When Becky Holbrook was rescued from a mortgage payment she and her husband could no longer make, she entered a little-known sphere of real estate.
It’s an arena where bankers pardon mortgage debt. Where it is better to forgive than to foreclose. Where credit ratings can remain intact.
It is, in brief, the world of the short sale. Short sales-selling property that results in a loss to a lender-receive little public attention. Not surprisingly. What bank likes to advertise that it will accept less than the balance due on a mortgage?
But over the last year, industry focus on short sales has heightened because home values have dropped in several areas of the country, stripping the equity from many owners who purchased at or near the peak of the market. These owners-who are overdue on mortgages payments and need to sell because of hardship-often are finding their properties are worth less than their mortgage balances.
Their salvation can be finding a buyer at market value and persuading a lender that a short sale will cost less than foreclosure.
Holbrook, 33, had no idea that was an option. When she and her husband bought the ranchette in Galt, near Sacramento, about five years ago, they fell in love with the property, which included a house surrounded by eucalyptus groves. There were 700 trees on two acres, and there was a built-in pool. It would be a good place to raise a child. Purchase price: $199,000. Zachary was born three years later.
“When we bought this property, we were whistling Dixie,” said Holbrook, regional administration manager for a workers’ compensation insurance company. “We knew we were in a sweet situation.”
But last year, sweet turned sour when the marriage ended, and the couple was forced to sell the home.
Asking $209,000-not even enough to recoup the original investment after realty commission and closing fees-there was nary a nibble because the home’s market value had fallen below what the couple had paid.
Meanwhile, the expense of maintaining two households took a toll. Savings were exhausted, mortgage payments fell behind and foreclosure was on the horizon.
Finally, Holbrook heard about a real estate agent who worked on “something called short sales.” The Realtor, Carol Jeske of Century 21 Valley Oak Realty, listed the home at $157,000, or slightly below market.
Almost immediately, there were two offers. Jeske, working with a Sacramento area company that focuses on short-sale negotiations, launched discussions with Bank of America.
In the end, Bank of America suffered a loss of about $10,000, said Jeske, considerably less than the potential for loss through foreclosure. And Holbrook said she felt as though she had been “rescued,” because the Realtor and negotiators relieved her of much of the stress linked to the transaction.
“Sometimes people don’t have a clue that there is any other alternative,” said Sterling Watkins of the Sacramento area company Jeske had contacted, AMC (Alternative Mortgage Concepts) Realty. “They end up charging their payments on their credit cards.
“If we catch them early enough in the process . . . if we can demonstrate a hardship, we can get the lender to look at a compromise sale. That saves them from having to live on credit cards, and relatives and bleed everybody dry.”
Short sales don’t work for everyone. Equity-drained sellers need to look at the tax consequences of asking a lender to forgive part of the mortgage debt. A tax accountant or tax attorney can make the determination, said Rod Luman, marketing specialist for Sacramento Title Co.
But the IRS is likely to view $20,000 in forgiven debts as a taxable $20,000 gain.
And while lenders are deciding whether a short sale will be cheaper than foreclosure (and it often is), they are taking the owner’s hardship into consideration. Owners without hardship, such as job loss, divorce, illness or death, may have a tough time persuading a bank to forgive mortgage debt.
The lenders’ own investment strategy also will play a role. The stronger the institution, the less likely it is to engage in a fire sale.
Archie C. Milligan, senior vice president of the Sacramento division for San Francisco Federal Savings, said most institutions are not going to accept offers of 10 percent to 20 percent below market value just to avoid foreclosure.
“They can’t afford to let everyone walk away from their obligations,” said Milligan.
San Francisco Federal Savings recently completed such a sale in Sacramento; so each short offer, if it can save a bank money, is worth considering.
Huck Ferrill, senior vice president and chief residential loan officer for Sacramento Savings Bank, said his institution has done a handful.
The bank doesn’t invite them. “But on the other hand,” said Ferrill, “the homeowner who is faced with a no-equity position . . . we are kind of in that investment with them. To that extent, if values have gone where they have gone, we would lots rather be talking to the homeowner than foreclosing. That’s ugly.”
Numbers are hard to come by. Derek Kirk, chief financial officer for AMC Realty, estimates that as many as three in 10 Sacramento-area listings-depending on the neighborhood-are short-sale candidates. In economically stressed Southern California, particularly Palmdale and Lancaster, the rate is much higher.
But Daily Default Infoservice, a private research firm that tracks foreclosures, reports they jumped 31 percent in the first half of this year compared to the same period in 1993 in Sacramento, Placer and El Dorado counties.
Even so, Daily Default Publisher Alexis McGee says the foreclosure rate would be even higher without the growing volume of short sales.
Interest in conducting short sales already has prompted some title companies to offer courses to Realtors.
Among them is Luman of Sacramento Title. On hearing about short sales, said Luman, “most people will say, ‘You can’t do that.’
“Well, you can do that.”
