Before the subprime debacle hit last summer, the term “short sale” was not in New York City’s real estate vocabulary. Now, while short sales are far more prevalent outside New York, some brokers in Upper Manhattan and in the outer boroughs are not only aware of the term, but can probably provide an extensive definition.
A short sale occurs when a homeowner, in order to prevent foreclosure, is allowed by his lender to sell the home for less than the balance owed on the mortgage loan. The homeowner is considered “underwater” or “upside down” on his mortgage, which means the loan balance is higher than what the home is worth.
“A year ago, hardly anyone knew what the term ‘short sale’ meant,” said Jeff
Silverbush, president of Elmhurst-based Century 21 Best, one of the largest real estate brokers in Queens. “There was a certain deniability about it on the part of buyers, sellers and banks. The expectation was that when they sold their homes, they were going to get more money. Guess what? The worm has turned.”
Median home prices in Queens fell 9.8 percent to $438,000 in January from a year ago, according to the Long Island Multiple Listing Service.
Silverbush said that short sales take
up more than 25 percent of his firm’s business and that they are becoming more common in northern Manhattan and in the outer boroughs.
On Staten Island, Jim Athens, CEO of Weichert Realtors Vitale Sunshine, noted, “In my office here, to be conservative, one in every 10 listings on the market are basically in a short-sale situation.”
Athens said that single-family home prices are down about 12 percent to $475,000 in the borough, and that people who bought houses during the boom years from 2003 to 2005 are now facing higher interest rates after their adjustable rate loans reset.
Meanwhile, foreclosure auctions in the outer boroughs skyrocketed during the first quarter, according to PropertyShark.com, with Staten Island auctions rising 411 percent and Queens auctions rising 90 percent. Many buyers are unable to work out their loans or sell their homes for a profit, leaving a short sale as the only alternative to complete foreclosure.
“It’s a large portion of the business now,” said Moses Seuram, vice president of the Queens Board of Realtors and associate broker at CNC Equity in Richmond Hill. “Queens has a lot of difficulty with sellers [whose loans are] upside down.”
A nationwide survey of 3,000 real estate agents conducted by Washington-based Campbell Communications found that almost 20 percent of listings are short sales. While local figures were not immediately available, Moody’s Economy.com estimated that across the country, about 9 million homeowners owe more than their homes are worth.
“We know as brokers before everybody else knows, because when the house is in trouble, [the lender] will call their asset manager, and the asset manager will call me trying to find out how much the house is worth,” said Willie Kathryn Suggs, owner-broker at Willie Kathryn Suggs Harlem Real Estate, who works in a community with a long history of speculative real estate deals.
Suggs said she is currently working out short sales on million-dollar row houses uptown. One of her clients took out a $1.5 million loan with a major U.S. bank to buy a four-story row house on 159th Street, which is considered by some to be one of the toughest blocks in Washington Heights. Six months after taking out the loan, the client defaulted on the house. She said the client will be lucky if he can get $1.2 million for the property.
Heavily leveraged buyers with low down payments, or subprime borrowers with exploding adjustable rate mortgages, are often most likely to end up candidates for a short sale. Still, there are serious considerations from a client perspective about whether a short sale makes sense, experts warn. According to real estate lawyers, short sales can do major damage to a client’s credit report, rivaling a foreclosure or bankruptcy in the severity of the financial blemish.
However, the U.S. government recently made a change to the tax law to help homeowners. Previously, the Internal Revenue Service had taxed the difference between a homeowner’s loan balance and their short sale price. The Mortgage Forgiveness Debt Relief Act signed by President Bush in December will make that amount exempt from taxation between now and 2009.
Fannie Mae and Freddie Mac, the biggest buyers of home mortgages in the country, are also in talks with the banking industry for further mortgage regulation reform. The government-backed companies are working on plans that would allow brokers to proceed with a short sale on distressed properties if the sale doesn’t fall below a pre-approved minimum price.
What puts a homeowner on the short sale path? If an owner cannot make their mortgage payments and their real estate attorney or broker cannot work out an agreement with the bank to reschedule payments, then a short sale may emerge as the final alternative before a foreclosure.
Lawyers say that policies will vary depending on whether the bank is willing to accept a sale that falls below the appraised value of the home, and whether the bank is willing to eat the difference.
“Most often times, by the time they come to us, the damage is done,” said Luigi Rosabianca, a Manhattan-based real estate attorney. “Your job is one of damage control. If you’re fortunate, you can have reasonable negotiations with the lender.”
For real estate agents, the three biggest problems with short sales appear to be the time it takes to complete the deal, the excessive amount of documentation required, and disputes over the commissions paid by the lender.
Brokers complain that banks take more than a month to get back in touch with them when they have lined up a buyer for short-sale deals, so that by the time the banks respond with an answer, the buyer has gotten a response on another house through another broker.
For their part, lenders, who were reluctant to give many details about their short-sale business, admitted that they are struggling to keep up with the demand.
“Part of it is, we’re getting people up to speed and getting enough bodies to
do it,” said JPMorgan Chase spokesperson Tom Kelly.
Kelly said his bank’s policy is to do
everything possible to keep the homeowner in the house, and if that is not possible, the bank has to determine how to get the biggest return out of the property.
“If somebody can’t afford the house, first you work through whether you can modify [the loan]. Then you work through, ‘Do they have an offer [for the house]? Is it a legitimate offer, and is it a reasonable offer?’ Finally, you ask, ‘Can we sell the house for more out of foreclosure?'”
As far as paperwork, the documentation required in short sales is almost as comprehensive as the documentation for an original purchase. The seller must prove that he or she is in such a high level of financial distress that a short sale is their only alternative.
Finally, there’s the commission problem. In short sales, the agent representing the buyer often gets a smaller commission than the listing agent. And in certain short sales, a broker can get stuck without any commission from the lender.
“The short sale is the most difficult sale to pull off,” said Alexander Levin, a veteran short sale specialist and broker at Staten Island Dreamhouse Real Estate. “It’s such a pain in the neck, I don’t have words to describe it.”