Hoping to avoid foreclosure, some financially strapped homeowners are taking advantage of what until recently had been a little-used option. When they find they can no longer afford their homes, they negotiate with their lender to accept a short sale—a transaction where a bank or other lender allows the house to be sold for less than the amount owed on it.
According to the records of Midwest Real Estate Data (MRED, which until recently was known as the Multiple Listing Service of Northern Illinois), at least one of every ten houses that sold in the Chicago area over the past month went as a short sale. The figure is far lower for condos: only about one in 25 went as a short sale.
Of the 466 house sales I studied, 47 were flagged as short sales—which means that 10 percent of the people who sold their houses left the closing with no equity to transfer to their next home. It also meant that the banks holding those mortgages also lost at least some of their investment. And because a home sale is identified as a short sale in MRED’s system only if the seller agreed to have it flagged, there is no way to know for sure the exact number of short sales locally.
Marki Lemons is a Rubloff Residential agent on the board of the Chicago Association of Realtors (CAR) who teaches classes on short sales to CAR agents. She estimates that the total number of short sales actually comprises about 15 percent of local sales. She blames the problem in part on overly optimistic or outright fraudulent appraisals in the past several years, and in part on the willingness of lenders to finance up to 100 percent of the appraised value of a house. “Some people borrowed more than their house was ever really worth,” she says.
Marc Shudnow also points to the recent explosion of home equity loans, which tended to drain out any equity in a home before the market stalled. (Shudnow and his wife, Iva, are RE/Max agents in Skokie who specialize in short sales. They have two websites, this one for sellers, and this one for buyers.) “A lot of people used their homes as ATMs for three or four years,” Shudnow says, “When the market stopped going up, they got in trouble.”
Like the foreclosure numbers, short sales are at present more concentrated in lower-priced homes. Of the 47 short sales among houses that I looked at, all but two involved homes that sold for $400,000 or less (the other two both went for more than $1 million). Among the 336 condo sales over the past month, only 15 went as short sales—and each of those condos sold for less than $400,000.
Marki Lemons attributes the lopsided concentration to aggressive predatory lenders stalking lower-income neighborhoods over the past several years, talking people who “really could not afford to own a house” into easy credit that often lumped in extra cash to pay off car loans or other debts. Once the market and lending terms changed, explains Lemons, and the inflated appraisals deflated, the borrowers had little choice but to let go of their houses.
Another explanation for the large number of low-priced short sales is that several housing agencies have been actively introducing their counseling and other programs into low-income neighborhoods where predictions called for an epidemic of foreclosures. Counselors may have steered troubled borrowers toward the short-sale option.
Short selling is better than foreclosure, explains Shudnow, because the lender saves money and the sellers don’t end up with a foreclosure judgment against them and don’t get kicked out of their homes until the time of sale. In a short sale, Shudnow or another agent negotiates with the bank to find out precisely how low it’s willing to go—how much of its investment it is willing to lose in order to recoup the rest—and then prices the house accordingly. The house becomes a bargain then, which ought to encourage a quicker sale.
Typically the lender ‘loses about half as much in a short sale” compared to any loss in a foreclosure, Shudnow says. But the bank usually ends up carrying the house for a shorter time; it also saves money by not having to pursue the homeowner through legal channels or having to board up or otherwise secure an empty property. As for homeowners, they not only get to live in their homes up to the sale date, but their credit record takes a lesser hit. While short selling is still reflected in your credit history, Shudnow says, “it’s not a lien against you, and you have nothing to pay back.” A short sale also signals that a homeowner about to lose his home is willing to work with the bank to get it sold, rather than throwing in the towel.
As for the rarity of short sales among condo sellers, Shudnow points to the appraisal process. Because of the different number of rooms, the types of finishes, and countless other variations, it is often tough to compare one house to another, which can lead to widely varying appraisals. But condos, particularly within one building or complex, are often very similar and more easily comparable—which may have reduced the number of inflated appraisals in that segment of the market.
Because MRED only began flagging short sales in late February, I couldn’t compare this recent data with transactions in past months and years. (Based purely on his experience, Shudnow, who has been specializing in short sales for eight years, estimates that the number of Chicago-area short sales has at least tripled this year.) The change at MRED came at the urging of real-estate agents and real-estate appraisers who said it would more clearly identify houses that were sold for less than the market norm because of owners’ financial problems. That should distinguish them from houses that were sold at lower prices because of the declining market, according to Sarah Burke, MRED’s supervisor of rules and regulations. That distinction is going to be crucially important for tracking the rise or fall of local home prices in the future. “You’re going to see discrepancies between the last sale price of this house and the one before, and you’re going to need to know why,” Burke says.