I still encounter new investors and home
buyers looking for a new residence who ask me if I can find them a “short sale.” In order to understand the question and why
short sales are much less common in 2019 than they were in 2010, let’s go back
to basics. What exactly is a “short
sale.” Here is a concise, if not
academic, definition: A short sale is the sale of a property for an amount less
than the seller owes on his or her
mortgage(s). An example might be
helpful. John has his home for sale for
$200,000, but he still owes $220,000 to the lender on his mortgage. If the lender consents to this sale and
agrees to release its mortgage in exchange for the proceeds from a $200,000
contract to sell John’s home, John will be selling his home “short” of the full
amount needed to satisfy that mortgage.
There are a few of important things that
must be present in a short sale. First,
as noted above, the mortgage lender must agree to it. Why would they agree to allow the sale of a
property against which they have a
valid, binding security interest (“mortgage”) for less than they are owed? They would do this when, among other things,
(a)the home is worth less than the outstanding balance owed on the mortgage,
and (b)the seller (their mortgagor) is not able to pay the difference between
the value of the home and the balance of the mortgage, usually due to some
hardship such as extended unemployment, bankruptcy, etc.
In 2010, in the wake of the “Great
Recession,” short sales were relatively numerous. Real estate values had seen a huge decline
from their highs in 2007 or so, many homeowners were experiencing extended
periods of unemployment or underemployment, and personal bankruptcies were
up. A home that had been purchased new
in 2006 for $450,000 might be worth only $325,000 in 2010 and the $425,000
mortgage taken by the buyer in 2006 was then secured against a property that
had nowhere near sufficient value to cover it.
Moreover, the home buyer who felt in 2006 that he could afford the high
monthly payments on that mortgage was suddenly looking at continuing to make
high monthly payments on a home he felt would never be worth what he was going
to have to pay for it over the next 26 years or so. Many people decided just to walk away from
their homes under those circumstances and allow foreclosure.
Others homeowners had lost their jobs in
the Great Recession and had no ability to continue making high mortgage
payments associated with pre-recession purchases. They were likely to discuss with the bank the
notion that they would try to sell their home to “get out from under it,” but
would need the bank to cooperate in the sale by agreeing to accept less than it
was owed on its mortgage to allow the sale to close. These circumstances describe the bulk of
short sales. Why would a bank agree to
this? They would agree because, at that
time, they could incur thousands in legal expenses to foreclose, adding to the
amount they were owed. Then they would
only be able to sell the home after foreclosure for a fraction of what they had
spent. If the debtor was unemployed or
bankrupt, there would be very little likelihood that the bank would recover from
the debtor/homeowner any amount beyond the proceeds from the sale of the
home. So they simply decided to “cut
their losses” and agree to the short sale.
It certainly wasn’t what the bank wanted, or even what it was legally
entitled to, but it was better than a larger loss.
So why do we see fewer, if any, short
sales in 2019? The answer is relatively
obvious. In 2019, property values have
recovered a great deal from their lows at the depths of the recession. Those homeowners who were willing to walk
away from their homes because they owed so much more than their homes were
worth in 2010 and 2011 have already done so.
Those homes have long since been resold at prices that were adjusted to
match the market in 2011 or 2012.
Lending practices also changed after the Great Recession. Lenders that were willing to loan $300,000 to
anyone “who could fog a mirror” in 2005 or 2006 began to use much more strict
loan underwriting standards and practices in 2009 and 2010. (Those requirements have been relaxed in the
last year or two, leading some experts to wonder if we may see another housing
bubble in the future.) So those homes
that can even match the definition of a short sale are far fewer in 2019 than
they were in 2010. It is much less
likely today that a home seller owes more on his home than it is worth—largely because
lenders are less likely to make loans in excess of appraised value and because
market values in general have continued to go up significantly year-over-year
in the last two or three years.
Are short sales then a thing of the
past? Not entirely. But they have become increasingly rare in
2019, and as the market—at least in Charlotte—continues to see steady
year-over-year increases in property values, the fact scenario that typified or
defined the “short sale” nine or ten years ago will also be increasingly
rare.
For more information about the greater Charlotte, NC, real estate market, contact us directly at (980)875-0950 or visit www.EricDorerRealEstate.com.
