2009 Jan 26th

Short Sales in Hoboken – All the Latest Real Estate Rage

By LORI TUROFF
Realtor

Looking For a Bargain

Since the onset of the housing crisis I’m frequently asked about the availability of foreclosures and short sales in Hoboken. Buyers have read in the press about amazing bargains to be had by purchasing distressed properties at steep discounts.  They want to find bargains in Hoboken.

When the current market value of a property is less than the amount of the mortgage on the property, the mortgage holder is said to be “under water” or “upside down”.  Some people in this situation cannot or do not want to pay their mortgage.  (The ethical ramifications of that decision are a discussion for another day.)  Whether through a short sale or a foreclosure,  the owner gives up the property and the bank discharges the mortgage.  Both negatively affect the credit rating of the seller.  A short sale will not hurt the owner’s credit score or ability to get another mortgage as much as a foreclosure will.  In fact, it may be possible for the owner to get a new mortgage in as little as a year or two.  So many opt for the short sale.  In the Hoboken condo market, it is far more common to see short sales than foreclosures. In fact, I’ve encountered a few short sales of condos in Hoboken, mostly at the Skyclub.  I have yet to see a single foreclosed condo property on the market in Hoboken.  So let’s focus on short sales.

A Quick Summary of How a Short Sale Works

When a home owner has missed mortgage payments or claims that he or she will soon no longer be able to make them, the owner notifies the bank’s loss mitigation department and, after discussion with the bank, puts the property on the market. When an offer comes in, the bank must agree to accept the offered amount.  Since it will typically be less than the mortgage and closing cost amount it is considered “short”.   If and when the bank agrees to the sale, the full mortgage amount is forgiven and the debt is discharged.

So What’s the Problem?

You would think that with the banks crying to Congress about their woes, they might want to get the bad assets off their balance sheets as quickly as possible.  Approving a short sale, however, often takes months and months. I was involved in a short sale recently.  The buyer was purchasing the condo so she could move to Hoboken to make her commute easier.  She waited over six months to hear from the seller’s lawyer that the bank was ready to approve the sale.  It is common for the banks to take forever to approve these sales.  Worse yet, the buyer, the buyer’s attorney and realtor are often left in the dark as to the bank’s progress. The timing may not be as important to you if you’re an investor and can wait indefinitely to close.  In a declining real estate market though or, as in the case in Hoboken, when there is so much new condo inventory buyers have little incentive to wait that long for their deal to move forward.  Better deals come along every day in Hoboken’s condo market.

Are More Hoboken Short Sales Likely To Appear?

There are some parts of the country like Las Vegas, Florida and Southern California where almost half of the properties on the market are foreclosures and short sales. Should Hoboken property values stay steady or decline only slightly we probably won’t see too many distressed property sales here in Hoboken.  It’s my opinion that there are more at the Sky Club than elsewhere because there are more investor owned units in that building.  The Sky Club was initially built as rental units but the developers switched to condos when the market started to take off.  The units were sold at below the Hoboken market rate at the time.  Many investors scooped them up to use as rental properties.  It’s much easier for an investor to walk away from a mortgage (especially when the property was purchased in an LLC) than an owner occupant. I’m not saying this is what I believe will happen but, if Hoboken condo prices plummet, there will likely be way more short sales in our future.  So it can’t hurt to know more about them.

Does A Buyer Know It Is a Short Sale?

I was involved in a deal recently where the short sale was not disclosed by the listing agent until after we negotiated a price, signed contracts and went into attorney review.  Interestingly, the National Association of Realtors does NOT require disclosure of a short sale.  They leave that decision up to the local Multiple Listings Service.  I searched our local real estate board website for the local rules but could find none.  Tomorrow I’d like to call the board and see if I can get a direct answer.  The theory behind non-disclosure of a short sale is that if the buyer knows it is a short sale they will make a lower bid than otherwise. The intent is to help the seller/bank get the highest possible price.  In light of the procedures involved in a short sale, and the inordinate delays, does that sound fair to the buyer?

What Does the Tax Record Say?

Tax records are public documents and easily searched.  The first thing I do, and any good realtor should do when a buyer is interested in a particular property, is pull the tax record.  The tax record states who the seller is, what they paid for the property, how long ago they bought it and from whom, and the current mortgage amount.  Now I remember clearly from my days as a lawyer that a mortgage is a security instrument and, in order for the mortgage holder to perfect their claim on the subject property, the mortgage must be recorded in the public records.  This gives notice to the world that someone other than the “owner” has an interest in the property.  The last short sale in which I was involved, the property had been purchased in the early 2000’s, well before the real boom in Hoboken real estate prices.  There was no recorded mortgage. Could the seller have very recently refinanced, taking all of the equity out of the property with the intention of selling it shortly thereafter?  Did the seller know that the true market value of the property was likely to be less than the amount of the appraisal and the new loan?  Are people out there scamming the system at the taxpayers’ expense?

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  1. stan

    Thanks for the info and insight.

    your site is a valuable resource for Hoboken news and data

  2. Lori Turoff

    Thanks Stan. We’re big believers that, as Sy Syms said a long time ago, an educated consumer is our best customer. The real estate and mortgage industry could sure use more of it. Please spread the work about hobokenrealestatenews.com to your friends.
    – Lori

  3. Tiger

    Thank you Lori what a great insight!!! You are doing everyone a great favor, so thanks a lot!

    I wonder how many Hoboken sellers would do that. I wonder why they won’t rent out the condo instead? Even if rent wouldn’t pay the mortgage, I imagine a year or so of negative cash flow would be better than having a permanent shortsale record on the score.

    BTW I found out when I put the offer that my condo was a foreclosure, which was bought by a flipper who sold it to me. I’m not complaining though, I got a great deal (even in today’s standards) on it and the guy didn’t cut corners in renovating (apparently it was a warzone when he got it). It looks like it was an isolated case though.

  4. Ari

    If short-sale’s were announced, I imagine banks would get even less for their money. So long as the buyer is made aware that a prolonged closing period is required, I don’t think there’s anything wrong with keeping it quiet.

    No one, including myself, is a fan of banks right now, but no one wants even more of their taxes going to keep banks afloat b/c they’re not getting as much $$$ on short sales.

  5. Lori Turoff

    Ari – Once you notify the buyer that the closing may be prolonged, you’ve basically let them know it’s a short sale. So at what point in the process would you suggest informing the buyer of the delay? I agree that we don’t want to make the banking crisis worse but I suspect the differential in money the bank would get with disclosure versus non-disclosure would be infinitesimal in the scheme of things.

  6. Lori Turoff

    Follow up on the local MLS rules – when calling the office agents are told they must speak to their broker. The board will not provide any information to or speak with agents. The broker must call the president of the board on the agents behalf. Unbelievable!

  7. Tiger

    Look what I found, an advertised short sale at the cookie-cutter, I mean skyclub:

    http://newjersey.craigslist.org/reb/996456641.html

    Why would they advertise it as a short sale?

  8. FAP

    A way to mitigate this would be to put a clause in the contract penalizing the seller if the closing took longer than a specified amount of time.

    Of course the seller would only be penalize if it was due to their tasks that the sale took longer.

  9. Ari

    Lori,

    As FAP notes, the sale agreement should require the sale be completed by a certain date or else damages be paid by the seller. I know I had this in my contract a while back when my lease was ending on my apartment and I faced having to potentially pay a massive month-to-month rental fee if the sale did not go through on time.

    If the lawyer does a bad job and fails to include such a basic provision, then I’d guess the buyer could still get away with pulling out of the sale by claiming that the seller is in breach b/c a prolonged closing was not contemplated and a regular closing period was a material condition of the agreement.

  10. Lori Turoff

    Well it’s not that simple. Who is the seller? The home owner or the bank? Who pays the damages? The home owner who (supposedly) is insolvent and cannot make mortgage payments or the bank? Can the seller penalize the bank for taking too long? I don’t believe so. Is the buyer actually damaged is the closing is delayed? How do you measure those damages? Is specific performance the remedy, since property is unique? If so, won’t a court action simply prolong things even further thereby increasing the damages? Wouldn’t the buyer have a duty to mitigate damages – i.e., not sue? Who is going to pay for this litigation? The taxpayers? The failing bank?

    What happens is the buyer walks away with all his or her deposit money. The home owner risks foreclosure if another buyer isn’t found. The bank keeps the ‘toxic’ mortgage on its books and, once again, we the taxpayers are left holding the bag!

    I have learned that the Hudson County MLS requires that short sales be disclosed in the listing agreement. Why? Similar to Tiger’s question of why would the Sky Club advertise a short sale. They probably think it will attract buyers looking for a “deal”. But if the reason there is a short sale is because the market price on that and similar properties has dropped, shouldn’t a buyer be able to find many similar properties at a low price with less bother?

    As an aside – once the tenants move out from the investor units the property is typically a mess and doesn’t show well. That’s where the opportunity lies.

  11. Sean

    There is a bit of a mistake here in the original post.

    “When an offer comes in, the bank must agree to accept the offered amount. ”

    The bank does NOT have to agree to the offered amount. They can easily say No. I have experience in short sales also, and at that point the owner still owns the property and can agree to a price, but the bank CAN SAY NO.

    If they say no, its them upto the seller to still move forward and come up with the mortgage amount difference to the agreed to sales price- or just kill the deal.

    I also saw someone ask – “Why advertise as a short sale?”

    Because it will attract the people looking to take advantage of the market. People believe there is more value there, and sometimes there is. But in a market that is overrun with so many properties its the deals that stand out. If advertising it as a short sell gets it an offer whereas it didn’t before- then it was to the benefit of the seller and the bank. The just want to dump it regardless- hiding that doesn’t help anyone.

    Regarding the last post as too who is repsonsible… ?

    The seller *IS* still the owner, but to sue them when they already are in financial distress won’t get you anything. Before it gets to that point, any GOOD attorney for a seller will make sure they are not resposible for damages, etc sould the sale be prolonged due to the banks delays. By disclosing the short-sale, and it being subject to bank approval is how you get around alot of those.

  12. Lori Turoff

    Sean, you parse words. By saying “the bank must agree to the offered amount”, of course it means that the bank can say no. That is pretty clear from the context of the rest of the paragraph. You say if the bank says no that the owner can still agree to a price. That is incorrect as the bank holds the mortgage on the property which is worth more than the property at this point. If the owner says he’ll take say $100K but the mortgage is for $150K the seller can’t go forward with the deal unless he has the resources to satisfy the entire mortgage and closing costs. If the seller had an extra 50K lying around, one might assume he wouldn’t be behind in the mortgage in the first place or it would not be a short sale at all. Finally, in Hoboken, disclosure of short sales is required by the real estate board.

  13. Sean

    If you re-read my post you will see I did write “If they say no, its then upto the seller to still move forward and come up with the mortgage amount difference to the agreed to sales price- or just kill the deal.”

    They can move forward if they have the difference.

    You said “If the seller had an extra 50K lying around, one might assume he wouldn’t be behind in the mortgage in the first place or it would not be a short sale at all.”

    Short sales do not mean the seller is behind in his mortgage. In many case people are doing short sales to save their credit, and are continuing to came up with the payment every month but may not be able to do so in the future.

    All these properties that are being advertised as Short Sales aren’t all short sales UNTIL the bank approves them, which is part of what needs to be understod. Hence the bank can disapprove a short sale, but the owner may still find a way to come up with the difference to sell the property.

    In that case its not being sold as a short sale, but it doesn’t mean it wasn’t advertised as one.

  14. jack parler

    Just grabbed the feed… thanks for posting this.

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