Should You or Shouldn’t You?

Short sales offer a way out of underwater mortgages, for some

If Las Vegas’ lousy housing market has achieved one good, it’s that people are more forthcoming about their financial difficulties. The stigma of unemployment or foreclosure—of failure—has lessened because many of us are in the same boat.

To that list we can add the growing number of homes being short sold—the sale of a home when you owe more on it than the home is worth. According to a report by First American CoreLogic, a data collection company, some 11.3 million (24 percent) of mortgages nationally were in negative equity at the end of last year. An additional 2.3 million mortgages were approaching negative equity, bringing the total percentage to 29 percent. According to the report, Nevada has the highest percentage of underwater homes in the nation, nearly 70 percent.

As of last week, according to Realtor Felipe Crook, there were 6,620 short-sale properties on the market in the Valley, out of 13,844 overall. It’s one more dubious area where Nevada is a national leader. “We’ve seen the tip of the iceberg,” says Kathryn Bovard, managing broker with Prudential Americana Group Real Estate. “It will continue to be a lot. We’ll continue to see short sales strong in the market for several years.” There are benefits to short selling a home. “Depending on how the short sale is handled by the property owner, it can be more forgiving on their credit,” Realtor Stephanie Serra says. “In addition, depending on the source of the loan, the wait time to qualify for a home loan may be less than having a foreclosure.”

But getting cooperation from the banks can be hit-or-a-miss. “Banks have been notorious at dragging their heels at short sells,” says Nancy Rapoport, Gordon Silver Professor of Law at UNLV. “Part of the reason from the bank’s perspective is that if they do agree to the short sale they’re admitting the value of something on their books is way less.”

A few underwater properties may not be a big deal to a bank or other loan servicer. But the accounting gets tough when properties pile up and the value of the assets on their books doesn’t match the actual value of their assets. “In a state like Nevada, you don’t want to rush to write off all these assets.”

The key to the short sale is forgiveness of deficiency—your lender has up to six years to pursue you for the difference between the loan amount and what you sold the house for, unless they agree to forgive the deficiency at the time of the sale. They are most apt to forgive a deficiency when homeowners can demonstrate hardship. There’s no data on the percentage of local short sales where the banks show mercy, but real estate agents interviewed for this story suggest that completing short sales is becoming easier.

Nevada statutes do provide homeowners some protection: Banks can’t go after the deficiency if you still have your original mortgage (no refinances), if you used all the money from your mortgage to purchase your home (and didn’t purchase a new car or something else) and if you have lived in the house continuously.

Sometimes short sales can go smoothly; just as often they don’t. David Lyons had what he calls a nightmare trying to modify his loan with Chase last year. The bank on three occasions asked him for documents he had already sent, then confused his identity with another homeowner’s. When he tried to short-sell his house last month, the mistaken identity slowed things down. Then his purchaser couldn’t get financing and the deal fell through. He’s debating whether to search for another buyer or try another loan modification. On top of that he owes $15,000 in legal fees in dealing with Chase.

“The whole process seems to be so disorganized that I don’t believe the average person will be successful in completing either a loan modification or a short sale,” he says.

And even under the best circumstances, there are caveats: Short sales can tarnish your credit, and even if you are forgiven the deficiency (or some part of it), you have to pay taxes on that money. Folks considering strategic short sales—they still have their job, but their house is underwater and they’re trying to cut their losses—can have an even tougher time. “If I were a bank,” says Rapoport, “that’s the last person I would a cut a deal for … the person who is solvent and just walking away.”

Short selling is also a moral question. Pride, integrity and honor are on the line. Bankers may take bailouts from Washington, but salt-of-the-earth Americans—the group we all like to think we’re members of—have to wrestle with whether they want to bail on contracts. The stigma of talking about a short sale may be down, but following through on one is difficult. “It’s a sense of,” Rapoport explains, “how badly do I want to keep my word?”