Break for sellers: Banks settle for less

Article published 05.30.08
By Mary Ellen Podmolik
Chicago Tribune
Homeowners in danger of foreclosure increasingly are looking to beat the bank to the process by selling their homes for less than the value of the mortgage, with their lender’s permission.

Dumping a house for a fire-sale price ordinarily would not be encouraged by banks. But the housing crisis is so severe that both lenders and struggling homeowners see so-called short sales as an acceptable alternative: The home seller avoids the trauma of a foreclosure, and the lender gets back as much of the loan as possible, without the expense of being saddled with a foreclosed property.

The practice offers good deals for buyers, but real estate agents say the growth of the short-sale market is having a detrimental impact on the overall housing market because it brings down comparable-sales data, making neighborhoods look less valuable.

“It screws up a lot of stuff,” said Jason Pietrucha, a broker at Koenig & Strey GMAC Real Estate in Glenview, adding: “It’s without a doubt the healthiest part of the market right now, that and bank-owned properties.”
Because there is no requirement to denote a property as a short sale, real estate agents can’t measure the trend precisely, but some sales are flagged and the National Short Sale Center Inc., an Arizona-based company that acts as a negotiator between real estate agents and lenders, recorded a 380 percent increase in its short-sale activity in the Chicago area between the first quarter of 2006 and this year’s first quarter

“When I go through the MLS, and I do it daily, I see ‘pre-foreclosure, must need bank approval’ all over the place,” said Bo Buchanan, a real estate agent at Kettley Realtors in Oswego. “Short sale is the new frontier in discount or deal real estate. That’s where the new opportunities are.”

Stephen Johnson of Crystal Lake, a former branch manager at a wholesale mortgage lender, is selling his home short for $220,000, when it appraised 14 months ago for $290,000, the same amount he said he owes on his mortgage.

Johnson had borrowed 100 percent of the home’s value in 2007 at 10 percent interest to pay for his wife to attend law school and had hoped to refinance at a lower interest rate. But he lost his job when the lender he worked for folded, and by the time he found another job in October his mortgage company already had begun foreclosure proceedings.

Well aware of what a foreclosure would do to his credit report, Johnson opted to list the home as a short sale. He submitted the buyer’s bid of $220,000 in January to his lender and was told less than two weeks ago that the bid was accepted and the transaction would have to close by June 15. His credit report will still take a hit, but Johnson reasons that showing that the loan was settled for less than the full amount is better than looking like he just walked away from his responsibilities.

“If the short sale hadn’t been approved I would have had to be out Aug. 15 as a foreclosure,” Johnson said. “The last thing you want your neighbors to see is the sheriff knocking on your door and putting your stuff out on the street. I feel bad because prior to this I was always the one who paid [on time] and understood the market.”

Increasing jitters

As short sales gain steam they are increasing some jitters in the market. Short-sale properties typically sell for at least 20 percent under market values, so the closing prices of short sales, like foreclosures, are skewing comparable sales prices in neighborhoods, affecting traditional sellers and their own homes’ market values. Also, the protracted buying process—in some cases it is taking up to six months for lender approval—is removing potential buyers from considering non-short-sale home listings.

Greg Grojean, a senior vice president at Home State Bank in Crystal Lake, said he is seeing more short selling and said that at times it’s a good alternative in a struggling real estate market.

“The declining markets have created a position where a lot of people owe more on their house than it’s worth,” he said.

The downside, other than the lender not getting full repayment: “It does keep market values depressed,” he said.

A short sale isn’t the easy answer some suppose. Real estate agents say they are hearing from many homeowners who see it as a way to unburden themselves rokettube of homes that just aren’t selling in a depressed market. To qualify for a short sale, homeowners have to prove true financial hardship, and a Lexus in the garage, a six-figure salary and a well-funded 401(k) plan don’t help a homeowner’s case.

Missed payments

Typically, homeowners who do qualify already have missed mortgage payments, have been served with notices of default and a lender has started pre-foreclosure proceedings against them or else they are current with their payments but are facing circumstances that will cause them to fall behind.

Many are upside down in their mortgage, meaning they owe a lender more than the house is now worth.

A year ago, Elburn resident Angie Zelensek had to quit her job because of illness, which left her and her husband struggling with one paycheck to pay the mortgage on their home as well as that of her deceased mother.

In March she defaulted on the mortgage for her mother’s small one-bedroom house and had a real estate agent put it on the market as a short-sale listing. Originally priced at $149,000, the price was dropped to $129,000 and will drop this weekend to $119,000. Zelensek owes $162,000 on the property and has already applied to her lender for the hardship designation that will help speed through any offer she receives.

“At this point it’s definitely affecting my health,” Zelensek said. “I can’t wait until someone makes an offer. We’re just very scared at this point about losing our [own] house.”

Along with price, one advantage for buyers in a short sale is the property’s condition, which usually is decidedly better than foreclosed homes because sellers frequently are still living in the homes.

Gene Carey, a broker associate with Re/Max Advisors in Lake Villa, posts video tours of short-sale listings on his Web site so potential buyers can see the insides of the homes.

“A lot of them are leaving beautiful appliances,” he said. “You don’t have wires dangling from the ceiling. These houses are in good shape.”

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