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 still 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, homeowners who couldn't make their monthly payments found that they couldn't just sell, because they owed more 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 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."
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 condo for unpaid homeowners 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 slow to respond to buyers' offers. One said he just closed on a short sale that took 18 months — and his buyer was the sixth person to try to purchase the house.
"There was lots of duplicate paperwork and lots of waiting," said George Violick of Coldwell Banker in Oradell, N.J.
"We'd go months without hearing from the bank, and then it'd be, 'We need this form signed by the end of the day.' "
But other real estate agents say the mortgage industry has taken steps to streamline the process. For example, Fannie Mae and Freddie Mac, the large entities that guarantee mortgages, 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 move forward, among other actions.
And a number of large banks now use equator.com, where documents can be uploaded and viewed, cutting the potential for lost paperwork. As a result, "the process goes more quickly," said Johnny Rojas, a Century 21 broker in Garfield, N.J.