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RISMEDIA, August 21, 2007—(MCT)—Investor Harold Stark paid $365,000 for a three-bedroom Boynton Beach townhouse last year. But the monthly mortgage payments soon started to feel like a noose around his neck.

His property’s value dropped below what he still owed, $329,000. But rather than letting the townhouse fall into foreclosure, Stark worked out a deal in which he sold it for $285,000, and his lender, Chase Home Finance, forgave the difference.

“I got out of the quicksand, where I was sinking and sinking and sinking,” the 74-year-old Delray Beach resident said last week. “It’s such a burden off my chest.”

So-called short sales are becoming more prevalent as South Florida’s housing slump deepens. It’s an attractive option for debt-ridden homeowners who bought at the height of the housing boom or who siphoned the equity out of their homes and now are left in the lurch as prices plummet.

Short sellers walk away without the stigma of losing their homes to foreclosure tainting their credit reports. But they do have to count any amount forgiven by a lender as taxable income.

Lenders also benefit because they’re saving thousands of dollars in carrying costs and other expenses by wiping the properties off their books.

“It’s a great tool,” said Ron Rosen, Stark’s Lighthouse Point-based real estate agent. “It helps out everyone.”

Per Gunnar Berglund, an analyst with Moody’s of West Chester, Pa., said housing market conditions will make short sales increasingly popular in the months ahead.

“In South Florida, we haven’t really seen a bottom yet,” Berglund said of the housing slump. “Prices will continue to fall further in the next couple of months and into early 2008.”

During the rush to buy residential real estate from 2000 to 2005, homeowners who fell behind on monthly payments when their adjustable-rate mortgages rose simply refinanced or sold the properties, pocketing thousands of dollars in the process as home values soared.

Neither of those options is as easy today, however. Not only are banks tightening credit standards, but the glut of properties for sale in South Florida and the decline in prices are preventing many recent buyers from selling quickly, making a profit or breaking even.

“People had equity before, and now they don’t,” said Brad Hunter, a housing analyst in West Palm Beach.

A short sale isn’t available to any frustrated seller. Only homeowners who are behind on their mortgage payments and facing lenders taking their homes are eligible.

They must submit to a lender W-2 forms, bank statements, two years of tax returns and other documents, including a hardship letter that explains why they can’t pay the full amount of their loans.
Real estate agents can negotiate on behalf of their clients and find out whether the lenders will accept short sales. But some banks won’t agree to one until the seller presents a signed contract from a potential buyer, agents say.

In that case, the contract should be contingent on the lender approving the deal, said Pamela Orr, an agent with Balistreri Realty in Lighthouse Point.

Lenders will seek an appraisal or an agent’s opinion of price to determine the property’s worth before deciding whether to approve a short sale.

John Will, a default manager for SunTrust Bank, said he typically denies a short sale if there is a large discrepancy in the property’s value. He also will reject one if the homeowner has enough assets to cover the mortgage.

“But we absolutely, positively want to help everyone we possibly can,” Will said. “We do not want to foreclose on people.”

Lenders are more open to short sales in which the buyers pay all cash or have large down payments and agree to close quickly, but the deals still have to make financial sense, said Jim Sahnger, a former banker who now is a mortgage broker in Palm Beach County.

“Most banks are not going to bail on 40 cents on the dollar,” Sahnger said. “They want to recoup as much as they possibly can.”

Lenders are required by law to show late payments on the short seller’s credit report. They also may note the short sale or indicate the loan was “paid in full with assistance,” Will said.

“But people can recover much more quickly from that than a foreclosure,” he said.

Fort Lauderdale real estate agent Colleen Kelly has a client who owns a two-bedroom condominium in Oakland Park. She paid $160,000 in 2005 and still owes about $158,000.

Unable to keep up with the payments, Kelly’s client wants to sell, but the condo has lost value. She’s listing it for $142,000 but competing with dozens of other units in the same complex that also are for sale.

“When we get an offer, we’ll contact the bank and see if they’ll accept it,” Kelly said. “It’s unfortunate that someone earning a decent living finds herself in this situation. It’s not a fun thing.”

Stark, the Delray Beach short seller, recently took a part-time job with a rental car company to earn extra money. Although his finances have taken a hit, he’s grateful to be out from under the strain of a hefty mortgage.

“At least now I have peace of mind,” Stark said. “I really feel good. If I had a little money, I’d go out and celebrate.”

Copyright © 2007, South Florida Sun-Sentinel
Distributed by McClatchy-Tribune Information Services.