Real Estate Short Sale Guide

What are some benefits of short sales?  Take a quick look!

• The Seller avoids having a foreclosure on their credit
• It can help the seller get out of a frustrating position
• A home doesn’t have to be abandoned
• The short sale buyers gets the property at a good price and is typically in better condition than a foreclosed home.
• The bank gets more money and it minimizes their costs
• The bank does not have to seize, evict, manage, clean-out, maintain or resell the property which can yield big savings to the bank.
• The Neighborhood is spared another boarded up vacant foreclosure
• Other sellers in the neighborhood are spared the stigma of a foreclosed home which could bring down the property value for the neighborhood.
• Owners trying to refinance or sell their home will have their home appraised higher by being spared having a foreclosure in their area
• The Realtor can sell the home at a lower price due to the short sale status.
• The seller can be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 years.

What are the negatives of a short sale?

• There is no guarantee that the bank will accept the short sale offer.
• Waiting for the bank to respond can be very frustrating.
• The lender will want to examine the seller’s personal records to determine short sale eligibility: tax returns, bank accounts, assets and a hardship letter
• The credit mark will remain on the credit report for up to 10 years.
• The courts get less money with fewer foreclosures
• Law firms that do foreclosures make less money
• Companies that board up homes make less money
• Foreclosure auctioneers also make less money.
• Collection companies make less money.
• Criminals who attack vacant homes make less money
• Scrap yards that accept stolen cooper make less money

Doing short sales are quite hard, but can get even harder when there are 2 loans involved. You know need 2 lenders to cooperate, not just one. Double trouble.

The 2nd mortgage lender will always be in the 2nd position, even though the 2nd loan is a home equity loan. The lender who is in the first position will receive the funds collected from the foreclosure proceedings when the Notice of Default is filed.

In many parts of the country, the 2nd lender must make up back payments to the first lender to pay the 1st lender’s cost to file the Notice of Default and associated expenses and then file its own Notice. If the 2nd lender does not do this, they could get wiped from the foreclosure proceedings and receive nothing (especially if there is little money to go around in the first place).

When the 2nd lender receives a notice which states the 1st has foreclosed, many 2nd lenders do not initiate their own foreclosure proceedings since there may not be enough equity leftover to make the cost of foreclosures profitable.

When a short sale is used to avoid foreclosure, the seller would have signed a listing agreement with a real estate agent.

To reduce closing costs, lenders will usually refuse to pay the following:

• Home Warranty Plans
• Pest Inspections
• Roof Certifications
• Sewer Inspections
• Repairs
• Buyer’s Closing Costs (Credits)

Now, the 1st lender will offer the 2nd lender a small amount to go forward with the short sale transaction, sometimes by offering as little as $1,000 to a loan balance of $55,000.  If the lender refuses, they could end up getting nothing in the end – it’s a risk.  But many 1st lenders are happy to receive at least 90% of the loan, leaving the 2nd a bit more money…sometimes $4,000 or $8,000.  The 2nd lender must agree to release the loan, if not the short sale will be denied and the first lender will probably put the property into foreclosure eliminating the 2nd loan.

A short sale happens when a total mortgage amount owed on the property is more than the purchase price of a property and the mortgage holder (bank or lender) is willing to accept the purchase price as the “full” payment.  Short sales can only occur when the owner can prove a financial hardship and secure a buyer for the property.

Short sales carry more risk than traditional sales as the purchase process is a bit different.

• The short sale seller needs to have the lender approve to lower the mortgage purchase price.
• The buyer will have to apply for a mortgage before the lender will agree to the deal.
• Once all the contingencies are removed, the short sale package is submitted to the lender mortgage for approval and the process can take a few weeks to a few months due to the large amounts of short sale packages being delivered to the lenders.
• Once the mortgage holder approves the purchase price, the bank will expect the buyer to close fast, so the buyer must be in the position to close fast.

The reasons lenders/mortgage holders accept short sales is because they do not want to foreclose (it can be very costly to lenders).  They do not and are not in the business of ownign property as they are in the business of lending.  If you give them an offer that makes sense, they will be able to work with you.  Although many short sale deals fall through because many of the “players” (buyers, sellers, real estate brokers or attorneys) do not understand the process.  Negotiating with the bank on a short sale is more than “asking them to accept less”.  It takes some skill and patience to get the purchase contract accepted.  Make sure to get someone with experience in working with the banks or lenders for short sales.

Homes are selling for less than many people owe on their homes and some homeowners are struggling financially making them that much more worried about paying off their mortgage.

We are in difficult times as people are struggling to make ends meet.  You may try to sell your home but it’s worth less than what you owe, you won’t have enough money to pay back the mortgage.  This is when you call the bank for permission to do a “short sale” (where a lender allows you to sell the home for less than what is owed and will reduce the amount of the mortgage.  With this option, you will need to demonstrate a financial hardship that the lender will approve.

You could also look into renting out the house and finding somewhere cheaper to live or even refinancing the home, cutting back expenses or a combination of these.

But first, speak with a mortgage lender and find out if you can get approved to refinance.  If you can get a much lower interest rate, you can make your monthly payment lower. Then talk with a property manager to see how much you could rent out your property.  If you can cover or almost cover the mortgage, you may be able to keep the house.  You can rent something much cheaper (apartment or townhouse) and your monthly expenses will go down.

Also, look at your budget and see how much you need each month to live and cut out some of the extras.  If staying in your home means enough to you, cut back on other things.

Selling in this housing market when it hits low is the definition of “panic selling”.  It can hurt you financially and hurts the market.  If you can hang in there, try to, as real estate performs best over long-term and is a good investment (in most cases) when compared to renting but it is not designed to make you rich in a couple of years.  If you plan to live in your home from 5 to 10 years, then stay a few more and see where things stand.  History shows us that values will come back up.

1. Submitting “Ghost” Offers

(Trying to obtain a Short Sale approval before there is a committed Buyer)

One of the leading cause of chaos within a Lender’s Short Sale Process is the amount of offers that are presented with false buyer information.  Agents who want the listing sold quickly will sometimes do this with their intention of bringing the offer up to speed so that the short sale approval is near the end of when the actual buyer makes an offer.

This is a fraudulent act if the initial “buyer” on the offer is not an actual person.  Acts like this clog up the lender pipelines.

2. Fraudulent Bankruptcy

(Using an existing bankruptcy case to stop a pending foreclosure sale)

Sellers are often approached by companies or individuals who claim that for a fee and a transfer of the seller’s title, a foreclosure sale can be stopped or postponed.  This concept is a scheme .  It’s a highly fraudulent act.

3. Rent Skimming

(Accepting rental income on a property in foreclosure)

Many times a seller will continue accepting rental payments from either existing tenants or from potential buyers they have already allowed to move in while the offer is being reviewed by the lender.  In the meantime, the seller stops making the monthly mortgage payments and keeps all the rental income.  This is a serious offense and could position the seller to have a more difficult time getting the property sold w/o deficiency judgments or unsecured notes.

4. Purchase/Lease-Option

(Selling the property at a discount to a buyer who plans to sell the property back to the seller at a furture time)

For sellers who wish to stay in their home, but cannot afford to catch up to their mortgage payments, an attractive option that investors and family members might present to the seller is to sell the property, then lease it back from the buyer with an option to re-purchase at a later time.

If the short sale were to close successfully with this scenario, and the seller ended up buying back the property, after having been forgiven for the previous mortgage debt, the original lender could pursue legal action against the seller for intentional fraud.

There is a common belief that a short sale isn’t as bad as foreclosure or deed-in-lieu of foreclosure.

Early this year, FNMA announced that a record of foreclosure on a credit report will require that 3 years must pass prior to placing a borrower into a FNMA insured loan.  At the beginning of June 2008, the time frame was extended to five years.  That is five years from the sale date.

Remember, the home owner does have a redemption period after default, thus the sale date is the actual date of the foreclosure.

It is the 120 day late payments which damages the FICO score.  How the problem is resolved does not impact the credit score one way or another.    However, you probably won’t be able to purchase a home with a decent interest rate for five years after a foreclosure.  For a short sale, it can be more like 2 years.

Either alternative (short sale or foreclosure) can drop your credit score anywhere from 200 to 300 points from where it was before.

You closed on an REO property and now received a defaulted property tax bill in the mail, what to do?

When you close escrow, the title company should have checked on all the taxes due, obligations, etc. for the seller (the lender in this case) to pay off before the lender was to close on the property.  There should not be an unpaid property tax bill on the house from the previous owner.  Check with title and make sure they did it right and they should be able to resolve the issue for you.  Make sure your agent is also aware of this and have them do the leg work, if necessary to get to the bottom of it.