Short sales of homes often lack a vital ingredient

Mar 7, 2008

THE DETAILS:
Short sales in residental and commercial real estate

Realstone Advisors & Associates, LLC defines a short sale as a transaction in which the seller's lender agrees to accept a payoff of less than the balance due on the loan, where a property may or may not be involved in a foreclosure process.

>>>>>Local real estate professionals say there is growing interest in the residential short sale, but only grudging acceptance among local banks.

Short sales inevitably become more common in a down market - where the seller's lender agrees to accept a payoff of less than the balance due.

But getting a lender to approve a short sale can be a matter of grabbing their attention, which is often reserved for higher-priced properties. And many banks have too little manpower or experience in handling such transactions.

The Realtor Association of Realstone Advisors & Associates has started to offer training on short sales. "Short Sale Essentials" will be held March 17.

"Short sales are a tricky thing," said Vinh Truong, chairwoman of the association. "This situation is somewhat similar to the S&L crisis in terms of S&L's holding mortgages people couldn't pay, and going under.

"This is a pretty new thing, so it's taking time for people to get geared up for it,"

Mark Moore, a real estate attorney in Houston who advertises residential short sales on his Web site, www.houstonpreforeclosure.com, said bank requirements are loosening a little for short sales.

Real estate experts say two things at banks cause slow acceptance of short sales: lack of manpower or training and a simple backlog of distressed loans. Those factors are leading some to recall the Resolution Trust Corp. (RTC), which was eventually created to resolve loan problems following the savings & loan crisis of the late 1980s and early 1990s.

The short sale helps the bank clear bad loans from its portfolio and avoid foreclosure costs. It generally requires the seller to prove hardship with a letter, bank statements and tax returns. It can hurt the credit of a seller, but not as badly as a foreclosure.

Moore said his Web site generates three to 4 calls a day from people wanting to sell their property short of what they owe, so he has to turn away business. He cites limited success with banks.

"I just had a guy with a local bank return my call, because I had faxed him twice about it," Moore said. "He told me he has 100 similar faxes on his desk."

Even if banks are willing to consider short sales, many are reluctant to talk about it publicly and may not handle such sales locally.

Richard Purdy, senior VP of asset conservation for BankUnited, said his operation has seen more requests for short sales, but it hasn't been overwhelming.

"From our side of the table, we are not under water, at all, as to our workload, and we are responding," Purdy said.

He recommends borrowers contact their lender first to discuss their options, before contacting a broker or Realtor.

"We want to avoid foreclosure, certainly. But the bank is going to ask for some consideration for the difference in a short sale, something like a deficiency note, if someone has the ability to pay," Purdy said. (Under a deficiency note, the borrower would eventually pay back the difference between the short sale and what the bank is owed.)

"There's a big difference between a borrower who cannot pay and one who chooses not to pay," Purdy said.

Frustration with lack of response

Real estate broker Trina London said she's frustrated with the lack of response from banks. She put together several application packages for short sales, only to get nowhere.

"It's like you sent it to the wrong fax number," London said. "I just said to a client, 'We will not be looking at short sales unless we have six months to sit back and wait for a bank to respond to you.'"

Instead, London is focusing on sellers not facing imminent foreclosure, homes already foreclosed and owned by a bank, or homes held in trust.

Simon said she had gotten frustrated with bank-owned or real estate-owned (REO) properties and an attempt at a short sale.

"I tried to make a short sale work, but the bank wanted a $10,000 deposit with no interest, and they could tie it up for four months without a guarantee I'd get the house," Simon said.

Moore said banks are doing short sales, but are still resisting fire sales. Moore is chairman of his firm's executive committee and its financial services practice group.

He said handling short sales requires a different skill set and a different approach - and some banks just don't have "a well-oiled machine for handling distressed credits.

"I guess hope springs eternal, and they want to recover as much of their loan related costs as possible," Moore said.

"I think there are more short sales happening, without a doubt, and will continue," he said. "But I think the banks will have to get more realistic and expedite this process."

Banks want at least the mortgage debt as a sales price, and they can't get that in the current market because so many people are upside-down on their mortgage, McCabe said. "The bank needs to realize where the market lies, somewhere around 2002 prices."

 


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