In 2007, during the height of the housing crisis, Shanette Vega and her husband bought a three-bedroom house in Hicksville for $520,000. Their mortgage payments were nearly $5,000 a month and they could never get ahead as the house quickly lost about $200,000 in market value. When they got divorced in 2011, it was harder to keep up on the mortgage with two households.
Vega, who now rents a house in Port Washington, sold the Hicksville property in 2017 for $400,000 in a short sale — when a lender allows the homeowner to sell the property for less than what is owed on the mortgage. She never looked back.
"We were keeping up with the payments, but all we were paying was the interest, so we just kept owing more," said Vega, an event producer. "We tried to stick it out to see if the house would actually gain and build capital, but it wasn't enough to keep it."
Situations like this are likely to increase as the COVID-related unemployment rate remains at historic highs and loan forbearances come due, leaving some Long Island homeowners who owe more on their mortgage than their homes are worth to make painful choices about whether or not they can keep them, predicted Alan Schnurman, a real estate investor, broker and attorney based in the Hamptons and New York City.
Eitan Finkelstein, an attorney and owner of Elpis Debt Solutions based in the Bronx, which works exclusively on short sales, has many clients who got stuck in the same situation as Vega. Additionally, he said there are typically three other financial situations that tend to lead to a short sale solution.
"One is divorce, which can put a strain on financial circumstances," he said. "Job loss is another main one. Medical bills are another factor. I have clients who were surviving financially on two incomes, and then one of them got sick and now can't work or is disabled and they fell behind on their mortgage."
What is not usually a factor is ZIP code. Finkelstein said he has clients who own million-dollar properties in the Hamptons.
"There’s a notion that short sales are cheaper properties, but anyone can end up in that situation," said Finkelstein, adding that 90% of his clients are on Long Island. "But there are always more short sales in Suffolk than Nassau since the price points and income demographics lead to more short sale situations."
As stressful as it can be, a short sale can give a homeowner a way to move on, said Jean-Marie Stalzer, a licensed salesperson at Daniel Gale Sotheby's International Realty in Sea Cliff.
"I've worked with people who had been under the burden of being behind on their payments and worrying so much about the house," she said. "When they sell, they feel relief because they can go on to the next step."
Vega said she is a proponent of short sales. "It did impact my credit, but the long-term advantages far outweigh the disadvantages. If you’re in a position where you have to short sale, don’t let your credit be the reason not to move forward because it's more important to get your life back on track."
A short sale can also be beneficial to buyers. Stalzer said there’s not as much competition because it typically takes longer to close, and usually the home is owner-occupied, which means that at least minimum maintenance is taking place.
Here’s a guide for what both sellers and buyers need to know about a short sale.
Start the process
Finkelstein said that when possible, approach your bank for a loan modification. "Try to rework your loan and stay in your home if that's what you want," he said. "But if you're struggling and you get behind a year, two or more, it is better to just pursue the short sale as opposed to letting it go to foreclosure."
If you decide you don’t want to keep the home, get in touch with the lender for a short sale application, known as a Request for Mortgage Assistance. The bank should walk you through the application and required paperwork, like tax returns, pay stubs and bank statements.
"Not all homeowners who apply for a short sale will meet the lender’s criteria," Stalzer said.
Stacy Zigman, a licensed associate broker with RE/Max City Square in East Meadow, who specializes in short sales, said that a qualified realtor can handle all the paperwork for you.
"They’re the ones who can negotiate directly with the lender," she said. "Be sure that the lender provides a waiver deficiency letter so that the seller is no longer responsible for the debt."
Find a qualified broker or processor
Because not all realtors have experience with short sales, sellers have to be careful to find one they trust who will look out for their interest, Finkelstein said. "If the realtor doesn’t have experience in short sales — like 10 or more —ask them if they work with an attorney or processor who does know how to represent you."
Zigman said that the rest of the process should be like any other home sale, except that you don’t incur out-of-pocket costs because expenses paid by a seller in a typical real estate transaction, like real estate agent commissions, attorney fees and back taxes owed on the property, are absorbed by the lender.
Start the process
The price of a short sale home can be attractive to buyers. But Finkelstein said that "sometimes there's a misconception that you'll get the deal of a lifetime by a short sale. I would say the average discount is 8 to 10 percent."
Stalzer added that you can put down less than the typical 10% at contract, as little as 3%.
The downside is that closings can take several months. "You need to be flexible with your closing date and be prepared you might not get the house at the end," Stalzer said. "It could get foreclosed on or the lender might look for more money than you went to contract for. You might need to negotiate with the lender right before the closing. A short sale is usually for people who are willing to take more of a risk and have time on their hands."
But Zigman added that if the seller has a good agent, and all the paperwork has been taken care of, closings can be the same as a regular close of between 90 and 120 days.
Find a qualified engineer for an inspection
Stalzer said it’s a misconception that houses that are in short sale are not in as good shape. "It depends on the property. Some of them are in a nice state, but a lot of times people haven't had the money to keep up on the repairs."
An inspection will let you know what to expect before you get into a contract. But deferred maintenance has its benefits, said Schnurman, who is the author of "I Can I Will I Must: Buying the Hamptons, Building a Successful Future, Becoming the Best You Can Be."
"You’re paying less money for the house, and if you get the house for maybe $50,000 less and it needs improvement, you could add value to it immediately," he said. "But you need a good engineer who can pick up on things like a water tank is leaking or if the roof needs to be replaced."
Finkelstein said a buyer should ask who is handling the short sale, who is negotiating with the bank and how much experience they have.
Further, Zigman recommended that your realtor find out how many loans the seller has as they may have more than one lien on the property. She added: "Short sales are sold `as is’ with respect to certificates of occupancy (CO) and certificates of completion (CC). Buyers should find out if any structures that were added to the property have their proper CCs and confirm upfront with their mortgage rep that the bank will provide financing despite lacking COs/CCs."
Short sales on the market
$425,000, Oyster Bay
A golden oldie, this short sale is nicely updated with granite countertops, three bedrooms and 1½ baths. Walk to town and water in the Oyster Bay School District. It’s 6,600 square feet on a 50-by-132-foot lot. The house needs work and is sold as is, subject to third-party approval. The home is under contract, pending bank approval, but the owner is taking back-up offers. Taxes, $5,740. Melissa Kovary, Providence Realty Group, LLC, 631-255-0910.
$435,000, Port Washington
This three-bedroom, 2½-bath, 3,200-square-foot Colonial is within walking distance to stores. It needs some work to make it your own. The short sale is as is and subject to third-party approval. The home is under contract, pending bank approval, but the owner is taking back-up offers. Taxes: $8,781. Melissa Kovary, Providence Realty Group, LLC, 631-255-0910.
A bank-approved short sale, this fully dormered Cape is in a quiet, midblock location. The living room has a fireplace, and there’s an eat-in kitchen, dining room and convenient laundry room. The 50-by-100-foot lot is close to parks, beaches, malls, LIRR and the Nautical Mile. Flood insurance is required. The home is not suitable for an FHA loan. Cash buyers or $203k home renovation loans only due to repairs needed at property. Seller has not grieved taxes and tax impact notice shows a declining tax burden due to the reassessment. Taxes, $12,925. Stacy Zigman, RE/Max City Square, 516-270-8022
Short sale versus foreclosure
During foreclosure, the bank that issued the mortgage to the owners of a property is trying to reclaim that property because the owners have not made the necessary payments.
A short sale is an alternative to foreclosure.
Instead of trying to take the property back, the lender gives the owner permission to sell the house for less than what is owed.
Eitan Finkelstein, an attorney and owner of Elpis Debt Solutions, based in the Bronx, said the main benefit to a short sale versus foreclosure is your credit score.
“The drop in your credit is slightly less in a short sale than a foreclosure. Usually in a foreclosure it takes five to seven years before you can qualify for another mortgage,” he said. “But with a short sale, you could get a mortgage in less than two years. It's ultimately reported on your credit report differently because in a short sale you've satisfied your loan.”
So if a house is only worth $300,000 on the market, but has a $500,000 mortgage, in a foreclosure, the bank can still hold you accountable for the balance. In a short sale, they forgive that $200,000 debt.
Another benefit of a short sale, Finkelstein said, is that banks often give between $3,000 and $10,000 in relocation money when someone lives in the property. This is intended to help them move out and put a security deposit on their next property or rental.
“A bank would also prefer that you do a short sale than a foreclosure because they recoup more of their money and faster,” Finkelstein added.