In New Twist On Short Sales, Home Sellers Pay The Bank To Unload Property

Talk about rubbing salt into the housing market's wound. Some homeowners who owe more on their mortgages than their homes are currently worth are now paying banks to take their houses back.

Hoping to prevent a short sale -- and the damaged credit rating that comes along with the deal -- homeowners have started bringing "cash to closing," as the practice has been dubbed. They're reaching into their bank accounts -- draining savings and sometimes dipping into retirement funds -- to make up the difference between what they owe the bank and what the buyers are willing to pay.

In short sales, sellers generally ask their banks to eat not just the loan shortfall, but also the closing costs -- which typically includes a 6 percent commission paid to the real estate agents involved. But lately, banks have been tossing the closing costs back in the sellers' court, demanding that they pay the fees if they want the short sale to be agreed to. In other cases, banks have asked sellers to contribute thousands to make up for any shortfall as well.

"It's kind of like being held up at gunpoint," said one agent who specializes in short sales and asked for anonymity as she has to continue to work with the banks. "They just come back to the sellers and try to call their bluff."

Many see short sales as a key means of reducing excess housing inventory and jumpstarting the real estate market. With banks dragging their feet on the process, however, homes that could have been quick short sales are becoming foreclosures -- adding fuel to the continuing housing crisis.

And since short sales lower the sellers' credit scores and preclude them from getting another mortgage for two to three years, some have decided it's easier and smarter to just avoid the process altogether.

Who needs the hassle of all that paperwork plus the negative credit impact if you can write a check that won't pinch too badly and then just unload the place? That's what a prominent TV personality, who spoke on the condition of anonymity, recently did with a property in Malibu.

He contributed about $20,000, he said, to the recent condo sale.

"It's a comment on the state of the market," he said.

Chuck Kormanski made a similar move last year when he sold his 4,563 square foot home in State College, Pa. Kormanski and his wife had invested about $100,000 to build their dream house, he said, but then they divorced and needed to sell it.

After it sat on the market with little interest for more than 18 months, a buyer came along offering them less than what was owed on the loan. After considering all their options, the Kormanskis decided to take the offer. They brought $10,000 to the table to avoid a short sale.

For Kormanski, it came down to his desire to preserve his credit and set a good role model for his college-age kids. "You just don't know what the future will bring," he said, "or whether you are going to need your credit to get a loan for something."

His real estate agent, Nyssa Smith, of Kissinger, Bigatel & Brower, said she's seeing more sellers bringing cash to closing.

"It's unfortunate, but it's necessary," Smith said. "If a homeowner can bring money to the table, it really saves them from them from hurting their credit or, worse yet, a foreclosure if they can't afford to stay in the property. Sometimes we have to think outside the box."

For his part, 48-year-old Kormanski is renting now, and said he's not eager to return to home ownership just yet.