What is a Short Sale and How Does it Connect to the Foreclosure Process?

The term short sale has been brought up more and more in the real estate world as the property market has corrected to a more sustainable growth level. Depreciation of home values over the last few years has led to homes that are worth less than the mortgages that were used to finance the purchase. This situation coupled with a nationwide recession that has created the need for people to sell their homes despite being “underwater” has led to the recent popularity of short sales.

What Is an Underwater Loan?

A home loan or mortgage that is higher than the actual value of the home is said to be underwater. Over the last few years this situation has become a common occurrence as homeowners who bought at the peak of housing prices with little or no money down have seen their property values decrease, sometimes dramatically. They began with a $300,000 loan on a home that appraised around that value, and now their mortgage amount is around the same, but that same house appraises for less than $250,000.

With the rise in unemployment, many homeowners who have found themselves in this difficult situation have been forced to sell their home because they can no longer afford the mortgage. The problem that occurs is that even if the homeowner sold their home for $250,000, they would still owe the bank the additional $50,000, which holds up the sales process. This hurts everyone involved because the original owners cannot pay the mortgage, so they default on the loan. The new buyers who are excited about the home are not allowed to buy it at the new market price. Finally, the bank that holds the mortgage will not let the original owner sell, does not receive a payment each month for the mortgage, and must now go through an expensive and time consuming foreclosure process to get possession of a home they will only be able to sell for less anyways.

Buying and Selling a Home with a Short Sale

This is where short sale comes into play. In a short sale the original homeowner who is underwater will get an agreement from the bank to complete a short sale and put their home on the market at the current local price. When a buyer decides to purchase the home, the bank agrees to let the sale take place and take a loss on the original mortgage. Ultimately, this type of legal settlement allows the homeowner and bank to avoid a costly and credit damaging foreclosure process. The owner will still take a hit on their credit score and the bank will lose some money on the transaction, but the overall solution is much better than foreclosing on the home.

Foreclosures and Short Sales

Short sales are becoming more common with our current correction in home prices and high unemployment, but many bands still make the process very difficult for the owners because they do not want to take a loss on the loan. For this reason, many banks will not consider the option of a short sale until the homeowners are already several months behind on their mortgage. In addition, banks reserve the right to not accept the price the new buyer offers for the home if they think it is too low. This creates tension between all parties involved, and if unresolved leads to the eventual foreclosure of the home.

Short Selling Your Home – The Right Answer?

As the real estate crisis and slumping economy continue to squeeze homeowners, many have sought to escape their mortgages by conducting a short sale of their properties. A short sale is a transaction whereby the owner sells his home for a lower amount than what is owed. The lender must accept the deal, and stories have been circulating of buyers and sellers waiting several months before hearing a decision from the bank. So, is this technique the best answer?

Refinancing and loan modification are more efficient, and lenders such as Countrywide are much more accepting of these programs than a short sale. But if circumstances prevent you from qualifying for these loans, a short sale may get you out from under an unmanageable situation. There are two reasons a bank may accept a short sale: 1) the costs of foreclosure can cost a lender up to 18% of the loan amount, and 2) lenders do not want to carry properties on their books.

Not all homes qualify for a short sale, says our personal financial expert Nathan Threebes. “There must be evidence that home values have dropped in your area, the loan must be in or near default status, and the seller must show that financial hardship and a lack of assets prevent her from making up the difference,” Threebes says.

There are two major consequences to conducting a short sale. First, according to the Mortgage Forgiveness Debt Relief Act of 2007, the IRS allows lenders to issue a 1099 form for the forgiven amount, which you must report as income. Second, your credit report will be blemished though not quite as severely as a foreclosure (but creditors may not see a distinction as your FICO score lowers almost equally).

Under new Fannie Mae guidelines, conducting a short sale versus allowing a foreclosure may shorten the waiting period between the sale and obtaining a decent rate for a new home. Homeowners considering using this strategy are advised to seek professional advice.

Buy A Short Sale Home At Heavily Discounted Prices

You may have been reading or heard about all the money that you can save today with the purchase of a short sale home. Many people who do not even have any experience with buying homes or real estate investments are now buying these homes with great success. This is, however, a process that must be fully understood before being undertaken.

When you are buying this real estate, you are essentially purchasing a home at a heavily discounted price. The words “Short Sale” basically mean that the seller’s lender is willing to accept a payoff amount less than balance of the current mortgage. You can make offers on homes, which the seller and their lender will then consider. Both the seller and the lender must be in agreement for the short sale to be accepted.

Lenders will most often allow a home to be listed for short sale if the current buyer has fallen behind on mortgage payments or has completely stopped making payments. However, in some cases a lender might allow the current buyer to list the home as a short sale even if they are completely current on their mortgage payments. Situations like this may happen when the buyer has become “upside down”(owing more than the home is even worth) in the home due to the real estate market value dropping.

If you are considering buying a short sale house, it is vital that you do some investigation once you have found a potential home. Finding out whether a foreclosure notice has been issued and learning the amount that is still owed on the home, information that an agent can obtain for you, will help you in deciding if this is a good chance to make an offer. Lenders that offer a home that they are foreclosing on may be more motivated than those who have homes that the buyers are still making payments on. Knowing the amount owed is helpful since it will give you an idea of the finances behind the deal: How much the lender might be willing to sell for. Getting all of the pertinent information can save you a bundle when you are purchasing these properties.

Short Sales – Influencing The Brokers Price Opinion (BPO)

When you do a short sale, the lender most likely will order a BPO.

BPO stands for Brokers Price Opinion and is a process by which a realtor

appointed by the lender, comes out to evaluate the property and give his “opinion”

on what the value of the property is. So the lender sends a realtor out to the

property and it’s your job to influence the BPO to come down as low as you can.

This is the whole key to a successful short sale. This is why you want the lender to

contact you, so you can meet the realtor at the front door and influence their

BPO to come in as low as possible. To build your case, the first thing you

should do is show up with a list of repairs and estimates for the property. If you

have to go get a contractor to bid a job or repair, go get one. The higher the quote,

the better. This is good evidence. The second thing you should do is show up with

a list of comps in the area that are low. Most real estate agents appreciate you

doing some of their work for them. Provide them with the lowest comps you can

find and they will decide if they want to use them or not.

When you meet the realtor on the property steps, just tell him you are the buyer and

doing a short sale on the house. Then you will proceed to walk the realtor

through the property. When you are walking through the property make sure you

point any and every repair or problem with the property. Again, you are trying to

make the value of the home come in as low as possible. If you are dealing with a

nice house with minor cosmetics, you may really have to search for problems.

Then call him the next morning to see if he was able to get the price you wanted. Sometimes they will tell you sometimes they won’t. Just ask to find out. If they won’t tell you, call the bank. Many times they will tell you. You really have no control over this process. You can encourage the BPO to come in low, but this does not always mean they will come in low.

If there is someone living in the property, you may want to ask them to leave when

the realtor comes out to do a BPO. If they can’t, just tell them to stay out

of the way. Explain to them you will be trying to make the house value look as low

as possible. They may not understand why, just tell them it is the only way to save

their house. Also, tell them not to worry about cleaning up at all, leave it the way it

is. This is the one time your house can be a mess. You need to make the value of

the property look as low as possible.

If the loan on the property is FHA or VA, they will not take less than 82% of the BPO.

Usually you can expect the BPO to be in the range of 80-90% of the

repaired value. So if you have a house that is worth $120,000 after repairs, the BPO

you would guess to be about $98,000 to $108,000. Then multiply that amount by

82% and this should give you a good estimate of what to offer. If it is not a VA/FHA

loan, then you can offer whatever you want. It is a good idea to start low, just in

case your BPO comes back lower than you thought, you can always raise the offer. It

is an educated guess to find out what the BPO will be. If it comes back

high not in your favor, sometimes you can call the loss mitigation department and

tell them the BPO is way to high. Many times they will work with you and

order another BPO. Whatever you do, don’t ever give up. If they don’t accept it,

negotiate with them some more. Ask them what they are looking for, or what they

are trying to get. Sometimes they will tell you, sometimes they won’t. Be

persistence. Be patient. Ask, ask, ask. Part of being successful in this business is

how you negotiate. You don’t ever want to be rude to them, but let them know

where you stand. Make them aware of what’s happening to the property.

Is A Short Sale The Right Choice?

With the decline in home values in the past few years, some homeowners who need to sell in the current market find themselves trapped, as they owe more than their home is worth. In this situation, the short sale can become a viable option.

What is a short sale:

A short sale is simply a sale in which the proceeds are not enough to cover all of the outstanding obligations associated with the sale of the home including the mortgage or mortgages, unpaid property taxes, attorney’s fees, title expenses, commissions, etc. This shortage would require the seller to bring money to the closing or to negotiate a “shorted” payoff with their lender. The lender has no obligation to agree to this, but many will. In most cases, a short sale is attempted by sellers who are facing foreclosure or have fallen behind and no longer have the ability to continue making their payments.

The process:

There are a lot of misconceptions about the short sale process and the lender’s role in it, even among some RealtorĀ®s. The seller’s lender’s role is nothing more than that of a contingency. This can vary by state depending on whether it’s a title theory state or lien theory state. This information applies to Illinois, which is a lien theory state (the owner holds title and the lender holds a lien on the property)

The seller owns the home and ultimately is the one who, with the help of their agent, accepts, rejects or proposes a counter offer once an offer is received. When the offer is accepted by the seller, it is done so contingent on their lender agreeing to accept the net proceeds of the sale as full settlement of the amounts owed. I’ve had more than one occasion where an agent working for a buyer asks when their offer will be submitted to the bank, even before the seller has agreed to accept it. It can add to the confusion if multiple offers are received. Some think that all offers must be presented to the lender. This is not accurate. All offers must be presented to the seller, not to the lender. The goal of the listing agent should be to obtain the best offer possible, thereby giving the transaction the best possible chance of actually closing.

What are the odds of a successful closing?

They’re actually better than they used to be. Nowadays it makes sense for banks to seriously consider accepting a short sale as, in many cases, they net more money overall versus going through the whole foreclosure process, taking the home back and marketing it as an REO (Real Estate Owned). Illinois is a judicial foreclosure state. Some states are non-judicial. Judicial foreclosures take much more time to complete. In Illinois, the process can take a year or more. There are some states which take upwards of 3 years. When you consider that, in most cases, the bank is receiving nothing while the process drags along, you start to see their motivation to consider other options. Add to this the deterioration to the property during that time and the additional carrying costs, and the benefits to the bank become even more clear. The bank in this situation, much like the homeowner, is looking for the best way to limit their losses.

The benefits of a short sale:

Lenders generally don’t allow the seller to receive any of the proceeds of the sale. This is fair when you consider that the whole basis of the short sale is negotiating with the lender to get them to take less than what they’re owed. The only exception I’ve seen to this was years ago when, due to an error, we were out of balance by $.06 The title company actually cut a check to the seller for six cents! As a seller in this situation, one needs to keep in mind that, if the lender agrees to the short sale, they are allowing the seller to avoid having a foreclosure on their record which follows them around for many years. Additionally, most short sales also let the seller out from under the debt without being chased for a deficiency. These two things should be all the motivation you need. there are no guarantees of being successful but it’s certainly worth the effort.

Who should you call?

These transactions are not for beginners. There is no substitute for experience when it comes to navigating through this process. An experienced agent and attorney are crucial. In this situation it makes sense to ask a lot of questions. There are specialized short sale/foreclosure courses available for agents. Some are very worthwhile but these courses alone don’t necessarily make the agent an expert. An agent referred by a seller who’s been through this process is definitely someone worth talking to.

What will it cost?

In most cases, it will cost you nothing unless there’s an upfront fee charged by the agent to list the home. All agents negotiate their own fees. It should cost you nothing to talk to an agent and get information. All commissions and other closing costs a seller would normally pay will be factored in and, if the lender agrees to the short sale, they are agreeing to the net amount of the sale so essentially, it is the lender that is paying your closing costs. For someone facing foreclosure, a short sale can be an excellent solution.