While the current number of properties on Hatteras Island entering the foreclosure process is relatively low compared to other places around the country, the magnitude of owners facing financial distress can be expected to increase over the next few years when a substantial wave of Adjustable Rate Mortgages (ARMs) and exotic loans are forecast to reset. In fact, many loans are defaulting before their re-set dates. As time passes, the problem of distressed properties is becoming more widespread, cutting across all categories of loans and expanding outside the borders of the United States. The following chart shows the increase in the number of bank-owned properties and short sales in the Cape Hatteras real estate market that were sold during 2007 and 2008.

One troubling aspect of this trend is that as many as 70 percent of homeowners are estimated to be going into foreclosure without taking any visible action to prevent or delay this outcome. Many believe that recently enacted federal legislation will rescue them. The unfortunate fact is that this is probably not going to happen, especially where second homes and investment properties are involved.

Foreclosures

It is a common misconception that lenders are eagerly awaiting the opportunity to take over homes in distress. Nothing could be further from the truth. First, the lender does not want to own the real estate. Second, foreclosing on a property is an expensive proposition for a lender. When you take into account the cost of the foreclosure process and the expenses associated with “owning” the home for an extended period of time (e.g., taxes, insurance, maintenance, utilities, selling costs, etc.), it could easily cost the lender $30,000 to $50,000. Third, having a foreclosed property on the bank’s books has regulatory implications. Finally, under current real estate market conditions, the lender may be taking back an asset that is declining in value. Therefore, foreclosure is the alternative of last resort for both the homeowner and the lender.

Each state has its own foreclosure laws and procedures. In North Carolina, the entire process from the first missed payment to the actual foreclosure can often take five or six months. It is generally agreed that a homeowner should make every effort to avoid foreclosure. There are very serious and long-lasting implications of foreclosure including credit impacts, ability to qualify for a future mortgage, potential employment and security clearance ramifications, and possible tax consequences. At the first sign of financial trouble, homeowners are advised to immediately contact their attorney, their accountant, and a Realtor® who is knowledgeable about working with distressed properties.

The good news is that there are often options available to prevent or delay foreclosure for homeowners who find themselves in a financially perilous situation. Misinformation and lack of knowledge cause homeowners to make the wrong decisions which, in turn, can make their situations worse. We invite you to request a copy of our free report, “Ways to Delay or Avoid Foreclosure,” by clicking on the request link at the bottom of this page.

Short Sales

One alternative to foreclosure, known as a “short sale,” is often a viable solution for the owners of both primary residences and vacation homes. By definition a potential short sale situation exists when a borrower owes more on their home, including closing costs and expenses, than the current market value of their property. You may also have heard this set of circumstances referred to as a seller being “upside down” or “underwater.”

A short sale occurs when negotiations result in the lender agreeing to accept less than the full balance of the property owner’s loan. While the concept of a short sale seems simple enough, the reality is that the process has many dimensions, and it can require a lot of patience, communication, and understanding by all of the parties involved.

It is important to recognize that a short sale is not a “get out of my mortgage free pass” for anyone who owes more on their mortgage than their property is worth. A short sale is a way to avoid foreclosure. The seller has to either be in foreclosure or headed toward foreclosure. There must be a demonstrated financial hardship associated with the borrower’s inability to pay their mortgage, and the owner must owe more on their mortgage than the property’s fair market value. If these pre-conditions do not exist, then the homeowner basically has an investment that did not work out as planned. These individuals will usually have to wait for the market cycle to recover, bring cash to closing to pay the difference between the mortgage balance and the selling price, or, in the worst case scenario, allow the property go into foreclosure.

An essential part of conversations that the homeowner has with their advisors is understanding the potential consequences of a short sale. For example, depending on a variety of factors, the borrower may remain liable for the difference between the mortgage balance and the proceeds of the short sale (deficiency judgment); there may be income tax ramifications; the owner’s credit score may be impacted; and, the homeowner could be asked to sign a promissory note for the difference between the loan balance and the proceeds of the sale.

Once it has been decided that a short sale is the best option to pursue, the property is listed for sale with a real estate broker, and the marketing process begins. After an offer to purchase is received, the offer together with a rather extensive short sale package is submitted to the lender. It is the lender, not the seller, who decides whether or not to accept the buyer’s offer. Because of the high volume of foreclosure related files that lenders are processing and the associated backlogs, it can take anywhere from several weeks to several months for the lender to make a decision. This inherent delay is a major reason that it is so important for there to be open communication among all of the parties in the transaction about the short sale process and the need for patience and understanding. The end result can be beneficial outcomes for everyone involved. A copy of our free report, “Short Sale – An Alternative to Foreclosure,” may be obtained by clicking on the information request link below.

Perspectives for Buyers

Up to this point, the focus has been on the lender/seller aspects of foreclosures and short sales. Some buyers and investors may be hesitant to consider properties that are identified as foreclosures or short sales because they have concerns about benefiting from another person’s financial misfortune. The reality is that by purchasing a distressed property, the buyer is helping the homeowner, assisting the lender, probably obtaining the property at a favorable acquisition cost, and, in a very real sense, making a meaningful contribution toward resolving the current housing market dilemma by reducing the inventory of unsold homes.

According to Outer Banks Association of Realtors reports, at the end of 2008, there were about 45 residential properties and a dozen unimproved lots listed as bank-owned or potential short sales on Hatteras Island. Prospective buyers can obtain a current list of “Foreclosures and Short Sales” by clicking on the request link at the bottom of this page.

Distressed homeowners need an advocate who will act in their best interest and help them explore every possible solution to the financial crisis that they are facing. In addition to our traditional real estate practice, we also focus on helping property owners who face foreclosure or whose mortgage balances exceed the value of their properties. Tom has been awarded the professional designation of Certified Distressed Property Expert (CDPE). We have the tools, the expertise, and the tactics to effectively assist homeowners who find themselves in financial distress. We understand the processes of short sales and foreclosures, and we can sometimes work as a liaison between the borrower and the lender toward resolution of an unpleasant set of circumstances. Equally important, we are empathetic to the fact that distressed homeowners are experiencing one of the most painful financial situations that they have ever encountered.