Real Estate and Business

Hatteras Island Real Estate:
Short sale is an alternative to foreclosure

By TOM HRANICKA

With each new report, the number of distressed homeowners across the country increases. While the present level of properties entering the foreclosure process on Hatteras Island is relatively low, the number of owners facing financial hardship over the next few years can be expected to increase when adjustable rate mortgages and exotic loans are forecast to reset.

One troubling aspect of this situation is that it has been estimated that as many as 70 percent of homeowners going into foreclosure may be doing so without taking any visible action to prevent or delay this outcome. Many believe that recently enacted and proposed federal legislation will rescue them. The reality is that this is probably not going to happen, especially where second homes and investment properties are involved.

The good news is that there are often options available to delay or prevent foreclosure for homeowners who find themselves in a financially stressful position. One of these alternatives, known as a “short sale,” is often a viable solution for the owners of both primary residences and vacation homes. By definition a potential short sale situation exists when a borrower owes more on his or her home, including closing costs and expenses, than the current market value of the property. You may also have heard this set of circumstances referred to as a seller being “upside down” or “underwater.”

A short sale occurs when negotiations result in the lender agreeing to accept less than the full balance of the property owner’s loan. While the concept of a short sale seems simple enough, the reality is that the process has many dimensions, and it can require a lot of patience, communication, and understanding by all of the parties involved.

It is also important to recognize that a short sale is not a “get out of my mortgage free pass” for anyone who owes more on their mortgage than their property is worth. A short sale is a way to avoid foreclosure. The seller has to either be in foreclosure or headed toward foreclosure. There must be a demonstrated financial hardship associated with the borrower’s inability to pay their mortgage, and the owner must owe more on their mortgage than the property’s fair market value. If these pre-conditions do not exist, then the homeowner basically has an investment that did not work out as planned. These individuals will usually have to wait for the market cycle to recover, bring cash to closing to pay the difference between the mortgage balance and the selling price, or, in the worst case scenario, let the property go into foreclosure.

You may be asking yourself, “Why would a lender even be interested in agreeing to accept less than the entire mortgage balance owed on a property?” The answer is that, first, the lender does not want to own the real estate. Second, foreclosing on a property is an expensive proposition for a lender when you take into account the cost of the foreclosure process and the expenses associated with “owning” the home for an extended period of time (e.g., taxes, insurance, maintenance, utilities, selling costs, etc.). Third, a short sale keeps the property off the bank’s books for regulatory purposes. Finally, under current real estate market conditions, the lender may be taking back an asset that is declining in value. Therefore , the bank is often better off accepting a buyer’s offer that is less than the outstanding mortgage balance rather than foreclosing on the property.

If an owner has reviewed his or her financial situation and thinks that it may be advisable to pursue a short sale, there are certain actions that should be taken. In my opinion, the first conversations should be with the owner’s attorney and accountant and a Realtor who has specialized, advanced training in working with distressed properties. These professionals will generally be aware of the spectrum of alternatives that are available to the borrower and can provide the owner with valuable perspectives. Then, a call to the lender holding the mortgage is essential to ascertain whether or not the lender will even consider allowing a short sale. Without getting into the details, the process can become more complicated if there is more than one mortgage on the property or if there is Private Mortgage Insurance on the loan.

An essential part of conversations that homeowners have with their advisors is understanding the potential consequences of a short sale. For example, depending on a variety of factors, the borrower may remain liable for the difference between the mortgage balance and the proceeds of the short sale (deficiency judgment). There may be income tax ramifications. The owner’s credit score may be impacted, and the homeowner could be asked to sign a promissory note for the difference between the loan balance and the proceeds of the sale.

Once it has been decided that a short sale is the best option to pursue, the property is listed for sale with a real estate broker, and the marketing process begins. After an offer to purchase is received, the offer together with a rather extensive short sale package is submitted to the lender. It is the lender, not the seller, who decides whether or not to accept the buyer’s offer. Because of the high volume of foreclosure-related files that lenders are processing and the associated backlogs, it can take anywhere from several weeks to several months for the lender to make a decision. This inherent delay is a major reason that it is so important for there to be open communication among all of the parties in the transaction about the short sale process and the need for patience and understanding. The end result can be beneficial outcomes for everyone involved.

Up to this point, the focus has been on the lender/seller aspects of a short sale. Some buyers and investors may be hesitant to consider properties that are identified as short sales because they have concerns about benefiting from another person’s financial misfortune. The reality is that by purchasing a property through a short sale, the buyer is helping the homeowner, assisting the lender, obtaining the property at a favorable acquisition cost, and, in a very real sense, making a meaningful contribution toward resolving the current housing market dilemma by reducing the inventory of unsold homes.

According to Outer Banks Association of Realtors reports, there are currently 25 residential properties and eight unimproved lots listed as potential short sales on Hatteras Island. Asking prices for the residential properties start at $135,000, while the unimproved lots begin around $79,000. Prospective buyers can obtain a list of these properties by contacting their local Realtor.

Misinformation, fear, doubt, and uncertainty have the potential to create a paralysis that can have far-reaching effects on our future financial well-being. Facing the prospect of financial distress related to a primary residence or a vacation home can be extremely upsetting under any circumstance. It is important to restate that there are alternatives to foreclosure with a short sale being one possible choice. If you or someone you know is experiencing a financial hardship related to property ownership, please take the first step and speak with your attorney, your accountant, and your Realtor. Likewise, if you have been thinking about purchasing a cottage or a home site on Hatteras Island, some properties listed as short sales present highly attractive buying opportunities while helping the sellers to favorably resolve the painful circumstances that they are facing.

There is no question that these are unsettling times in many different ways. Understanding available choices and having a clear plan of action can increase the probability of a favorable outcome when market forces change direction. Opportunity appears in a variety of disguises. If we can identify the opportunities that are hidden within the disturbing media reports and market statistics, then future financial well-being and success may be much closer than we think.

(Tom Hranicka is an associate broker with Outer Beaches Realty. Questions, comments, or suggestions for future articles may be sent to Tom Hranicka at P.O. Box 237, Avon, NC 27915, or e-mail to hranicka@hatterasisland.com )

Copyright©2007 Tom & Louise Hranicka. All rights reserved.