Short sales, an alternative to foreclosures

There’s one in the Historic District on Garcia Street, a few more in the new La Pradera subdivision, one in tony Las Campanas and dozens of others scattered from Eldorado to Rancho Viejo and down into Bellamah.

They are homes known as distressed or short sales, properties that have been sold or listed for sale for less than what is owed to the lenders.

Because short sales take so long, just a dozen have closed in Santa Fe County, according to Anthony Atwell, an agent who along with his partner, Peter Kahn, specializes in distressed properties. But dozens of others are listed for sale – ranging from $155,000 to $825,000 – and with foreclosures increasing, it’s likely short and distressed property sales will continue in Santa Fe well into next year. One analyst said several hundred homes will be sold short, but may not be listed that way.

“There’s no way around it,” said Dennis Branch of GMAC Real Estate Fine Properties, who added appraisers can no longer ignore distressed sales as they are being used for comparable sales. “They will be 40 to 50 percent of the market over the next two years. It’s not even close to being over.”

Accommodating sellers

While home prices were climbing, real-estate short sales were an oddity, and banks and lenders had no reason to establish guidelines – nor did sellers and agents, said Kahn.

But with the economic downturn – home-price declines and job losses mean more short sales – the industry is figuring it out. First, the seller has to prove he or she is truly distressed, which means they cannot pay the mortgage and will not be able to catch up on late fees and penalties. Before Kahn signs up a seller, the person has to fill out a 20-page questionnaire documenting job or income loss that will have to be reviewed by the bank that holds the loan.

In traditional sales, Kahn spends more time addressing the qualities and needs of the home. With short sales, it’s all about the seller. “You have to qualify the seller; they have the hardship,” he said.

Kahn said he has to educate the seller. “They have to understand that this is what they’re getting” out of the sale, he said, holding up his thumb and index finger to form a zero.

But even with that, he argues, it’s better for the lender and the seller than going to foreclosure, which is usually more costly because lawyers and court fees are involved.

Kahn and Atwell also argue that a foreclosure or simply walking away from a property is worse on a credit report than a short sale. “It’s like choosing the lesser of two evils,” Kahn said. In Santa Fe County, there are more than 70 properties listed as being in foreclosure – a small number compared to other cities nationally, but a big increase from a year ago, said Atwell.

The average short sale in Santa Fe has taken 220 days from listing to close.

“Short sales should be called a long sale,” said Kahn, who tells stories of the difficulty of finding distant bank managers who were authorized to negotiate a sale.

“It often takes eight or nine months, and there are few buyers who want to wait around that long,” said Suzanne Brandt of Coldwell Banker Trails West. It’s still easier with local banks, she said, but with national and international lenders, “it’s like looking into a black hole. They’re happening, but they’re hard.”

Brandt has one short-sale listing – a seller who purchased a home three years ago and has since transferred to a job out of town. The house is now empty and listed as a short sale

Kahn recalls one deal in the works for months that went to the bank’s foreclosure department because a piece of paper had an incorrect signature. When he called, he was told they weren’t authorized to talk with him, so the process started anew.

Neil Lyon of Sotheby’s International Realty in Santa Fe said offers and counters are normally done in 24 hours, but he had to wait some three weeks for a counter on the one short sale he handled – and the sale took five months.

“It was pretty shocking in that they had a big incentive to sell the property as soon as possible,” said Lyon. “It was a very, very painful sale. They were very patient and they were very rewarded, but we had drama until the moment it closed.”

Kahn said the process is becoming quicker and easier.

The packages he submits to lenders are often 140 pages and include appraisal and market data – as well as the income and job information of the seller. He often has to research second mortgage and credit lines on a property, and get commitments from credit unions or local banks that hold a second or third mortgage to take a lot less.

“They shuffle you around. It’s a lot like filing an insurance claim … they make it harder than it needs to be,” said Atwell. Still, “The banks are learning to do this now,” he said, adding, “the sooner they’re out of it, the better they’ll be. The longer it takes, the more they lose.”

He said in markets such as Phoenix, foreclosures are costing lenders 50 percent more than short sales because of the legal fees.

Then there are the fees and commissions, which are also taken out of any proceeds before the bank is paid. And agents involved in short sales are not inclined to negotiate commissions.

“A successful short sale is driven by the listing agent. … We’re working four times harder on these deals,” he said.

Still, there is always uncertainty over what a bank will accept – and sometimes a bank has said yes to one figure and the buyer has moved on. In that case, the property is listed as an “approved short sale” and can move faster the next time.

Kahn said New Mexico is a deficiency state, where lenders can still try to collect the full amount owed – and so he makes clear that the transaction is “paid in full for less than owed.”

The market impact

Homeowners looking to sell soon can be especially affected by short sales.

“Market movements can feed off other market movements; lower prices means more short sales, which means more lower prices and so on,” said Alan Ball, a title agent who publishes a monthly newsletter on the Santa Fe housing market. “It works in a hot market, too; higher prices means faster sales which makes prices go up further, and so on.”

Branch, who purchased a short-sale home on Camino del Gusto, is typical of many who have the cash to take advantage of distressed sales. The seller owed more than $200,000, and Branch bought the house with approval of the lender for $132,000. He fixed it up and now has a sales contract for $187,000.

He’s also representing a seller on Garcia Street with a private lender who has agreed to lose $100,000 on a loan just to sell the property and move on.

Agents like Atwell say all this is good – the sooner distressed homeowners can get out of their mortgages, the sooner banks can write off the losses, the sooner the market can improve.

“Most people think they have to give up their property and walk away,” Atwell said. “A lot of people don’t know they have options.”

Bruce Krasnow
Published: Nov 16, 2009
Contact Bruce Krasnow at
Source: Santa Fe New Mexican

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