Sunday, July 8, 2007

Finding a New Way to Sell

From Arizona.

A growing number of homeowners behind on their mortgage and facing foreclosure are finding a way to sell despite the glut of Valley homes for sale.

They are turning to "short sales," which are similar to regular home sales except a deal is worked out in which the lender accepts what the house is appraised for or what it will currently sell for instead of what is owed on it.

So a homeowner would sell the house to a buyer willing to pay the current market value of the home, and the lender takes a loss on the rest.

Short sales are the latest trend for metro Phoenix's slowing real estate market, and housing advocates are advising struggling homeowners to contact their lender about a sale before falling into foreclosure.

As foreclosures rise, lenders are more motivated to do the sales because they at least get most of what they are owed.

Homeowners don't get any equity from the sale, but they also don't get a nasty foreclosure mark on their credit record. And although lenders lose out on money they're owed, a short sale lets them avoid a costly foreclosure on the home.

"Short sales are the buzz in the market now," said Tom Ruff of Information Market, a research data firm based in Glendale. "With foreclosures climbing and homes prices falling, short sales are bound to climb."

There is no way to track the exact number of short sales closing in the Valley because they show up on public records as a regular sale between a buyer and a seller. But real estate market watchers say they are seeing an uptick.

For the Valley's housing market, a short sale means one less foreclosure at a time when the number of people defaulting on their mortgages has tripled from a year ago.

It also is one fewer hit to Valley neighborhoods, where foreclosures are pulling down housing values.

Short sales lower an area's "comps," or comparable sales prices, too, but not as badly.

For some homeowners, they are the best option.

A brother and sister from California recently approached Phoenix real estate agent Brett Barry about their house here in the Valley. The pair paid $597,000 for the investment home in Tatum Ranch at the height of the housing market in 2005. Now, they can no longer afford to keep it. And with a record number of Valley homes for sale, their chances of selling the home for what they paid are slim.

"I ran the numbers, and the house won't sell for more than $495,000 now," said Barry, of Realty Executives. "They didn't put any money into it. They have an interest-only loan. They could only rent it for about $1,800 and month, but their payment is $3,500."

He told them they could do one of two things: Work out a short sale or call the lender and hand over their keys.

Lenders can benefit

Most lenders prefer short sales because foreclosures cost them time and anywhere from $30,000 to $50,000 per house in legal, appraisal, marketing and servings fees. A short sale gets a home off their books and typically costs a lender less than a foreclosure.

At a recent foreclosure-prevention town hall meeting in Phoenix, the director of National Initiatives for mortgage giant Freddie Mac encouraged housing advocacy groups and lenders to steer people toward short sales if their only other option is foreclosure.

"We have an investment to protect as well as a moral responsibility to help people avoid foreclosure," Christina Diaz-Malones said.

A few years ago, most Valley homes to go to the foreclosure auction block enticed multiple bids from investors. But now, lenders are taking back 80 percent of the homes they are foreclosing on. Investors have stopped bidding on many houses because they can't make money on a resale.

To be eligible for a short sale, homeowners must prove they can't pay their mortgage because of some type of hardship such as a job loss, medical expenses, death of a spouse or, sometimes, too much debt.

But homeowners should be careful about confusing a short-sale plan with a foreclosure rescue scheme.

Once a homeowner misses a payment or two, a lender files a notice with the Maricopa County Recorder's Office to start foreclosing.

Many groups track those filings to try to buy foreclosure properties. But recently, some groups have begun preying on people about to lose their homes.

Many of the offers of help are thinly veiled schemes to get homeowners to sign over their house to groups that strip away any equity. Often, the homeowners then are required to pay rent until they can refinance and get their house back. But the rent is usually more than their old mortgage payment, and they wind up getting evicted.

Joann Hauger of Community Housing Resources of Arizona said groups that really want to help homeowners don't typically solicit them. More housing advocates such as Hauger are advising people to seek a short sale now instead of losing their home to foreclosure.

"Almost everyone we are seeing now for default counseling owe more than their house is worth," she said.

The hit homeowners take on their credit score is much less on a short sale than on a foreclosure.

A homeowner involved in a short sale will see an 80- to 100-point drop on his or her credit score. A foreclosure is a 250- to 280-point hit, said Randy Kutz of Phoenix Heritage Real Estate Group, HomeSmart. About 70 percent of his business now is short sales.

"Banks don't advertise they are open to short sales, but banks don't want to take the homes back," he said.

People who are able to do short sales will have a tax hit.

The difference between what a homeowner owes and what the bank gets for the house is typically treated as income for the seller. That's taxable income for the homeowner that will show up on a 1099 form from the lender.

The lower sales price from a short sale won't please too many of the homeowner's neighbors. It will show up like any sale and often will be a considered a comp for the area that other buyers and sellers use as a benchmark for home prices.

But housing market watchers say a lower comp or short sale is much better for a neighborhood than a home repossessed by the bank at a foreclosure auction.

"Foreclosed homes can quickly turn into empty eyesores with green pools, yards full of weeds and debris when lenders take them over," Barry said. "A short sale means a new owner for the home and one less foreclosure black mark for the neighborhood."

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