In the world of real estate, short selling has traditionally been met with stigma, both social and fiscal.
In a short sale, a lender agrees to allow a borrower to sell their home for significantly less than they originally owed on their mortgage. Short sales, by nature, are a bi-product of an over saturated housing market, like the one we have today.
Called a “strategic default” by lenders and realtors, short sales are attractive to borrowers facing different types of financial calamity, from those wanting to escape an underwater mortgage before its too late, to those who may be up to date on payments now, but foresee an inability to make them in the future.
It’s a delicate, time consuming, and most of all complicated procedure to go through, and choosing to short sell a house is never an easy decision.
On the social side of the equation, the short seller may be confronted with neighbors embittered by the prospect of their own home’s value being affected by the short sale (This might further spur on the need to get out of dodge). Which is inevitable; rule no. 1 of housing markets, a neighborhood’s collective property values dip in response to the lowest home price.
There is also the financial stigma that can follow a short seller into their next major investment venture, impacting a credit rating anywhere from 60-160 points, depending of course on the seller’s overall history. And while they are far from being as desperate as a foreclosure, short sales still carry with them a significant caveat; the deficiency. Although in some cases the deficiency is waived, or “eaten” by the lender, in others, the seller still is expected to comp all or a portion of the remainder, typically the byproduct of something called a “deficiency judgement”.
But since the couple of years leading up to the 2008 housing bubble burst, followed soon thereafter by the foreclosure crisis of 201o, short sales have been happening more and more often.
According to a recent report from the distressed housing database RealtyTrac, short sales have risen “33 percent year over year, to 35,000, in January. A total of 32 states saw annual increases in short sales, and 12 states saw more short sales than REO (real estate owned) sales.”
With this information in mind, we can perhaps slightly reframe our attitude about short sales. The question now, it would seem, is if indeed short sales have the power to serve as a major correcting factor in reviving the crippled housing market, will the stigmas associated with short selling transform into a kind of grim pragmatism?
“There’s a complex answer to that,” said Hugh Smith, owner of Easton-based Coldwell Banker Real Estate company.
“The first part is that a failure to pay a debt used to be viewed by society as a moral failure. That paradigm has shifted considerably however, in that now, a lot of the responsibility has fallen in the bank’s lap. There has never been a better time in history to default on a loan.”
Citing the GMAC Mortgage “robosigning” scandal that exacerbated the foreclosure crisis in the last quarters of 2010, Smith explained that when confronted with the shame and inconvenience of a foreclosure, short selling a home is by far the lesser of two evils for borrowers and lenders alike.
For the borrower, a short sale means moving on with their life after taking a small credit score blow. For the lender, who again, may have to “eat” the deficiency, it means capital can be freed up once again. And something is always better than nothing.
“Banks found out that they could increase their recovery rates through the short sale process as opposed to foreclosure; their net-recovery was higher,” said Smith.
“The banks are now encouraging sellers who have a hardship–and the hardship can be something like an upside down loan, or losing a job, or getting a divorce– to contact a qualified realtor to guide them through the process.”
According to Smith, who has access to the Short Sale Association of America’s (SSAA) database (no, this is information is not free), there are approximately 986 homes with delinquent mortgages across Kent, Queen Anne’s, Talbot, Dorchester, and Caroline counties. While he suspects about 1% of these borrowers will find a way to redeem their mortgage, the remaining 99% will be facing either foreclosure, or foreclosure’s slightly sexier, less snaggle toothed cousin, short sale sally.
“We think this is going to be 1/3 to 1/2 of our business over the next 5 years,” continued Smith.
“I think it is going to take us several years for us to clean this up, until the supply is equal to the demand, and right now we have way more supply than demand in all categories of real estate.”
But, on a more positive note, Smith mentioned that price levels are closer now to what they were in pre-bubble burst 2000 than ever before.
“For this economy to function, there has to be some moral leverage on recovering your debt,” said Smith.
“But I think that it’s easier today for a seller to try and sell short than it would have ben ten years ago.”
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