Coming soon to a neighborhood near you: A late-summer wave of short sales, as homeowners, mortgage bankers and potential buyers all race to settlement on bargain-priced homes that are worth less than the mortgages written on them.
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"We're seeing a rush already," said Daren Blomquist of Realtytrac, a firm that monitors real estate foreclosures and distressed sales. "There was a big increase in the first quarter and we're expecting that to continue."
A short sale occurs when the lender agrees to let the property be sold for less than the amount owed on the mortgage.
2012 may be the year the short sale market peaks, because of a number of factors. Bankers, pressed by the Obama administration and their own bottom lines, realize they are better off accepting partial payment on a mortgage than taking a home in foreclosure, said Blomquist. Some have created expedited short sales procedures in which they will pre-approve a home for a distress sale and even pay the seller as much as $45,000 to get the deal done.
Sellers with one eye on the clock realize that they could lose a valuable tax break if they fail to complete their short sale by year end. And some sellers -- who have been hanging on "by tooth and nail" to homes worth less than their mortgages for years, according to Elizabeth Weintraub, a Sacramento, California, real estate agent who specializes in short sales -- have decided now is the time.
"It seems to be doubling every year, but 2012 is particularly busy," she said.
In the first quarter of 2012, some 109,521 properties were sold in pre-foreclosure -- a proxy for short sales, according to Realtytrac. That was a 25% increase from the same quarter the previous year and a three-year high, Blomquist said.
So it seems like this is the time to make a move. Here is some advice for sellers and bargain hunters.
-- Sellers should start with their banks. Several lenders including JPMorgan Chase & Co and Bank of America Corp now have expedited short sales programs in which they pre-qualify sellers and their homes for short sales at agreed-upon prices. That dramatically cuts down on the amount of time it takes to push through all the paperwork that a short sale requires. In addition, these big banks are cherry-picking some troubled properties for extra owner incentives: Your bank may actually pay you as much as $45,000 to agree to sell your distressed home. Weintraub said she has one client who was offered $25,000 to sell a $95,000 house.
-- Sellers should start soon to get that tax break. Lenders are also routinely wiping away any extra debt left after the short sale. So if you owe $200,000 on your house, and you sell it for $150,000, the bank would theoretically be able to come after you for the additional $50,000. They are forgiving that, and it is that forgiven debt that is normally subject to income tax. It will not be, under a special provision that expires at the end of this year.
"If you can, you close this year," Weintraub said she is telling her clients. That means would-be sellers should start soon, if they have not already -- it can easily take three or four months to close a short sale once you have a buyer.
-- Sellers should realize that "hardship" is a relative term. In order for a lender to approve a short sale, the seller is supposed to make the case that financial hardship will keep him or her from paying off the loan. But in their rush to get these deals done, banks are considering a wider array of situations to be hardships. An impending retirement or job change can be a "hardship" if the rest of the deal is right. "It's a great opportunity," says Blomquist.
-- Buyers should look for deals but not expect anything amazing. Bankers and real estate investors have caught on to the fact that these distressed houses are a good deal, so there is competition. They are often a better buy than foreclosures, because short-sold homes typically are owner-occupied, well cared-for and come with guarantees. Foreclosures, on the other hand, may have been stripped of appliances (and walls) by displaced borrowers on their way out. Weintraub tells people to expect to pay market price for a short sale.
But that market price still could be good for the buyer. "The average price of these properties is $175,000 -- that's still 20% below the average price of properties not in distress," said Blomquist.
-- Buyers should go for long locks on their mortgage rates. It is a long trip from finding an appealing property on a site like Realtytrac to actually buying the property. If you have a buyer's agent, you can also ask your agent for a list of properties that are in distress. In the meantime, you can try to line up a mortgage at today's near-record-low interest rates. Don't even think about the 30-day locks; even 60 days may not be enough to get you through to closing. Buying a home that has been pre-approved through one of the banks' accelerated programs can cut closing times down to as little as 10 days, said Weintraub.