Selling a home in short order

More owners are making deals to sell their homes for less than what they owe.

Published online on Thursday, Aug. 07, 2008

The number of troubled homeowners able to sell their houses for less than their debt on the property is increasing.

It's called short selling and comes as lenders, overwhelmed with foreclosures, are more willing to make deals, and as real estate agents become more skilled in navigating the complicated transactions.

The number of houses sold in July in Fresno and Clovis through short sales -- where a lender accepts less than what is owed on the loan -- totaled 30, up from 19 in June. Short sales in just those two months topped the 46 in all of 2007, said Don Scordino, president of the Fresno Association of Realtors.

The story is similar in Visalia, where real estate broker Nancy Riggs said many banks are organizing short-sale divisions to handle the soaring number of requests.

A short sale is often treated as an option to avoid foreclosure. A homeowner can no longer afford the mortgage for whatever reason -- perhaps the interest reset because it was one of many variable-interest mortgages approved by lenders -- so he or she decides to negotiate with the bank to sell the property before foreclosure occurs.

The seller accepts an offer subject to bank approval and requests a short-sale package from the lender. That package consists of paperwork required from the seller that points to financial hardship. If accepted, the bank writes off the loss -- assuming the homeowner owes more than what the house sells for -- at the close of escrow as a cost of doing business.

Riggs estimated that 17% of the 800 houses for sale in Visalia are potential short sales.

Whether those homes close as short sales remains to be seen. Real estate agents say the process can be difficult, time-consuming and frustrating. By some estimates, fewer than 10% of all short-sale attempts succeed, although Realtors expect that percentage to increase.

"There is nothing short about a short sale," said Ken Neufeld, a London Properties agent who is spending a large chunk of time trying to close two of them.

A typical short sale often includes real estate agents representing buyer and seller, a negotiator who decides the price and a third agent who presents an independent value.

And because banks are often under-staffed and overworked, paperwork is sometimes lost or directed to the wrong person. "In the two I'm working, the bank lost the offers twice," Neufeld said. "Then they have to input it into the system and that can take three to four weeks. Then they have to appoint a negotiator," which may not happen for a month into the process.

Buyers often get frustrated and buy another property.

That said, more lenders are willing to consider short sales to avoid any more losses. "Banks are finally getting religion and maybe catching onto the program," Neufeld said.

A short sale often is not a lender's first choice. "We have seen an increase in requests for short sales, but we don't think it should be the first option for someone who intends to stay in their home," said Dave Bradley, a Bank of America spokesman.

A bank often would rather work with homeowners in structuring some kind of workout or loan modification. Bradley said Bank of America, which recently acquired troubled lender Countrywide Financial, has committed almost 4,000 employees to help troubled borrowers and hopes to modify at least $40 billion in problem loans over the next two years.

Bradley said many customers who request a short sale don't realize other options could be available, even though the bank attempts to contact homeowners an average of 17 times between the first late payment and foreclosure proceedings.