Dan's Papers -March 27, 2009

There are a lot of legal terms in real estate that can be very confusing to buyers and sellers. One term that we have all, sadly, become more familiar with these days is foreclosure. And there are other terms that are less prevalent, and basically used by savvy agents to impress buyers. Terms and phrases like buydown, estoppel, negative amortization, quitclaim deed and qualification ratios are real estate terms that the general buyer or seller doesn't really need to focus on in a simple transaction.

The phrase "short sale" fit into the category of real estate terms we rarely use, that is, until the credit crisis happened. The technical definition of a short sale is: "A sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold."

Basically a short sale is what happens when someone buys a house and then sells it for less than what they owe the bank, and that the bank and the owner negotiated a discount on that remaining loan amount - sometimes it is the full remaining amount. A short sale is only relevant when the price of real estate is going down. When real estate prices go up, a short sale is almost impossible unless for some strange reason you intentionally choose to sell the house below what you paid for it and below what you owe on your mortgage.

The reason short sales are worth discussing right now is because they are becoming increasingly, shockingly, more common in the golden market that was East End real estate. In these days, it is possible to get a house for below the price of what the current owner paid for it.

If you are involved in a short sale, by choice as a buyer or by force as a seller, it's important that you move forward with an experienced professional. Recently, Town & Country Real Estate held the first of three seminars on short sales and foreclosures at the Hampton Bays Library, discussing how a potential buyer and seller can benefit. Robin Long, Esq., of Fier and Long PC Attorneys at Law, explained how, for a seller, a short sale is more valuable than a foreclosure. For starters, it can save your credit - unlike a foreclosure, where your credit can be completely ruined. People at risk of not being able to afford their mortgages are primary candidates to explore short selling - before a bank forecloses on their house. Sellers considering a short sale should discuss the implications with a mortgage broker and attorney.

Because short sales are on the rise and until now, most people don't understand them, Long does one to three speaking engagements a month on the subject. "I'm a little bit passionate about this because I live in Hampton Bays and the community is very important to me - I have a vested interest," she said. "We have a very interesting situation in the Hamptons compared to the rest of the island. Up the island we have a lot of people who have 106% financing in their homes. In the Hamptons we have a lot bad refinancing products. Some people are caught up in an option/ARM product, where the monthly payment is below what is necessary to even cover the interest, and the remainder of what is owed is tacked back onto the mortgage, increasing it. Some of it is just horrendous."

Long went on to discuss some of the reasons for this messy situation. "Using your house as a credit was not a very smart thing to do. That is not what a house is meant to do but it became very fashionable because there was a 'don't worry' syndrome, as if we'd get out it. All of us believed that it would continue to work well."

Long summarized the three advantages of a short sale. "It is an excellent, excellent tool to solve the distress our market is in. For the seller, it is so much better for your credit compared to foreclosure or bankruptcy. For the buyer, it is tremendous because the home is priced at a fantastic market value - a true market value, and there is the possibility to secure low interest rates now," she said. "And for the community, it staves off foreclosures and chips away at the high inventories. Essentially, it stops the bleeding."