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Short Sales, In Short
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 If recent data are accurate, there are many homeowners in the U.S. who surely must feel like homeownership is the financial equivalent of being thrown in a lake with cement blocks tied to their ankles. Yes, we're talking about people who owe more on their houses than they could sell them for, also known as being underwater or having negative equity.
Two analyses of first-quarter 2009 data (one by real-estate site Zillow.com and one by Economy.com) suggest about 20 percent of all homeowners are in this situation, meaning... were they to sell their homes, they would end up in what's known as a "short sale." The proceeds from the sale wouldn't cover the amount owed on the mortgage, and the seller would have to come to the closing table with a check for the bank holding the mortgage (unless the lender had agreed to accept less than the full amount owed). More about that later.
The number of homeowners underwater is greatest in Las Vegas, where 67.2 percent of all property owners now are in this situation, according to data from Zillow. The other cities with high percentages of upside-down homeowners include many of the usual suspects as far as troubled housing markets go: various metro areas in California; Reno, Nev.; two Florida markets and Phoenix. See Zillow's data for 161 metro areas here.
All of us can expect the number of homeowners who are underwater to increase in areas where home prices are still falling. Also, data can be skewed if a community has a high foreclosure rate.
Short-Sale Solution
So what should you do if you must sell your home and you're going to come up short at settlement? By all means, reach out to your mortgage lender as soon as possible. The loan-workout specialists at many banks are overloaded with short sales and foreclosures (an agent at my company handled a short sale recently and said there must have been 500 files in the office of the workout specialist she dealt with), so a speedy solution usually is unlikely.
It will take negotiation between you, the bank -- and quite often, your real-estate agent, who wants to try to make sure he or she is paid commission on the home sale -- to reach an agreement on the amount the bank will accept. The bank representative will want a full picture of your personal circumstances, the value of your property and how much equity (or lack of) you have in it. If you have a potential buyer, the bank will want to assess the buyer's strength to complete the purchase.
A bank may agree to accept less than the full amount owed, and that is definitely information you must get in writing from your lender. But there's also a chance your lender will more or less keep you on the hook for the full amount, accepting a lump-sum payment toward the mortgage when your home sells, and then setting up a payment structure for you to cover the balance. Even the latter situation is better than walking away from your home completely and having a foreclosure on your credit history.
Consider Treading Water
Homeowners who are current on their mortgage payments but underwater because homes values have declined in their local markets may qualify for assistance under President Obama's "Making Home Affordable" plan. To participate, your mortgage must be held by Fannie Mae or Freddie Mac.
And if you are underwater but have a mortgage payment you're comfortable with -- and you don't need to sell your house -- don't. Pay extra on your principle, if you can, keep your home well maintained and refrain from investing in significant home improvements.
Various sources suggest the housing market will rebound in 2009, 2010 or, gulp, 2015. The latter forecast is from The Concord Group and is detailed in this Wall Street Journal Online "Developments" blog entry.
Of course, "rebound" doesn't mean large year-over-year gains in home prices. It just means that home prices will hold their ground or make small gains, and the inventory of homes for sale will level off or decrease. You can tread water in that situation and eventually make your way to the top of lake, head up and feet down.
On a final note, short sales can present bargains for home buyers, but be aware that they can be long, drawn-out transactions for all of the reasons cited above. Some data suggest that less than 50 percent of all offers on these properties are successful. A Google search on "short sale properties" will bring up lots of resources on buying these homes, but an article from Business Week's archives offers a particularly cogent explanation of what a buyer may face with short-sale properties -- and the picture isn't all that pretty.
Are you considering a short-sale for your "underwater" property? Share your thoughts on this now-common tactic.
-- Valerie Patterson oversees all online and print marketing efforts at Kurfiss Sotheby's International Realty, a privately-owned real-estate firm based in the Philadelphia area. Prior to joining Kurfiss, she was the producer of The Wall Street Journal's free real-estate site, RealEstateJournal.com.
Message Edited by Val_A_Patterson on 05-14-2009 01:47 PM
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