Short sales are a big topic on BusinessWeek's Hot Property blog. Here are some blog-reader questions—and experts' answers
"Short sales" are a big topic in real estate these days. The term comes from homeowners, looking to sell their properties in the slumping market, who ask lenders to forgive the difference between the sale price and what they owe. The National Association of Realtors estimates that 40% of all homes sold today are distressed situations—either short sales or foreclosures.
Lenders loath the practice. They'd rather change the terms of a loan than take a loss on it. Home buyers looking to snap up bargains are also likely to be disappointed, facing months of waiting as sellers negotiate with as many as three different lenders and the mortgage insurance company. The subject of short sales typically generates a tremendous amount of discussion on BusinessWeek's Hot Property real estate blog. Below, some questions from blog readers, answered by experts in the field.
Can an owner do a short sale on a house that has a first and second mortgage? Vicki, Sacramento
Yes, but this is one of the things that makes short sales so difficult—they involve negotiations between multiple parties. The lender of the second mortgage often has to agree to a total loss. Mortgage insurers and home equity lenders also can get involved. Sellers have to support their claim of financial hardship with bank statements, pay stubs, and evidence they actively marketed their home, says John Anderson, a Realtor in Crystal, Minn., who has done several short sales recently.
At the last minute the lender informed me that I will owe the difference. They are forcing me to agree to installment papers. Can they do that? Christiana, La Belle, Fla.
The bank has every right to ask for future payments, but the homeowner doesn't have to agree, says Jack Guttentag, a professor emeritus at the University of Pennsylvania's Wharton School of Business. He suggests telling the bank to go ahead and foreclose. "They are looking to avoid foreclosure expenses," Guttentag says.
I am looking to do a short sale with a company that negotiates for me, but I would have to pay them $700. Am I being scammed? Brenda, Bay Point, Calif.
Sellers do not need a negotiator, and there are questionable firms out there looking to profit from other people's distress. Homeowners who feel they need an intermediary should hire someone who takes a percentage of the sale from the bank or a minimal fee for paperwork. Alexander Paykin, chief executive of short sale negotiator Option Next, recommends working with a negotiator who is an attorney, so the homeowner knows the representative at least has a professional license to maintain.
Can I avoid paying taxes on the difference that I owe? Danny, Chicago
The Mortgage Forgiveness Debt Relief Act, passed in December, allows homeowners to avoid taxes on debt canceled on a primary residence. Taxes would still be owed if it is a second home or investment property.
Can the bank seize money in my savings account if I owe them money on the mortgage? Heather, Las Vegas
How will a short sale affect my credit? Kristen, Mason, Ohio
A short sale will appear on a credit report as a settlement of the debt as opposed to reading "paid-in-full." That means the seller will receive a lower credit score and have to pay higher interest rates for borrowing down the loan, says Rod Griffin, director of public information for Experian, the credit bureau. Notice of the settlement will stay on the report for seven years from the initial default date, but the impact on the credit score will not be as severe as a foreclosure or bankruptcy.
I'm trying to buy a home in a short sale. How long should I wait before I can expect an answer? Calvin, Atlanta
The "short" in short sales does not apply to the time involved. Buyers must be willing to wait at least three months for approval. Trying to pressure a bank to respond by making the offer expire in 30 days or less likely will backfire. A buyer should write in the offer that deposit money is payable only on acceptance of the sale by the bank. Buyers can speed up the bank's decision by offering to pay with cash or by making an offer equal to at least 90% of what an independent broker figures the home is currently worth.