Short sale eliminates need to foreclose

Last week we talked about the need for lenders in the Atlanta area to help stem the tide of vacant, bank-owned homes in our neighborhoods. One step lenders are taking more often is to accept a “short sale,” or a discounted payoff, on a house before it goes into foreclosure. This week, we will answer questions about short sales.

Q: How is a short sale different from a traditional foreclosure?

A: In a typical Georgia foreclosure, the lender notifies the borrower that payments are past due. The borrower is given a reasonable period of time to catch up or pay off the debt. Eventually, the lender forces the sale of the home at a public foreclosure auction. If no one bids, the lender ends up owning the house. The bank will then try to sell the house for whatever it can get, often taking a significant loss in the overall transaction. In a typical short sale, the borrower tries to sell the house before the foreclosure auction, finding a buyer willing to buy the house as is. Often, the offer is well below the amount owed to the lender, but it may be accepted to avoid the likelihood of bank ownership of a vacant house. In many cases, the bank loses less by accepting a short sale than it would if it foreclosed and tried to sell in a tough market.

Q: What is the advantage of a short sale over a foreclosure?

A: In a traditional foreclosure, the bank is almost certain to end up owning a vacant house in poor condition. Then it will try to sell the house in a depressed market. Because most lenders have a policy of making no repairs or improvements, the house deteriorates over time. The vacant house attracts crime and drugs and serves as a deterrent to anyone who may be thinking about buying a home in that area. In contrast, a short sale allows ownership of the house to be transferred directly from the original borrower to an investor who understands what it takes to get the house fixed up and rented. Investors know that time is money, and uniformly endeavor to complete their repairs quickly. The short sale is advantageous because it puts the house back into reasonable condition quickly so that it never hurts the community.

Q: How many short sales are there when compared with foreclosures?

A: A recent study from the Comptroller of the Currency showed that lenders completed three times the number of short sales during the fourth quarter of 2008 than they did in the first quarter of ‘08. Even so, lenders completed six foreclosures for every short sale during the last quarter of 2008.

Q: Why don’t lenders encourage more short sales?

A: Because they are unfamiliar with the benefits of selling now as opposed to selling later. In some cases, lenders genuinely hope to come out better by selling later. In other situations, the lenders believe investor offers are too low.

Q: Why is this topic important now in Atlanta?

A: More than 10,000 homes were advertised as going into foreclosure in the 13-county metro area for April, a record, according to EquityDepot.net. Unfortunately, the vast majority of these homes have no apparent equity, and most will likely end up as “toxic assets” sitting on the market and pulling down prices in their neighborhoods. The longer they’re empty, the worse they look. In my opinion, these homes are preventing a real estate recovery in the Atlanta area.

Q: Does the Housing Stabilization Initiative address the issue of foreclosures?

A: Yes, it seeks to prevent more foreclosures by encouraging lenders to refinance creditworthy borrowers and to modify loans of borrowers who are in trouble.

Q: If these vacant homes become eyesores so quickly, why can’t the lender manage them better?

A: There is an adage: Nothing good ever happens to an empty house. Lenders have never before experienced the need for large numbers of property managers and often try to convince real estate agents they should maintain the houses. Incidentally, code enforcement departments are becoming less forgiving when neighbors complain about an abandoned house. I recently met a listing agent who was fined and held in contempt when her lender client failed to mow the lawn when needed.

Q: What can we do if there is a vacant bank-owned home in our neighborhood?

A: Contact your neighborhood association and the lender’s “property disposition” office. Insist that the house be maintained to community standards regardless of lender policy, and be prepared to work with local code officials until the house sells.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.