you're out of luck.
But that's conventional wisdom. In fact, more and more defaulting homeowners are turning to a technique called a "short sale." That's when a property owner strikes a deal with a buyer willing to purchase a home for less than what's owed to the bank. The bank, in turn, agrees to accept less than the balance of the mortgage to make sure the property doesn't go into foreclosure.
Sounds simple. In reality, the process can be rife with intricate details and complex elements. But it may also be an option - essentially, a less traumatic form of foreclosure - for many homeowners struggling to get out from underneath hefty mortgage payments.
To figure it all out, we talked with real estate experts last week. They gave us a quick lesson.
Welcome to "Short Sale 101."
How many have used the short sale?
Unlike foreclosures, which require legal filings, definitive numbers on short sales are hard to find, according to Jeff Lischer, the National Association of Realtor's managing director for regulatory police. The group estimates that 15 percent of approximately 770,000 U.S. home sales in June were short sales, up from 11 percent in June 2009. No agency tracks numbers for the Metro East.
What's driving it?
A mixture of sagging home values, resetting interest rates on adjustable rate mortgages and job losses.
When should it be considered?
As soon as a homeowner realizes a property is at risk of foreclosure.
Jeb Blasingame, owner of Star Realty in Granite City, said homeowners need to start considering options as soon as they realize they have problems.
"They should call their banks immediately. The banks are a lot more willing to work with people than what people think," Blasingame said.
What are the advantages?
It can dramatically cut legal costs, and keeps properties occupied, eliminating upkeep costs. Credit scores may be less impacted than foreclosures or bankruptcies. In other words, it's better to take the hit now, our experts said.
"I commonly refer to that as a comparison on a Richter scale," said Elizabeth Kayser, a St. Louis attorney specializing in short sales. "A short sale is going to be about a three. A foreclosure is going to be about an eight or nine. A huge difference."
Bankruptcy or foreclosure can cost someone a job interview or a security clearance.
What are the problem spots?
In addition to the stigma of being forced out of their home, property owners face a long and complicated process, not to mention the possibility that a short sale deal will crumble.
Lischer, of the National Association of Realtors, said he's heard many complaints from both lenders and real estate agents about the process, but things appear to be getting better.
Government initiatives like the Home Affordable Modification Program and the Home Affordable Foreclosure Alternatives Program have given people more options, and seem to be speeding things up, he said.
Kayser said almost all homeowners will need professional help, including real estate agents, lawyers and possibly tax advisors.
One hurdle is negotiating the best deal for the homeowner, which can involve several banks, insurance companies and lienholders. Done incorrectly, the homeowner could be liable for the difference in the sale price and loan.
If proper Internal Revenue Service forms are not filled out, the difference between a selling price and outstanding unpaid loan could be considered income.
How long should it take?
A typical short sale can take up to six months or longer. During that time, the homeowner has to be honest, patient and involved.
Albert M. Suguitan, president/CEO of the Greater Gateway Association of Realtors, said it's still an option in some cases.
"A short sale or a foreclosure can take time and energy and skill, and increase the stress and frustration level tremendously," he said. "It doesn't mean it can't be done, because it's done every day."
Contact reporter Scott Cousins at 618-344-0264, ext. 113
Source: Surburban Journals
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