Selling when your house is worth less than your mortgage
Digging out in today’s real estate market.
Rather than go straight to foreclosure on properties where homeowners are behind on their mortgages, banks are entertaining short sales, a settlement in which they agree to take a lesser payment from the homeowner upon sale of the home to satisfy the mortgage due. The homeowner finds a buyer at regular market value and approaches the bank with the offer. Many homeowners qualify because the housing slump has made the value of their homes worth less than their mortgages.
Many Long Islanders are choosing the short sale route because it saves them the embarrassment of a foreclosure, and in many cases they can walk away free and clear from the sale – even if it comes up thousands of dollars less than they owed.
Short sale agreements are “hitting in every area,” including premium properties like “creek fronts and waterfronts in the Hamptons,” says Elizabeth “Missy” Capozzoli, licensed associate broker in the Westhampton Beach office of Town & Country Real Estate.
A short sale can save a homeowner’s good credit because if it is worked out beforehand, the bank agrees the mortgage has been satisfied in the sale, says Dwan Bent-Twyford, co-author of the new book “How to Sell a House When It’s Worth Less Than the Mortgage: Options for ‘Underwater’ Homeowners and Investors” (John Wiley & Sons, Inc., $19.95).
A house can also bring a better yield on a short sale, as these are completed more quickly (excluding time on the market, these close on average in three to four months) than a foreclosure, which can take one to two years, and the property is usually in relatively good shape.
“There’s no mystery,” says Phil Tesoriero, broker-owner of Dynamic Real Estate Services in Garden City, which primarily deals with distress sales. “A regular residential market will yield a higher price than a foreclosure.”
Banks are more willing to negotiate of late, Realtors say. In the past, a short sale agreement with the seller could only be entered into after the bank had filed a lis pendens, or notification of foreclosure; today, the short sale process can be started before the homeowner gets behind on payments but has proof of an impending shortfall.
Yet real estate experts agree, even short sales can financially haunt a homeowner if they aren’t handled correctly contractually. If the mortgage isn’t deemed “satisfied,” short sales can still jeopardize your credit rating. In addition, the bank may be able to sue you for the loss – that is, the difference between what was due on your mortgage and the amount the bank accepted, placing liens on your income until the loss is paid in full. Or it may report the amount not paid as income to the seller, and you will be faced with income taxes in the amount the bank wrote off as a loss.
Delays are common. “Banks are not geared up staff-wise to handle the influx of requests,” says Carolyn Webber, executive vice president with RE/MAX of New York in Garden City, which has been authorized by the Distressed Property Institute to produce training courses for its employees that lead to a certification in this area. She says that lenders are “in a quandary” regarding the price they should settle on in a short sale, so there are holdups. If there’s any doubt about your application, “they put it at the bottom of pile.”
What sellers need to know
While a short sale can be a good choice for the homeowner, there are caveats:
PROVE IT First, for the bank to agree to take a lesser amount than it is owed, a short sale must meet two criteria: The mortgage is greater than the worth of property. This is determined by comparable sales in the area. The homeowner must prove a financial hardship and demonstrate an inability to pay. People who are “upside down in their mortgage have to understand that they must be in financial hardship,” says Robin L. Long, an attorney with offices in Southampton and Ronkonkoma. It might mean “they got pregnant, have negative amortization on the loan, or loss of a job.”
ALL IS NOT FORGIVEN Sellers may still owe a deficiency judgment. “Many think the bank forgives the rest of the loan. But there is no absolute – no such scenario exists,” says Tesoriero, of Dynamic Real Estate Services. They may put a deficiency lien on your salary or a future mortgage may be contingent on it. Therefore, make sure the deficiency is negotiated as part of the short sale agreement with the bank, he says. “More often than not, the bank will waive its right to a deficiency judgment if you can prove a solid hardship,” says author Bent-Twyford. (Paying a small percentage of a judgment deficiency on second mortgages, however, is common, she adds.)
TAX ISSUES Sellers may owe back federal taxes. The bank may report its loss on the sale to the government as income you earned and you will be liable to pay income taxes on the 1099 the following year. The Mortgage Forgiveness Debt Relief Act of 2007 – which applies to short sales in 2007, 2008 and 2009 and relieves owners’ responsibility of paying these income taxes – will be reconsidered at the end of this year and may be reinstated. To overcome any taxes owed, says Bent-Twyford, “Always ask the bank to waive the judgment deficiency and the 1099 in writing.”
HOW LOW Simply losing value does not qualify a home for a short sale. “If there’s equity in the property, it doesn’t qualify as a short sale,” says Tesoriero, who teaches a 15-hour continuing education class for the Long Island Boards of Realtors called The Realtor Short Sale Professional. If the owner has assets and the ability to pay the mortgage, it also doesn’t qualify.
Sale pays fees Some owners forgo the chance to make a short sale because they don’t think they can afford to pay for fees for attorneys, real estate agents and others. This is a fallacy. Money is paid out of the proceeds of the deal, explains Tesoriero.
DOCUMENT IT A lengthy process causes more deals to fall through. To overcome this, before finding a buyer, gather proof of hardship, deeds, notes and surveys so that they can be submitted to bank quickly when a buyer is found, says attorney Long.
BANK ISSUES Banks are not prepared to expedite the overwhelming number of short sale requests, and the time it takes to complete them is increasing. Often mortgages are resold to out-of-state and offshore banks, which are typically difficult to reach and unfamiliar with current local home values and are hesitant to accept deals. “We are getting the royal runaround by banks,” says Joan Bischoff van Heemskerck, associate broker and managing director of North Fork operations for Town & Country Real Estate of the North Fork in Southold.
MORE BANK ISSUES Even when homeowners or their representatives reach the proper bank personnel, “If you don’t fit their script, you go on hold for three hours,” says Long. “They are not geared up to work with us.”
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