Short sales soaring in Twin Cities

Amanda Jurek has just added a "Mrs." to the front of her name. The Blaine woman tied the knot with Monty Jurek in September. However, before the couple could celebrate a happy honeymoon on the North Shore, Amanda had to cut the ties to her old bachelorette pad in Otsego.

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"I was getting married, so we needed to get rid of my town house." It was easier said, than done. "We were almost 100% upside down on the townhouse (owing twice what the house is worth), so we needed to figure out what we were gonna do and we started looking into all of our options as far as doing a short sale."

What is a "short" sale? President-elect Brad Fisher of the Minneapolis Area Association of Realtors (agent for Edina Reality) explains: "Basically, a "short sale" is a condition of where the seller owes more on their mortgage that what the value of it is."

Say a homeowner is carrying a $200,000 mortgage, but with the state of the economy and falling home prices, the house is valued at only $150,000. The homeowner has found a buyer willing to pay something around the new, reduced value of the property. The selling price comes in "short" of the balance of the mortgage. Hence: a "short sale". In essence, the embattled homeseller is asking the lenders to bail them out by losing a big chunk of what the homeseller owes on the mortgage.

For the homeseller, the short sale is bittersweet because they are losing their home. On the other hand, they are avoiding foreclosure which is really damaging to their credit rating. A short sale also hurts a credit rating, but not to the degree of damage done by a foreclosure.

For the lender or lenders, the full mortgage is a lost cause. However, the short sale nets the bank more money than can be had from absorbing a foreclosure.

All of which contributes to a sudden glut of attempted short sale deals. Notes Amanda Jurek's realtor, David Roppe of Otsego, "There is a lot of inventory out there, a lot of short sales and people trying to sell them and move them and (they sit) a lot of days on the market because they are not getting sold fast enough. It is a lot harder when you have two banks involved as well, getting approval from the first and trying to coordinate both banks to close at the same time and both accept the money that they would be receiving. Makes it tough."

Presently, approximately 25% of homes listed for sale in the Twin Cities are "lender-owned", that is: either short sales or foreclosures. Wells Fargo Home Mortgage Vice President Gwen Oberg in Fort Mill, South Carolina is an expert in short sales. "The real estate markets, of course, are in some trouble and we have seen a big uptick in short sales interest. We're always looking to try to keep the customer in their property. (However) A short sale is actually a great option other than foreclosure." A better deal for the bank as well? "Usually, yes, that is the case."

The rise in short sale "inventory" has been accompanied by a slowdown in "closing" the deals. Edina Realty  Agent John MacKany, who has written extensively about short sales, warns his clients. "People need to understand that there's nothing short about a short sale." MacKany also has a newlywed client couple. However, unlike the Jureks, Shawn and Melissa Rask want to buy a short sale home, not sell one. The process for the 22-year old Northwestern College Business major has been eye-opening. "Shortly after getting in, we realized this is not a typical 30-day-and-you're-done. It's more of a 2-3-4 months, who-knows-when-it's-gonna-be-done kind of a deal."

The Rasks are eager to move out Shawn's parent's Eden Prairie house and into a home of their own. There is a certain urgency in their plans. They need to take advantage of the temporary $8,000 Federal Tax Credit for first time homebuyers. In order to get the tax credit, they must close on their home before the program expires on November 30th (some observers think the program may be extended, but there has been no word as yet from Washington). Shawn says they clung to hope for weeks. "And we finally got the approval, so, it took 3 months on the dot."

Not so optimistic is Realtor Matthew Lee of Forest Lake. "I think they say the general rule is you should be able to get this processed in about 3 months. That hasn't been my experience." Lee has a South Minneapolis listing that is on the extreme end of the short sale stall. "It's been 8-10 months! 10 months, I was working the process through."

There is no end in sight to that effort. Why so long? Many realtors point fingers at reluctant lenders. David Roppe is one. "The banks are just taking forever to respond to any offer you submit to them, just not quick to pull the trigger on anything."

Brad Fisher has a qualifier. "It's not all banks. Sometimes, what has also happened is you have not only one mortgage, you'll have 2 or 3 mortgages and you'll have one mortgage company come to terms, but the second will not because they're not in foreclosure. They're not behind in payments and they're not motivated to settle."

Everyone agrees that assembling a short sale can be like constructing a house with more than one contractor. Matthew Lee stands on the lawn of his South Minneapolis property, vacant for a year and laments. "Now, this particular property here, the frustration, I think, is more so in the bureaucracy in the paper work and getting the stuff to them."

In fact, a storm of short sale faxes and mailings often fly back and forth, between agents, home sellers and lenders, a process that can take weeks. Lee insists that the lenders on his listing lost all of the material he had sent at least once, forcing him to start the process over from the beginning.

Wells Fargo insists they try to keep the customer in their home as long as possible. They are not directly involved in any of the examples in this story, but they are involved in many short sale offers of their own. Vice President Gwen Oberg agrees that better communication between parties, including the timely sending and receiving of documents could help speed up the process. "I guess my biggest point is just to keep in mind that the short sale is a graceful exit to a difficult situation for a customer."

Newlyweds Amanda and Monty Jurek have finally been able to have their happy honeymoon after weeks of short sale nail biting. Realtor Roppe sighs in satisfaction. "Yeah, we got this one done. It took about 3 and a half months from when we got an offer."
As for Amanda Jurek, her excitement was uncontained. "Oh, yeah! It's done! It's over! Thank goodness!"

The latest figures from the Minneapolis Area Association of Realtors (MAAR) indicate that the inventory of "Homes Available" that are "Lender-owned" (in foreclosure) dropped 60.9% from October of 2008 to October of 2009, thus far (4,885 in 2008, 1,911 in 2009).

Short Sale Homes Available also dropped, but only by 4.3% (4,459 in October 2008, 4,266 in October 2009).

Stated another way, lender-owned (foreclosure) homes, as a portion of the Twin Cities available homes inventory dropped from 15.2% to just 7.7%. At the same time, Short sales inventory climbed from 13.9% to 17.2%.

Another Real Estate indicator is "closed sales" for the past 12 months. By that measure, foreclosure sales soated by 102.4% from 8,015 to 16,223. By comparison, short sales closings climbed just 73% from 1,829 in 2008 to 3,165 in 2009.

MAAR President-elect Fisher sees the tiny drop in short sales inventory and the relatively weak short sales closings as indications that lenders are stalling on short sales deals.

Wells Fargo's Oberg insists "We're always looking to try to keep the customer in their property whenever we possibly can. When that's not a viable option, a short sale is actually a great option other than foreclosure." 

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