Short Sales: Nightmare or a Path to Financial Solvency?

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short saleShort sales, the hot potatoes of the real-estate market, are becoming easier to handle. Over the next three years, look for the number of short sales and mediations to grow, as the last reset of those toxic adjustable-rate mortgages comes due and major banks and their servicing divisions get more cooperative.

But throwing a line to upside-down homeowners isn't happening out of the goodness of lenders' hearts. They've just figured out that it's a smarter way to do business.

Michelle D. Plevel, broker and short sales division consultant with Chase International, says that over the past three years, lenders have learned that letting homes go into foreclosure left them holding properties that continued to devalue, and in many cases degenerated physically when left unoccupied. Not to mention the public pressure against allowing foreclosed homes to blight neighborhoods and decrease property values. "Lenders have realized that a short sale is much better," said Plevel.

The biggest obstacle is servicing time: How long it takes the lender to approve the short sale, especially if there's more than one lender involved. That can scare off a potential buyer. (At a recent short sale symposium for real estate agents, Housing Pulse reported that it takes, on average, three potential buyers to make a short sale stick.) And since short sale properties are sold "as is," there's also some uncertainty about what you're buying.

A Breeding Ground for Alligators?

Julie Escobar, a single mom of three teenage daughters, bid on a $149,000 Tampa, Fla., short sale last year so that she could take advantage of the tax credit offered to first-time home buyers. "The paperwork was a long process," she said, "but for me, the scariest part was the condition of the house. What was I buying?"

Her biggest fear was what lurked in the "black swamp" in the yard -- the in-ground pool. "It was pure sludge," she recalled, perfect conditions for those Florida alligators. She'd heard that some sellers, angry about losing their homes, use the pool as a receptacle for everything, including car engines, washing machines and household trash.

Escobar closed escrow in 60 days, then assembled a band of teenagers to fish through the muck. Luckily, there were no reptiles. "Everything worked out," Escobar said, "but I definitely felt that I took a risk."

For sellers, the risk is not getting the debt relief they seek, ending up in foreclosure, and taking a big hit to their credit rating. Ayanna Dookie bought her home in Baltimore in 2007 for $182,000, getting a 10-year, fixed-rate, interest-only loan. When she decided to move to New York a few years later to pursue an entertainment career, "property values had dropped way below what I had paid for the house," Dookie said. She ended up selling for $89,000 -- less than half what she owed the bank.

The short sale dropped her credit rating from 725 to 697, but at 29, she's not worried. "I have time to rebuild. This is the time to follow my dreams."

Getting Short Sale Help

Short sale expert Plevel said that the No. 1 thing for sellers pursuing a short sale to do is find someone strategically trained in loss mitigation.

"John Q. Public can't handle a short sale by themselves," she said, "and many real estate agents lack the experience."

Plevel counsels that sellers should ask potential listing agents how many loan modifications and defaults they've handled, and then check their references and ask those clients how the process went.

Rick Keefer of Pacific Union International in the San Francisco Bay Area, another short sale consultant who has closed about $7 million in short sales, suggests these additional tips:

1. Complete short-sale documentation prior to placing your property on the market. That way, an experienced agent/negotiator can identify any potential obstacles. For instance, a second lienholder may want a contribution to remove the lien or to completely extinguish the debt. Many transactions fail, Keefer said, because all the details don't emerge until weeks or months into the deal.

2. Don't list too low to start. Banks like to see some days on the market at a reasonable asking price. If you start out too low, the bank may reject your offer. List the property at a fair price, then adjust the price every few weeks until you get an offer.

3. Lenders don't like to make concessions for repairs. Buyers should inspect the property and send the lender an as-is offer.

4. Take the long view. Make sure the buyer is committed and in the deal for the long haul. If a transaction fails, you have to start at square one and end up losing valuable time.

For more on short sales and related topics, see these AOL Real Estate guides:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.
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