Monica and Bert Horner found their dream home last year in the Baltimore suburbs, but the deal from the start was akin to a troubled relationship — complicated.
The four-bedroom, 21/2-bath Colonial in Baldwin was listed as a short sale, meaning the owners were seeking to sell it at a loss in order to stave off foreclosure. Such sales often require several layers of lender approvals and can stretch on for months before any closing can be scheduled.
"We got nervous at times," Monica Horner said. "We put our offer in and didn't hear back from the bank for two months. We were really nervous. It was dicey. You had to go back and forth with the bank all the time."
Their patience paid off. At settlement last December, they bought the house for $325,000 — a hefty discount off the home's appraisal of $370,000, Horner said.
The Horners cashed in on a residential trend that has moved like a wave throughout Maryland's communities following the economic and housing downturn that began in 2008. Short sales have been a saving grace of sorts for families affected by major changes like job loss and unemployment, divorce, relocation and death.
The sales, called "short" because lenders agree to negotiate and accept a lower price for a property than what is owed by the seller, can be a long and rocky path, but real estate experts say the end result can benefit everyone involved.
"All three parties — the lender, the buyer and the seller — all win," said Vladimir Kats, president of Kats & Associates at Keller Williams Legacy in Pikesville, where short sales account for a big part of the agency's business.
"The lender recovers about 20 percent more than they do in a foreclosure, the sellers win because their credit is not damaged as much [as in a foreclosure] and the buyers get a home at a reduced price," Kats said.
In many cases, short sales also allow sellers to negotiate with their mortgage lender — both first and second mortgages apply — about how the difference between the reduced sales price and the amount owed can be settled or wiped out.
"The No. 1 one goal is to help people who have exhausted their other options to avoid foreclosure, and one way to do that is by getting your bank to agree to sell for less than you owe," said Shawn Wilkinson, vice president of short sales with Atlas Loss Mitigation, a division of Kats' agency.
Wilkinson said the group helps just over 100 homeowners each year who are seeking to sell their homes through a short sale. Buyers are typically first-time homeowners seeking a bargain, families seeking to move into bigger houses and investors.
Last month, Atlas Loss Mitigation sold 18 homes through short sales. The group has about 100 short sale listings "at different stages" across Maryland, with many in Baltimore County, Frederick and Southern Maryland, Wilkinson said.
Overall, there are about 800 properties listed as short sales in Maryland each month, but Ross Mackesey, president-elect of the Greater Baltimore Board of Realtors and a Realtor at Long and Foster in Baltimore County, said the volume of short sales in the metropolitan area seems to be leveling off, mostly because fewer homes are underwater.
"There has been a decreasing in volume since the peak in 2012, and that's for several reasons," Mackesey said."For one, short sales are difficult to keep buyers engaged for the length of time it takes to get a [bank] approval, and most of the short sales are occurring on homes that were purchased in 2004, 2005 and 2006 — at the top of the market.
"From a pricing standpoint, the market bottomed out in 2011, and so now, in most places, we are at 2004, 2005 pricing, and those that have been paying their mortgage have a reduced principal … and fewer people are underwater."
Data from the foreclosure tracking firm, RealtyTrac released in late October showed that short sales were at their lowest point nationally since the first quarter of 2011. Short sales represented 3.8 percent of all residential home sales in the third quarter of 2014, a dip from the second quarter, when they accounted for 4.2 percent, RealtyTrac said.
In general, short sales can prevent a house from plunging into foreclosure and remaining vacant for years, becoming an eyesore in a neighborhood, Mackesey said. A short sale requires lenders to forgive some of the indebtedness of a mortgage, but only after the homeowner can prove a hardship.
Recent statistics show the number of short sales dipping in Maryland. Some of the decline can be traced to the expiration of the Mortgage Debt Forgiveness Act, which had allowed sellers to avoid paying taxes on amounts forgiven by the lender in short sales. The tax relief expired Dec. 31, 2013, and has yet to be renewed by Congress.
But Mackesey said another part of it is because the recession is lifting. "Fewer people are experiencing a hardship for the first time," Mackesey said. "If they escaped the depths of the recession, they have figured it out by now or they have lost their house completely."
Data from the Greater Baltimore Board of Realtors shows that short sales impact regular housing values in the local marketplace, he said. So far in 2014, the average residential property sale has been $288,709 while the average short sale transaction has been $206,898.
"They are distressed properties," Mackesey said. "The adverse impact on the market for a short sale is that if your house is worth $300,000 and your neighbor's house in theory is worth the same but doesn't sell for that, it devalues your property. It doesn't devalue it to $200,000, but it doesn't help you get the cash out of your property."
Kats said he has been negotiating short sales for six years and has seen a change.
"Five years ago, I called the short-sale landscape the wild, wild west of the real estate industry," Kats said. "At that point, there were no guidelines, and so each lender operated how they wanted to operate."
All that changed when the Maryland Real Estate Commission issued guidelines on short sales a year ago, he said. Some of those guidelines include second mortgage holders on a property and how to negotiate a forgiveness of such loans in the case of a short sale.
Realtor Tom Rybczynski, of Coldwell Banker Residential Brokerage's Fells Point office, said he has been wary of short sales because of the uncertainty of the transactions.
"It's a little bit layered and I steer away, because they are unpredictable and when you're dealing with the public and as a professional, the public believes you know what you're doing and it makes the professional look bad," Rbyczynski said. "You are starting at the beginning at every transaction. Each lender handles the process a different way."
All of that did not deter the Horners. Once they navigated the short-sale maze — with the help of Theo Harris, a Keller Williams Realtor based in Baltimore — they settled into their new home with their 2 1/2 -year-old twins, Cooper and Addison.
"It just happened to come up on our radar and we saw how nice it was, and that's when we jumped on it," Monica Horner said of the listing. "It is exactly where we wanted to live and raise our kids."
5 tips on short sales
Research neighborhoods. Some have multiple short sale listings, such as several in communities with new construction.
Do your homework. Most short sales are "as is" and may require hefty renovations and upgrades. Hiring your own inspector may help avoid getting stuck with a money pit. Check state guidelines at http://www.dllr.state.md.us/license/mrec/mrecshortsalesguide.shtml
Be persistent. Patience is the key to making it through a short sale as negotiations with the seller's lenders, often first and second mortgage holders, must navigate many layers and can drag on.
Keep in close contact with your Realtor. Most are able to get updates and answers on the real estate sale deal quicker through their established networks.
Don't wait for the bank. Be proactive and call as often as needed to check on the intricate and fast-changing details of a short sale. Most transactions do not close in less than 120 days.