The sale of your home gets complicated when you owe more on the mortgage than the house is worth.
Slumping property values, sluggish sales and the stagnant economy have created an influx of short sales in the Seattle area’s housing market.
“It’s certainly bringing buyers back into the marketplace,” said Ron Sparks, managing vice president with Coldwell Banker Bain in Bellevue. “Houses are not so much for sale right now as they are on sale.”
Here’s what potential buyers and sellers need to know about short sales.
Q: What is a short sale?
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A: For many folks, it’s a last-ditch effort to save their home from foreclosure.
“It’s a situation where the seller owes more on the home than it’s worth, and they ask the bank to accept less than what is owed, if they sell it,” Sparks said.
In most cases, the debt owed is from a mortgage. However, any unpaid liens on a property, including debt from repossessed cars or unpaid taxes, can factor into a short sale.
Before a lender can permit a short sale, the homeowner must prove financial distress — that he or she won’t have the money to make up a shortage once the home is sold.
Q: How many houses in the area are in this situation?
A: “It’s not a number the MLS is reporting at this time,” said Cheri Brennan, a spokeswoman for the Northwest Multiple Listing Service.
However, the 31,000-member group that tracks regional housing trends plans to begin analyzing short-sale numbers soon, she added.
According to an informal survey of Coldwell-Banker Bain agents, about 30 to 40 percent of their recent sales have been short sales, Sparks said.
“It looks like Pierce County particularly seems to have substantially more short-sale transactions than any other part of our region,” he said.
Q: What is the driving cause for these numbers?
A: “No. 1 is decline in value,” said Kirk Russell, an agent with John L. Scott Real Estate’s Seattle Center office.
Many of the short-sale listings were bought at peak market price, with little or zero-down mortgages, and now there’s a significant gap between what’s owed and what they can fetch at today’s prices. Some people are using short sales to downsize their debt due to job losses, or fear of unemployment.
In addition, some sellers are in the situation because they purchased multiple properties with low- or zero-down loans. Once a renter misses one or two payments, the trickle-down effect generates debt that can spiral out of control.
Russell is quick to point out that short sales, which often end up in foreclosure, occur at all income levels.
“I’ve worked with doctors who are in foreclosure because everyone across the board was stretching their income,” he said. “I represent quite a few real-estate agents who are in foreclosure or short sales themselves.”
Earlier this month, the Seattle Web site Zillow.com released a report that showed 38 percent of the homes bought in 2008 in the Seattle-Tacoma-Bellevue area now have negative equity. That was better than the two previous years. Zillow said 56 percent of the homes bought in 2007 have negative equity and 49 percent for homes bought in 2006. If those buyers are now sellers, they would be short sales.
Q: What are the benefits of a short sale for buyers?
A: The main benefit is price. In most cases, a buyer can snag a home that’s 3 percent to 5 percent under a home’s true market value, Sparks said.
“There are some as much as 10 percent,” he added.
Q: How can you tell if a property listing is a short sale?
A: Most homeowners are reluctant to advertise that their property is a short sale with signs or fliers. In addition, the National Association of Realtors recommends not marketing a listing as a short sale because it can compromise the seller’s chance of getting the best price possible for a home.
Sparks said notice of short sale is usually included in an agent’s confidential remarks about a listing.
“Subject to bank approval, that’s another trigger phase,” he said.
Q: What should a buyer know before getting involved with a short sale?
A: “It takes forever, and the bank is typically not going to fix everything,” said Keely Jared, broker and owner with Re/Max Mutual Realty in Ballard.
And sometimes, the property has taken the brunt of a seller’s economic desperation, emotional distress or sheer neglect.
Sparks said he saw a short sale where the seller dismantled and took everything out of the house possible, including the hood over the range and the furnace.
It can take several weeks to hear if an offer is accepted, and most short sales are running anywhere between four to eight weeks to close at escrow.
“In some cases, we’ve had them as long as three months,” Sparks said.
Buyers also need to be aware that they could lose the deal, too.
“At any time while they’re waiting for that approval for the bank, a more aggressive, superior offer can come in and displace them,” Sparks said. “It’s just so much more of an unsure, uncertain process than when you’re dealing with a seller.”
Q: Why do some agents avoid showing their clients short-sale properties?
A: Short sales involve more negotiation than a typical listing. They also take much longer to wrap up, which gives clients time to walk away from a deal.
In addition, lenders often ask agents to help ease the financial hit by making concessions of their own.
“Short sales often don’t pay a full commission, so I do see agents steer clients away from them,” Jared said.
Q: What should a seller be aware of before trying a short sale?
A: In some cases, a seller is required to report the forgiven debt from a short sale as regular income, and pay federal taxes on it.
“Sometimes it’s not even in the sellers’ interest to go with a short sale,” Russell said. “Sometimes it’s best to pretty much walk away from a property.”
Sellers also need to be aware of scam artists, investment companies and third-party negotiators who approach them.
“Owners should be concerned about working with so-called investors, and people who are looking to buy the place and turn around and rent it to them,” Russell said. “They call them dummy sales, where essentially they will take a quit-claim deed for the property. … (The seller) will end up getting foreclosed on.”
Q: Sometimes, potential buyers make reasonable offers on short-sale homes, but the banks won’t accept them. A few months later the properties end up in foreclosure, and sell at a much lower price at auction.
Why do some lending institutions refuse perfectly good offers, especially in this market?
A: The main reason this happens is because there are two lenders involved on the property — usually the original mortgage issuer and a home equity line of credit, Sparks said.
“Very often, you can’t sell the home short because the person who has the second trustee gets wiped out,” he said. “So they say, ‘Heck, why would I give my rights to hang in there?’ “