Selling Homes for Less Than Owners Owe Increases in Central Texas

Short sales of homes have offered a modest and much-appreciated shot in the arm during the economic downturn, local Realtors said.

During normal, stable conditions in the Austin housing market, short sales typically account for about 5 percent or less of homes sold by Realtors. But with more homebuyers not able to make their payments and banks wanting to avoid the time and money that foreclosure entails, short sales today account for up to double-digit percentages among some residential real estate firms.

A short sale, in which a lender allows a homeowner to sell for less than is owed on the mortgage, can minimize harm to a homeowner’s credit, while enabling a lender to avoid “hefty fees” associated with foreclosure, said Robert Grunnah, a residential real estate broker and owner of Castle Hill Investments.

“Short sales definitely have helped move inventory more than usual,” he said.

Short sales usually occur when a homeowner can’t make the payments and the balance on the mortgage exceeds the home’s value. In some instances, home values swelled during the housing bubble such that the amounts borrowed to buy them then are more than those homes are worth now.

Homeowners can approach their lender, such as a bank, and claim they have an economic hardship that prevents them from making payments. If the bank agrees to a short sale, the borrower can either make up the difference or possibly have the difference partially forgiven.

“It’s a great alternative for a tough situation for all parties involved in facing a foreclosure, but it’s on the owner to approach the bank or lender to get the ball rolling on a short sale,” Grunnah said.

Grunnah, who mostly sells duplexes and fourplexes that are bought primarily as investments, added that when short sales are requested, banks are more sympathetic to homeowners who occupy their homes than to those who bought property solely as investments.

Short sales rise with foreclosure activity

Across the country, foreclosure rates are at or near all-time highs, prompting many homeowners to consider asking banks to let them sell short before reaching foreclosure. In January, there were foreclosure filings — including mortgage default notices, house auctions and home repossessions by banks — on 315,716 properties in the U.S., according to a recently released report by Realtytrac, a California-based real estate data firm. That’s a decrease of nearly 10 percent from December, but up 15 percent from January 2009. One in every 409 U.S. housing units received a foreclosure filing in January.

Meanwhile, distressed home sales — including short sales and bank-owned sales, which involve homes foreclosed on by banks that failed to sell at auction — accounted for 29 percent of homes sold in the United States in January, according to a recent report from Santa Ana, Calif.-based First American CoreLogic. Distressed home sales activity fell last July but rose again late last year and in early 2010, the report said.

Short sales accounted for 8 percent of all sales in January, up from 7 percent in December and 5 percent a year ago. The numbers are in sync with Austin’s figures, local Realtors said, although some have seen short sales jump to as high as 20 percent for a while during the 15 months when the market was at its weakest.

Todd Sherman, a broker and founder of Resident Realty LLC, said about 8 percent of the 153 transactions his firm brokered last year were short sales. He expects roughly the same percentage to continue through the rest of 2010.

“Central Austin doesn’t seem to have as many of them, but surrounding areas like Hutto, Pflugerville, Kyle and Buda have more short sales because the housing bubble grew bigger there with limited building options in Austin’s urban core,” Sherman said.

Process requires patience

While a short sale can mitigate a difficult situation for a homeowner and a bank, it poses a challenge to Realtors and buyers in that the process is notoriously long. Realtors said the time from when a potential home buyer decides to buy a house until closing can take six to eight months. Also, a deal can be derailed with barely 24 hours notice from a lender that decides to foreclose rather than let the short sale proceed, some said.

“The most ironic thing is that short sales are anything but short,” said John Horton, chairman of the Austin Board of Realtors and owner of John Horton Realty. “The process can be frustrating for Realtors and home buyers wanting to move the deal faster and get the buyer moved in.”

Such observations rang true for Mike Jatzalu, a truck driver who recently bought a three-bedroom house in Hutto that was sold short by $20,000. He started the process in September and didn’t close for nearly five months. The closing followed the day after a bunch of paperwork was submitted at the last minute and just before the lender nearly foreclosed.

“Like with most short sales, I got the home as is. And although I ended up saving about $20,000 off the price, I still had to do a lot of renovations,” Jatzalu said. “I am glad I got it along with the new homebuyer’s tax credit, but it all requires a lot of patience.”

Grunnah said short sales may start to dissipate more rapidly in Austin than elsewhere in the latter part of 2010 and into 2011 because the housing bubble didn’t get as bad here as it did in other metro areas. He brokered 14 short sales last year and expects to do about the same number in 2010, with a sharp drop anticipated in 2011 as the market recovers.

“Lenders are increasingly starting to delay accepting a short sale because home prices are starting to pick back up and they can get a better deal by foreclosing,” Grunnah said. “Bank of America, the largest lender, is still overwhelmed in processing all this after acquiring Countrywide [Financial], and that is delaying some of these deals. And the Obama administration is constantly tweaking its policy on housing assistance and regulation. So it may still be risky for homeowners and Realtors to keep taking on [short sales] as the market picks up and returns to normal.”