The practice of short selling a home has become more popular in the wake of the mortgage bust only a handful of years ago. Until recently, many strapped homeowners just opted for foreclosure, unable to make mortgage payments or sell their home.
Unfortunately, foreclosure has a negative effect not only on the homeowner, but it can be extremely expensive for the lender, especially with the bounty of foreclosures currently haunting the market.
In response to rising costs, banks are now offering foreclosure bound homeowners a cash incentive to go for the short sale instead of continue to struggle directly into foreclosure.
According to RealtyTrac, this equates to 14 American homeowners who are either in foreclosure, behind on their mortgage or underwater. In a short sale transaction, the home is sold for less than what is owed, with the bank forgiving the remainder debt. In the past banks haven’t been overly keen to the short sale because they took a hit, but in many cases the notion of taking a small hit is better than a larger gouge produced by a foreclosure.
However, in an environment where homeowners have been burned too many times, borrowers are leery of the proposition. Sacramento area real estate agent Elizabeth Weintraub says that many homeowners are taken aback when approached with the incentive offer.
"Initially, the homeowners are skeptical," she said. "The bank may have already turned down their request for a modification. Then, one day, they call and say, 'Let us give you some cash.'”
When Angelique Pierce’s bank, Chase Mortgage told her that she would be getting a check for $25,000, she was in disbelief. "I got the offer in the mail. I called my bank to ask if it was real."
Pierce couldn't meet mortgage payments after becoming disabled a few years prior. When she had to stop working, she became delinquent on her mortgage payments on both her first and second mortgages. She is currently trying to sell her three-bedroom home for a fraction of what she originally paid. In 2002 she purchased the ranch home for $179,000…today she is trying to sell for a mere $95,000.
Like Pierce, Karen Farley was stunned to receive a letter from JPMorgan Chase & Co. in August about receiving cash if she sold her home. Farley hadn’t made a mortgage payment in a year after her home construction lending business went bust and was in over her head. “I wondered, why would they offer me something, and why wouldn't they just give me the boot?” she said. “Instead, I'm getting money.”
One California homeowner, who requested her name be withheld for personal reasons told The San Francisco Chronicle that she nearly threw away a letter stating, "You could sell your home, owe nothing more on your mortgage and get $20,000."
The woman said that she almost ripped it up, thinking it was just another scam. However, the letter was sent from her bank, JPMorgan Chase.
Banks Are On Board with Incentive Idea
According to Chase Mortgage spokesperson, Tom Kelly the overall strategy is a logical approach to avoiding foreclosure. "The first choice is a modification but if that's impossible than a short sale is a faster, more efficient solution," he said.
In the past, the practice of foreclosure was more of a rarity and homes wouldn’t sit on the market for months and years due to mounting competing inventory. Once the bank forecloses on the home, the borrower walks away from repairing roof leaks and plumbing problems. It’s up to the lender to handle and with too many foreclosures on the books, finding a better solution is in everyone’s best interest.
Sherry Lee, broker/owner of Lee Property Sales in West Palm Beach, Florida says, “It's (foreclosures) costing banks a fortune to do the foreclosure, and they want to cut their losses."
John Hayton, short sale specialist in Florida says he’s seen plenty of cases where the bank ends up paying a pretty penny just to prepare the property for sale. "I've seen a lot of foreclosures for sale where it would cost a lot more than $20,000 to get them into condition to sell again."
Short Sale Incentive Win-Win for Everyone
Short sales produce advantages to both lenders and borrowers. One distinct advantage is that short sales go for higher prices than foreclosures. The National Association of Realtors (NAR) reported that in December, foreclosed properties sold for approximately 22% less than a traditional sale, while the price reduction for short sales was only 14%.
Now that lenders are encouraging borrowers to sell by enticing them with an incentive, homeowners may be more inclined to go the short sale route. Redfin broker agent Nick Chaconas said that he was perplexed why one client was so gun ho on selling her home until he found out about the incentive. "Since I represent the buyer, I didn't even know about the incentive until the closing," he said. It wasn’t until he discovered that the seller would receive a $30,000 check for the short sale that it dawned on him.
In terms of incentive dollar amount, where you live and individual homeowner circumstances influence how much cash sellers receive.
For example, Wells Fargo has limits to certain states like Florida where the foreclosure process can be a long term commitment. Last November RealtyTrac reported that foreclosures took an average of 749 days in Florida and local Realtors say it has become cheaper to pay off borrowers than take them to court. Thus far the bank has paid $10,000 to $20,000 to borrowers who opt for a short sale or transfer their title to the bank via deed-in-lieu.
Bank of America’s Florida pilot program offered incentives ranging from $5,000 to $20,000 for short sales from September 26, 2011 to November 30, 2011. Amounts were based on 5% of the unpaid balance--$5,000 was the minimum and $20,000 was the maximum. This initial Florida program was considered to be a “test-and-run-program” and may spread to other states, says Jumana Bauwens, Bank of America's spokeswoman.
However Lee says that she had a difficult time navigating the Bank of America program. She said that computer system was hard to use and directions regarding who was eligible for the program were murky. “People want straight answers from us brokers, and I couldn't get them," she said.
Other Florida agents had better luck. Tampa Realtor Liane Jamason said she had a $20,000 deal for one client in writing from the Bank of America program.
"I think the problem was they didn't get the word out as much as they could have about the whole thing," she said. "I hope they continue the program and that more banks follow suit."