On an afternoon in late May, Chicago real estate agent Gary Lucido, president of Lucid Realty, glanced at the chicagohousingstats.com website. Among the stats grabbing his attention was one showing Chicago-area home prices had fallen 27.3 percent from their peak several years ago.
Noting many home buyers a few years earlier had purchased their homes with no money down, Lucido made a simple point. Those who did not put down a penny at purchase now own homes worth on average 27.3 percent less than the full purchase price they agreed to at closing, he says. Those homeowners are "underwater" or "upside-down" on their loans. And if they were forced to sell, there would not be enough cash from the sale to pay the lender, because the value today is far less than the balance owed on the loan.
Whether the result of putting no money down or 20 percent down, the state of being underwater on a loan is one factor behind the spate of short sales today. The other is that many of these same homeowners are unable to pay their mortgages, due to factors ranging from job loss, divorce and medical bills to adjustable rate mortgages, and face the prospect of foreclosure, Lucido says.
Having a home repossessed by the lender through foreclosure is "a recipe for severe emotional distress," notes Frank DeNovi, an agent specializing in Real Estate Owned (REO) and short sale properties at Coldwell Banker Residential Brokerage in Arlington Heights. The very few options open to people facing this crisis include loan modification, forbearance (an agreement to delay foreclosure), or a short sale. A short sale, if successful, averts the need to go through with the foreclosure, DeNovi says. "A short sale is a real estate transaction in which the proceeds from the sale do not cover the balance on the loan," he explains.
"So the lender accepts a discounted payoff on the loan. Once the short sale is completed and the sale closes, the foreclosure process is avoided."
If lenders are to accept short sales, sellers have to prove financial hardship, Lucido says. Were that not the case, virtually every home seller would attempt to have the lender eat part of the mortgage loan, he adds.
Hardship in general terms is being unable to pay the mortgage and being forced to sell to avoid foreclosure. But this situation is often the result of more specific catalysts that bring about hardship, such as a divorce, Lucido says.
"I have a situation now where a couple was able to afford a condo on a dual income," he says, adding that a subsequent divorce made that impossible. "Now the husband has moved out, so they have to sell the place, which is under water and they don't have the money to cover it. So they need a short sale."
An imminent move to a distant state to accept a much-needed job offer might also constitute hardship, Lucido says. In such instances, the home here would have to be sold, making a hardship-generated short sale a possibility.
Short sales from sellers' perspective
The owner in danger of experiencing foreclosure may react to that danger by first initiating talks with the lender's loss mitigation department, DeNovi says.
"That's usually when the experienced Realtor steps in," he adds. "This is such a daunting experience to go through as an individual. I will usually get a call from someone about to lose their home or unable to make a payment. There are lots of ways we find out. I or someone from my staff will sit down with the people, and find out if they're candidates for a short sale."
Whether they are good candidates for short sales will hinge on many factors. Those include whether they've defaulted on a payment, how much more they owe on the house than it is now worth, and whether they have taken second or even third mortgages on the home.
If they have not been able to make mortgage payments for some time, the homeowners may not be appropriate candidates for a short sale, DeNovi says.
"Lenders look to take lesser losses now, to avoid larger losses later. Sometimes they decide they'd be better off going through a foreclosure now."
To improve odds such decisions go in their favor, homeowners who may be candidates for short sales must get the best counsel possible. The agent chosen should, first, have experience in the short sale process, Lucido says. And second, he or she should be very proactive, articulate and process-oriented.
"It really does require these attributes to pull the deal together," he says. "It's not rocket science, but requires someone able to monitor the process, pull all documents together and on a daily basis determine who's on the critical path -- in other words, who needs to complete a key task to keep the process moving."
It also helps to have a real estate agent who will effectively market the property. "There are two types of agents," Lucido says. "One snaps a photo of the outside of the property, and no other photos. This type of agent is never there for a showing. This type of agent puts the home on the MLS and does nothing more. There are a bunch of agents marketing short sales that way."
The second and better type of agent brings in professional photographers to take photos of the property, counsels her client on staging, creates brochures and pushes the listing through all marketing channels to get the best price. This type of agent is also able to effectively convey to the seller the seller's obligation at every stage in the process, whether it's providing tax returns and pay stubs, a hardship letter, divorce decree or job offer from an out-of-state employer.
Other professionals will likely be part of the seller's team. The seller's attorney, for instance, may handle some of the tasks otherwise overseen by the agent, Lucido says. Another individual who may participate is a third-party negotiator. This participant may be brought in by the seller's attorney, or may have a symbiotic relationship with the seller's real estate agent, Lucido says.
In some cases, the third party will handle negotiations with the bank, he adds. But that service comes at a price. Third-party negotiators can take 3 percent of the sales price, meaning the bank is asked to take a bigger loss.
Short sales from buyers' viewpoint
A short sale can be attractive for buyers because banks have been known to accept 80 percent of appraised value to complete a sale, Lucido says.
But there are many offsetting concerns as well, he adds. The most important issue buyers in short sales should consider is that this purchase process isn't like any traditional home purchase they've experienced. "You're shopping in the bargain bin. This is merchandise as is," Lucido says.
"You do not get to dictate terms . . . That means you can do an inspection, but if you produce a two-page list of things you want fixed, forget it.
"Basically, you're putting an offer on the table, and your real negotiation is with the bank. But it's a real strange situation, because the listing agent works for the seller."
The buyer may find other differences from standard real estate transactions. First, the sale can take much longer than anticipated. Stories exist of would-be buyers with bids left hanging for six months or more with few status updates during the wait, Lucido says.
There can be other surprises. For example, the assessments on the home may not have been paid. "You'd expect the bank to pay, but the bank says, 'No we want the buyer to pay for the assessments,'" Lucido says.
Disruption of the normal sequence of events in a sale can be yet another surprise. "Normally, you have an accepted deal, and only then do you pay for your mold inspection, your home inspection and an appraisal," Lucido says.
"But in a short sale, you could be asked to start that process before the bank has given its approval. There's a little risk there because you need to shell out money, and the deal may fall apart.