Short Sales Hit Manhattan

Incase you dont know a short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. Search the recent sales listings and you’ll find dozens of advertised short sales, some being creative with their wording and saying something like “owner must sell.” Everything from town houses and co-ops to cond-ops and condos. Up until now, most short sales have been in other boroughs or the suburbs, but make no mistake- they are making their way into Manhattan. Property values are down as much as 25%, and many people who bought in 2006-07 are finding themselves underwater and grasping for a short sale. The New York Times tells some stories that will make you shake your head, but here are the basics of what Manhattan is looking at, beginning with a startling statistic:

Lis pendens filings (the first step in the foreclosure process for houses and condos) doubled in Manhattan from 334 in 2008 to 724 in 2009. There are 382 through the end of June this year.

And just because there are a growing number of short sale listings doesn’t mean they are happening quickly. While it is generally regarded as a softer landing for an underwater homeowner, it’s a laborious process involving many parties, many negotiations, and many months to even have a chance of happening.

First there is the art of pricing by the seller- low enough to create interest (and hopefully a bidding war) but not so low as to raise objections from lenders. Banks will never broadcast how much of a loss they are willing to take on a short sale, and negotiations can often come down to getting everyone to offer something the bank will agree to. Lower than list price will work, but lowballing an offer will never get approved. A seller must first get an application in hand, then submit it to the bank, then convince the bank in writing that they can’t pay the mortgage.

Then, when negotiations do start, buyers have to negotiate with the seller and the seller’s lender, and the seller has to negotiate with the lender as well around the terms of forgiving what’s left owed on the mortgage, whether the lender will sue for the loss and whether the seller will have to pay income taxes on a forgiven loan. To top that off, many mortgages are owned by more than one investor, all of whom must agree to the terms. And then there are everyone’s fees… If the short sale does go through, the seller tends to walk away with nothing to show for it- other than getting out from under a mortgage they couldn’t afford.

In the end, it can easily take more than 6 months or more, and banks routinely decline sales even after that long. Unfortunately, for both the buyers and sellers, the only thing moving fast about short sales is the number of them being listed.

Photo Credit: TheTruthAbout

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