Selling short. For many facing foreclosure, it's the only way out

Danielle Merriweather added up all the numbers and they didn't look good. The mortgage was $1,162 a month. The winter gas bills ran $500 a month. There were four children to care for. And there was little money coming in after the young mother lost her job as a medical biller.

"It's not easy to come up with that kind of money when you don't have a job," said Merriweather, 29, who bought her home on Detroit's west side two years ago. "I was just like, 'Oh my God, I can't afford this house.' "

Merriweather hasn't made a mortgage payment since December. But instead of joining the 16,351 Detroiters whose properties were foreclosed on during the first quarter of the year, Merriweather began to work with her lender and agreed to sell her property in what's called a short sale. That's when the lender agrees to accept a lower price for a property than what the seller owes.

A short sale differs from a so-called upside-down sale, which happens when the homeowner is not at risk of foreclosure but must pay the difference between the purchase price and the principal owed at settlement.

Merriweather's situation illustrates the painful, yet simple math many homeowners face. She paid $140,000 for the house and owes roughly $127,000. The house is on the market for $125,000 and probably will sell for even less.

In a short sale, the buyer negotiates directly with the mortgage company through a real estate agent. The lender typically requires an appraisal and proof of hardship before allowing a short sale.

Sellers lose all equity, but they walk away without a foreclosure to mar their credit rating. The late payments will still be reported.

What many short-sale sellers don't realize is that they face income tax liabilities, too. Banks report the canceled debt as income for the seller to the Internal Revenue Service (though Congress is considering a bill that would amend the tax code to forgive the tax debt).

Banks on board

Real estate agents said they're advising more sellers who've fallen behind on payments to look at short sales as a way to avoid foreclosure and, increasingly, banks are willing to work with them.

Michigan has the 10th-highest foreclosure rate in the country -- with 29,467 foreclosures in the first quarter of the year, according to RealtyTrac, an Irvine, Calif., firm that publishes foreclosure data.

"The worst thing possible for a bank is to foreclose," said Eric Burgoon, group senior vice president of LaSalle Bank, based in Troy. Burgoon advises homeowners unable to pay their mortgage to contact the lender before missing a payment. Some may be able to refinance the mortgage at a lower interest rate or change the monthly payments.

"It's the last thing we want to do," Burgoon said. "It doesn't help the customer and it's the worst thing for us."

Many expect the number of short sales to grow. Property values have tanked in the state's overcrowded real estate market as unemployment rates have soared, leaving owners unable to sell their homes for what they owe on the mortgage.

The ranks of financially strapped homeowners also likely will increase as those with adjustable-rate mortgages find themselves unable to handle the higher monthly payments.

"I'm getting calls every day," said real estate agent Venesha Harris of the Loft Warehouse in Royal Oak. Homeowners "ask, 'What can I do?' It's desperate times out there."

Double jeopardy

Angela Armstrong agreed to a short sale on her Southfield property this year. Armstrong, who was laid off as a finance manager for Oak Park Schools in 2005, moved to Maryland soon after and placed her house on the market.

When it didn't sell, she leased it in May 2006 to a tenant for $1,000 a month, $237 short of the mortgage payment. The tenant has bounced five checks since then and a few months ago stopped paying rent altogether. Hoping to preserve her credit score, Armstrong struggled for a while to cover living expenses in both states.

"We were eating peanut butter," Armstrong said. Her home is now on the market for $105,000. She paid $137,000 for it in 2004. "We were tapped. We were always on the brink of losing everything."

There's a potential buyer for the property, and last week Armstrong evicted her nonpaying tenant and is hoping for a quick sale.

The main downside to the short sale, Armstrong said, is that she will lose the equity in the home.

"I just kind of walk away," she said. "I get nothing."

Still, if not for the short sale, "I probably would have been in foreclosure," she added. "I got to a point that I was either going to have a heart attack or let it go."

Getting a bank to agree to a short sale isn't always easy. Real estate agent Denise Consiglio said she worked for four weeks to try to get a lender to accept a short sale offer on a client's listing. By the time the bank agreed, the buyer was gone.

"They say we're willing to work with you, but their system is outdated," said Consiglio, who works for Real Estate One in Fraser. "If I told you," as a buyer, "it was going to take four weeks, what would you do?"

Consiglio and other agents say they will take reduced commissions to get banks to accept short-sale offers.

Even when lenders agree to a short sale, some may not be willing to take much below what they are owned, said Mandy Melone, a Realtor with Added Value Reality in Livonia.

But in some cases, lenders "are taking 50 cents on the dollar of what's owed them," said Melone, who has three short-sale listings and closed on 12 others in recent months.

Merriweather is hoping to put her short sale behind her. She plans to move to a home owned by her mother in Troy, rebuild her credit and eventually purchase another house.

"I'm going to try to build my money back up," Merriweather said. "We've got to do what we got to do until I get myself back together." (www.freep.com)