WASHINGTON TWP.‑ As the recession drags on and foreclosures remain a real threat to many, a growing number of homeowners are under water and reaching for a life raft known as the short sale.
In a short sale, a mortgage holder agrees to sell a home at market value while canceling out any remaining mortgage debt. The short sale is for homeowners who can’t make payments on their mortgage which is more than the market value of their home, a condition known as being “under water.”
“A short sale is much less painful than the foreclosure process and having the sheriff knocking on your door,” said Kelly Holmquist, team leader for the Holmquist Team, the Long Valley office of Keller Williams Towne Square in Bernardsville
In Mount Olive, a quarter of the homes under contract for sale are short sales. In Long Valley, 19 percent of the homes are short sales while in the Chesters, the figure is around 10 percent, according to Holmquist.
The short sale is often the best option for struggling homeowners. The owner benefits by eliminating mortgage debts and the bank gains by selling the property rather than going through the lengthy foreclosure process.
The buyer, meanwhile, can get a short sale home at below market value and will get a property that has been mostly occupied and maintained. Foreclosed properties are often sold after being unoccupied and are often poorly maintained, Holmquist said.
The downside of the short sale for the seller and buyer is that the process can be very time consuming. It is also more costly than a traditional sale but most legal fees for short sales are paid by the bank, said Martin Eagan, a Morristown lawyer who specializes in real estate transactions, including short sales.
Eagan said the average out of pocket costs for a short sale are $750 to $950.
The other options to struggling homeowners include having a mortgage modified to make it more affordable, a situation that most banks do not favor. Homeowners also can go into foreclosure and stop making mortgage payments, a strategy referred to as a “strategic assault,” according to Holmquist and Eagan.
A foreclosure also affects credit ratings much more than a short sale. Holmquist said in most cases, credit is reinstated within two to three years of a short sale while it can take up to seven years for credit to rebound from a foreclosure.
Strategic assaults may be a benefit to those not concerned with poor credit because the process can take up to two years to complete and the homeowner can live for two years virtually without making any mortgage payments.
Eagan said state law does allow a bank to sue in some circumstances after foreclosure to recoup some of the delinquent mortgage.
“I never advise not to make mortgage payments but strategic assault is absolutely an option,’ Eagan said. “The overall financial situation is the first thing we look at. More times than not, the short sale is the viable option to foreclosure.”
Holmquist said another benefit of short selling is that income from the sale can be claimed as a deduction in federal income taxes. The law permitting the write-off , however, expires on Dec. 31.
Many of the homeowners that meet with Holmquist and Eagan are struggling because they took out second mortgages or home equity lines of credit in the peak of the financial boom years.
Too often, banks approved extensive second mortgages based on the booming real estate values, even though the borrowers may have shown questionable signs of being able to repay the loans.
Holmquist said she knew of one situation in 2006 when a 92-year-old man was approved for a 30 year loan.
“That shows what banks were willing to do in the hey day,” she said.
Homeowners used the new credit for everything from vacations to buying a car to paying for college. But when the economy tanked, many homeowners lost jobs or had their pay cut and found they could not make mortgage payments. At the same time, they couldn’t sell their over-valued homes because of the recession.
Holmquist said a short sale can be as straightforward as a traditional sale or a much more complicated process, depending on the such factors as the number of mortgages on a property. And many banks, real estate agents and lawyers won’t handle short sales because of the work and time involved, she said.
The mortgage holder sets the sale price, usually at about 10 percent below market value. The mortgage holder’s primary concern is that the home be sold at or near market value. Without a reasonable offer and likely chance of a closing, the mortgage holder will likely not consider a short sale, Holmquist said.
Too often, homeowners who are drowning in debt, don’t seek out options like short sales.
“When people get in financial stress they tend to close themselves off to options,” Holmquist said. “Either they are embarrassed or they don’t know where to look for help.”
It doesn’t help that some Realtors and banks don’t suggest short sales to people who are delinquent on mortgage payments.
Eagan said some banks and mortgage companies like Bank of America, GMAC and Wells Fargo have set up special systems to speed up short sales. Others, like TD Bank, are more reluctant to get involved with short sales, Eagan said.
“Some lenders are anti-short sale,” he said.
Holmquist said that rather than encourage short sales, some Realtors do little marketing and instead list hundreds of foreclosed homes on the multiple listing at “deeply discounted” prices. A short sale, however, may have a better chance because it is marketed in the same way as a traditional listing.
Holmquist and Eagan both said the best situation is to hold on to a home and try to make the payments. But Holmquist also warned against homeowners who stay with a bad situation because they expect the property values to bounce back to pre-recession levels.
She said experts report that it will take twice as long for the market to return than it took to hit bottom. That means pre-recession values probably won’t return until 2024.
Short Sale Numbers
In Chester borough and township, over the past 12 months, 11 of 103 sales were short sales. Four homes out of 96 current listings are available as short sales.
In Mount Olive, 28 of the 200 homes sold over the past 12 months were short sales. And 36 short sales are now available out of a total of 168 current listings.
In Long Valley, out of 171 homes sold over the last year, 14 were short sales. There are current 125 properties listed for sale, including 16 at short sale.
In the Mendhams, six of 119 sales over the last year were short sales. And of the 113 now listed, six are offered as short sales.