In months of house hunting, Carrie Hennessy saw places she liked and places she could afford, but none that checked off both boxes. Then she found a 30-year-old, three-bedroom colonial in Ramsey, N.J., on the market for less than $400,000, in a neighborhood where similar homes had sold for more than $500,000 during the housing boom.
Although the house was a good deal, it was also a short sale, that is, selling for less than the homeowner owes on the mortgage. These sales are often more complicated than other sales, because the seller's lender has to accept a loss. And Hennessy's deal hit a few bumps.
"It was challenging and time-consuming; it was a headache," said Hennessy, a clinical director at an autism program. "But in the end, I'm really glad I did it."
Hennessy closed on the home for $350,000 in less than four months. But while some mortgage servicers have taken steps to streamline the process, the negotiations over a short sale can stretch out for much longer, depending on the lender. Buyers who are in a rush are usually advised to stay away.
"We've had short sales get approved in five weeks, and others take a year and a half," said real estate lawyer Jill Cadre of Englewood Cliffs, N.J.
Short sales became more common in 2007 and 2008 as the housing bubble began deflating. With home values plummeting, troubled homeowners who couldn't make their monthly payments found that they couldn't sell because they owed more on their mortgages than the homes were worth. That left lenders with an unpleasant choice: foreclose on the distressed properties, which involves legal costs, or allow the homeowner to sell the property for less than the mortgage amount, and forgive the difference.
The biggest delay in many short sales is that the first mortgage is not the only lien on the property, said Allen Seelenbinder, a senior vice president with Bank of America. Homeowners who can't pay the mortgage are "not paying other bills, either," said lawyer Robert Bavagnoli of Totowa, N.J. As a result, there may be second mortgages and other liens and judgments on the home. Dealing with all of those creditors can dramatically slow down a transaction or even torpedo it.
Hennessy, for example, was buying from an owner who had four liens on the house, first and second mortgages, plus two unpaid loans. Her real estate agent, Rita Lutzer of Re/Max in Mahwah, N.J., had to negotiate the offer with all four lenders.
"The fun really started when it came time to get all signatures from the four individual banks," Lutzer said. They tried faxing and scanning the documents, but those images weren't clear enough.
"Ultimately, the original had to be FedEx-ed to each individual party all around the country for signatures," Lutzer said.
Linda Stamker of Prominent Properties Sotheby's International Realty in Fort Lee, N.J., said she worked with a buyer who tried for eight months to purchase a house. The deal fell through because two lenders held liens on the home.
"There was one bank that held title, but another did a refinance on the property," Stamker said.
"In the end, they couldn't settle the dispute on who could close [the sale]. So the buyer ended up losing the property."
Barbara Weismann, a Weichert agent in Tenafly, N.J., said she has seen condo deals fall apart because there's a lien on the unit for unpaid homeowner's association fees, and neither the seller, the bank nor the buyer is willing to pay it off.
Short sales also can be challenging because the homes are sold "as is." Buyers sometimes try to negotiate to have the seller or lender pay for repairs, but in most cases, neither will pay.
Real estate agents and lawyers say some mortgage servicers can be very slow to respond to buyers' offers.
Other real estate agents say the mortgage industry has tried to streamline the process. For example, Fannie Mae and Freddie Mac have reduced the paperwork requirements in some short sales and will offer up to $6,000 to pay off second liens to help the deal advance, among other actions.
Short sales also tend to go more smoothly when the listing agent and the attorneys involved are experienced with them and know how to deal with the banks, several agents said.
Bank of America's Seelenbinder said sales are quicker when the distressed homeowner goes to the mortgage servicer first and gets approval for the short sale, as well as a minimum price that will be accepted for the property. The process is slower when the homeowner puts the house on the market, gets an offer and then tries to get the mortgage servicer's approval.
In Hennessy's case, her purchase was complicated by the presence of a tenant in the house, and the need to take care of some matters that the seller usually pays for. Because the house was sold "as is," she had to deal with mold in the garage, water damage in the kitchen and uninsulated pipes that froze during recent frigid weather. With all the necessary renovations, she joked, "Home Depot is my home away from home now."
But she's happy with her choice. She got to stay in Ramsey, where she had been renting and her 7-year-old was in school, and got the space and back yard she wanted. Going with a short sale, she said, was a hassle for a few months, but it gave her the home she wanted for the long term. "I'm glad I didn't have to settle," she said.