Ins and Outs of Short Sales

This house on Fishburne Street in downtown Charleston is one of dozens of dwellings in the Lowcountry that are listed as short sales.

Reading the classifieds, driving past homes and checking online, home shoppers likely have seen the term "short sale" a buzzword if there ever was one in the tight housing market these days.

Short sales can be great deals: a seller doesn't lose their home to the bank and a buyer gets a house for a low price. But in some cases, they flop: agreements come unraveled, buyers and sellers spend months on transactions that fall through, agents lose commissions and lenders are forced to foreclose.

Each transaction is different. Yet two things are clear. The short sale is rarely ever short, and it's no guarantee of a sale.

Some people know all about short sales. "They have a pretty good idea what the property is worth," says Walter Mueller, Realtor with Exit Realty Charleston Group. "A fair number tried to sell their property 'for sale by owner.' More often than not, they come with knowledge."

Other house hunters and marketers don't have a clue. And still others think they know a lot but don't, which worries people such as Michael Scarafile, legal counsel for the Charleson area's largest agency by volume, Carolina One Real Estate.

"We've got people walking in, thinking, "Short sales means 'good deal," Scarafile says. Maybe a particular short sale is the right move, but maybe not, he says.

No wonder short sales, nearly nonexistent a few years ago, are increasing in popularity and visibility.

By one recent estimate, 20 percent of sales in greater Charleston involving financially distressed properties were short sales (most of the rest were foreclosures). That's compared with a handful three or four years ago.

The National Association of Realtors found that 45 percent of all home sales nationwide in fourth quarter 2008 were foreclosures or short sales,

"In this market, a good number of buyers are coming off the fence. They want a good value," says Seth Manaker, closing attorney with Manaker and Associates on James Island.

So what is a short sale? Here's how it is stated in a contract, as supplied by Stan Huff of The AgentOwned Realty.

"A Short Sale is a transaction in which any Lien Holder releases its lien against the Property and accepts an amount less than the full amount."

The lien holder typically is the bank, mortgage company or other party that holds your mortgage. It may be more than one entity if you have a second or third mortgage. And there can be other liens, such as contractors owed for work.

To help educate agents and the public, professional groups are sponsoring classes, seminars and courses on the subject and beefing up advertising.

The Charleston Trident Association of Realtors hosted a seminar this week. At least one local broker recently earned a distressed property designation from a Florida institute that certifies expertise in handling short sales.

Some agents list short sales separately on their Web sites. Mueller has individual properties marketed as high as $700,000 on his short sale list.

Another broker Scott Hodges of Grand South Auctions and

Keller Williams Realty, has put a twist on the process with "short sale auctions. We've been very successful with it," he says.

With all the short sales activity, trade organizations such as the CTAR's Multiple Listing Service have started collecting figures.

"We have been doing it for nine months. Short sales are becoming more prevalent. We thought it was important to know," says Teena Martindale, on the Realtor's association's MLS staff.

While short sales have been rare locally until the past year or so, there was a wave of them around the time of the Charleston Naval Base and Shipyard closing in the mid-1990s, she says.

Naturally, short sales are more common in a declining or stagnant housing market and a struggling economy than in a strong housing market and economy.

In a short sale, the mortgage holder and any others owed money agree they don't want all their funds back. They would do so for various reasons, but notably because the seller doesn't have the cash at hand, even with the home sale proceeds, to pay them in full.

That was rare in a real estate market that, with a few exceptions. boomed for decades up to 2007 or so. Houses tend to grow in value. Say you borrowed $200,000 to purchase a $220,000 house in 1999. When you sold at $400,000 in 2006, there was plenty of money to pay off the note. But times have changed.

Take the buyer in 2006, who, for instance, took out a $360,000 mortgage on the $400,000 home. Then, the buyer is laid off, and mortgage payments prove too steep. The house goes on the market, but the price has dropped to $300,000, and there's no sign it will rebound any time soon.

While a short sale can help out, even short sale pros note that the deals take time, from a few weeks to a few months.

"Fourteen weeks is our longest," says Marshall Walker, agent with Keller Williams Realty. "We actually did that one," he says, rather than have the bank or other parties walk away.

Still, banks are understaffed, and they're flooded with offers and possible contracts. Lenders require lots of paperwork such as financial statements from the sellers, wanting to make sure the seller isn't hiding assets. Even then, they may find it more suitable to move toward foreclosure, or otherwise reject a short sale offer.

Typically, buyers are aware that a property is a possible short sale. Agents most often advertise the situation so there's full disclosure. Even so, Manaker says he had a recent case where the buyer didn't know until the closing that the seller could not come up with the cash to pay off the debt. Eventually, the deal went through but there were some hairy moments, he says.

Another point to remember, Walker says, is many short sale properties sell "as is. It may require some elbow grease (to fix them up)."

Also, the money that the lender releases a seller from paying may be treated by the IRS as a capital gain and therefore taxable, agents and others note.

"All sellers should seek legal advice and tax advice," Walker says.

In a way, the recent short sale surge fits the line, "what goes around, comes around."

Alex A. "Kemp" Hooper knows. "I was doing short sales when they were called settlements, negotiated payoffs, paydowns," says Hooper, who launched his Charleston-area based company Coastal One Day Funding in 1999.

"People on the Internet, they are charging $5,000 to help (with short sales). Hooper say his rates are a much more reasonable $49-$99 a month.

While he works with other agents sometimes, "I'd rather do the deal myself. That's where the money is." Yet he doesn't give clients false hopes. "It takes four to six months. I can't buy into that 'home run" stuff. I say to people, there's 160 baseball games and the record is 73 home runs." But Hooper, whose company Web site is www.coastalonedayfunding.com, says he gets the job done, even if it means his business has to purchase a distressed seller's home.

"When I write on your sign, 'I will buy your home,' it's a fact, and it works."

Reach Jim Parker at 937-5542 or jparker@postandcourier.com

LOCAL FINDINGS

Lowcountry Housing Trust surveyed short sales among other properties in December 2008, using RealtyTrac consultants and the Charleston Trident Association of Realtors Multiple Listing Service as sources. Here are some of the results.

Number of short sales: 159

Geographical breakdown:

West Ashley 27 percent

Highway 165 26 percent

Dorchester Road 15 percent

Highway 78 11 percent

Highway 52 9 percent

Mount Pleasant 9 percent

Urban core 3 percent

DO'S AND DON'TS

These are some of the questions agents should be asking sellers, courtesy Stan Huff, Realtor with The AgentOwned Realty. While the questions are geared toward agents, they are applicable to anyone.

1. How much do you owe on this property?

2. Do you have a second or third mortgage?

3. Who is the lender or lenders?

4. Have you talked to your lender about a short sale?

5. Have you talked to your tax adviser and attorney?

6. Are there any pending laws suits or judgments against you or this property?

7. Do you have any personal tax liens?

8. Have the property taxes been paid?

9. Have you filed for bankruptcy and has it been discharged?

10. Once we receive an offer the lender will require a lot of information to complete the sale. Will you cooperate and diligently supply all needed information?