Virtues of the Short Sale

By ELSA BRENNER

Is it possible for a homeowner who owes $725,000 on a mortgage to sell a house for only $560,000 and still walk away happy, or at least relieved? The answer is yes, if the transaction is a short sale — defined as selling for less than the mortgage owed, in a deal with the lender to forgive the rest of the debt and head off a foreclosure.

A last-ditch option for a homeowner in default, the short sale is increasingly being seen a valuable tool by sellers, buyers, real estate agents and lenders. But it does come with this caveat from real estate agents and lawyers: it is an intricate transaction, often taking many months to complete.

Describing the process as “the lesser of two evils,” Mark Boyland, the president of the Westchester-Putnam Multiple Listing Service and an associate broker at Keller Williams NY Realty, nevertheless emphasized its value as “a way to help out both the homeowner and the bank, and make a bad situation better.”

The case above, involving a four-bedroom ranch in southern Westchester, is typical. The sale price did not cover the entire mortgage but was still high enough for the lender to forgive the remaining balance, said Patti Cunningham, the owner of Cunningham Realty in Hawthorne, who brokered the deal.

The owner had been grappling with the costs of college tuition and a parent’s medical bills, and had refinanced the mortgage loan six times in five years to meet the growing expenses, Ms. Cunningham said.

The owner decided to sell the house, bought in 1999 for $310,000. But the $700,000 that a 46-year-old ranch in good condition might have fetched in a more robust market was not realistic. The house languished, and when bids did come in, they were far below the asking price. Several months later, the seller, who had fallen behind on mortgage payments, was notified that foreclosure proceedings had begun.

Finally, with an offer of $560,000, Phyllis Knight Marcus, a real estate lawyer in Hawthorne, contacted the lender, who eventually agreed to the deal.

“In the end, the seller got out from under,” the lawyer said. “The buyer was happy because he got a bargain, and the bank was pleased to have the situation solved.”

Ms. Marcus is working on five short-sale cases in Westchester County; last year she had none. Mr. Boyland at Keller Williams is similarly negotiating five short sales, versus none a year ago.

“It’s a trend that began last year in response to a troubled market,” he said, “and more and more people finding themselves in an upside-down situation.”

Nationally, defaults on home mortgages reached an all-time high at the end of 2007 as foreclosures surged on adjustable-rate mortgages, the Mortgage Bankers Association, an industry group, reported on March 6.

In Westchester, foreclosure numbers are also on the upswing, said Geoffrey Anderson, the executive director of Westchester Residential Opportunities, a nonprofit housing group in White Plains. In the first nine weeks of the year, there were 515 foreclosure filings in Westchester, Mr. Anderson said, adding, “That’s up significantly from what it was last year, and we’re expecting many more in the coming months” as many more adjustable-rate mortgages reset this spring and summer.

The bulk of the foreclosures are occurring in places like Yonkers, Mount Vernon, New Rochelle and Greenburgh, which have the highest concentrations of low-income residents, Mr. Anderson said. But more affluent communities are far from immune. For example, Mr. Boyland’s short-sale cases are in Pound Ridge, Katonah, Bedford and North Salem.

Still, when compared with foreclosures in other New York area suburbs, Westchester’s are relatively low. For instance, according to ForeclosureDeals.com, a listing service, Westchester has 91 homes in foreclosure, while Nassau County has 186.

As an indicator of how complicated such cases can be, and of how many more are expected, Mr. Boyland is one of a number of professionals taking courses in short sales. He has also hired a specialist as a consultant. “The banks change their guidelines every week,” he said, “so you have to stay on top of things.”

The laws governing such sales are also in flux. For example, a federal law passed late last year exempts sellers from having to pay income tax on the amount forgiven, but only if the house in question is the owner’s primary residence. In previous years, the forgiven debt was considered income, even though the seller received no money.

PropertyShark.com, a real estate data provider, is one of several businesses offering courses. “It’s very important for investors and brokers to understand the distressed-property industry,” said Bill Staniford, the company’s chief executive, “because it looks like we might be dealing with this for years down the road.”

But even though short sales are on the increase, Ms. Cunningham of Cunningham Realty cautioned that sellers should not expect to use them as “a quick way to get out of a bad deal.”

Before a bank agrees to one, she said, the lender first needs to ascertain that “a seller is really at the end of the rope financially, and has tried to utilize his or her own resources first.” A seller seeking a short sale must submit a hardship document outlining what led to the default in payments, along with a detailed lists of expected fees, expenses and commissions, in addition to principal and interest.

But even then, after a price has been determined and the paperwork submitted, many months often go by before a decision is reached by the lender, which retains the right to turn the deal down.

Housing advocates and mortgage counselors caution that a short sale is only one option; some nonprofit groups are helping borrowers work out alternative arrangements with their mortgage holders.

“The short sale is not the only way to go,” said Mr. Anderson at Westchester Residential Opportunities. “We’re not involved in any yet, but as we see that a short sale could benefit a homeowner, we would advocate for that."

Copyright 2008 The New York Times Company