Short Sales 101
Q. What is a short sale?
A. Short Sale occurs when a property is sold for less than the amount owed on the mortgage and the lender agrees to accept that amount as satisfaction of the mortgage owed. For a short sale to happen the property must go under contract and the discounted amount must be accepted by the lender.
Q. What benefits does the seller get?
- The credit score is not as adversely affected with a short sale as with a foreclosure. Most Short Sales are recorded as having been satisfied. Two years after the short sale the seller may again obtain an FHA backed loan.
- The seller may continue to occupy the home while the process continues.
- The seller will feel better since most people feel its morally correct to pay their debts.
- The possibility of getting the debt wiped clean and only a 120-130 point decline in credit rating. A short sale is considered a payoff that satisfies the debt and in some states deficiency judgments are not allowed. Please consult legal counsel on this matter as they are the only ones that will be able to tell you if your state is a non recourse state and/or if your loan is a non recourse loan.
Q. What benefits does the Lender Get?
- Toxic Loans are removed from their portfolios.
- The Lender does not have to go through a lengthy and costly foreclosure process. Loss Severity, the rate they expect to lose money by going through the foreclosure process weights heavy. The costs of a foreclose are much higher than those of a short sale
- Eliminates having to sell the home as a REO for a lesser amount and having to spend money for listing and advertising the property.
- The Lender does not have to deal with issues surrounding the eviction process including having to pay for the cooperation of the resident to move out.
- Saves the banks time to deal with other matters.
Q. How do I know if the short sale will work or not?
A. For a short sale to work you need several things to come together at the same time, you will need a highly trained negotiator on your side. Short sale negotiators are usually realtors and/or attorneys, both are very helpful and both bring different skills to the table. Sometimes realtors and attorneys work together on short sales, one marketing the property and getting all the necessary paper work and the other negotiating with the banks, associations and any other interested party. Just as important as the negotiator, the seller has to qualify for a short sale (The right type of hardship) and the buyer has to have the financing in order and willing to wait around a bit. Understanding and familiarizing yourself with the short sale process will help you.
The Short Sale Process
1. Listing the property for the right amount in the beginning is essential and it will be necessary for a CMA and an absorption rate analysis to determine the best price for a quick sale.
2. Gather necessary paperwork the lender will require.
a. Letter of Authorization
b. Homeowner's financial reports
c. The Hardship Letter
3. Marketing the property and executing an agreement between the buyer and seller.
4. Get the property inspected and make a note of any defects
5. Prepare a preliminary HUD-1 with all closing costs and net to lender.
6. Prepare and submit a complete Package to the Lender with a good cover letter.
7. The lender will then evaluate the property by asking a broker to complete a BPO (Broker price opinion, similar to CMA or simple appraisal)
8. Negotiate with the lender and other lien holders if any.
9. Closing and mortgage satisfaction.
Q. When is a short sale not likely to work?
1) When there is no real hardship that has caused the delinquent payments
2) If the seller is current on payments the bank may be unwilling to deal with the borrower/seller. (Banks don’t care that your upside down unless you stop paying)
3) When the seller has filed for Bankruptcy.
4) When the price is unreasonable
5) When there has been recent cash out refinancing or a recent HELOC (home equity line of credit)
6) When there are many liens on the property (we expect there to be some but a high number of liens want to be fully satisfied and this is not always possible)
7) When the seller is deep into the foreclosure process there may not be enough time to market the home and get a decent offer. (The average foreclosure takes 1 year and it takes about 90 days or 3 missed payments for the process to start)
8) When the proceeds of the sale are not enough to satisfy the first and second lien when there is a second. (the second is usually looking to get at least 10 % of their outstanding debt)
9) The seller has enough funds to cover the difference between the proceeds of the sale and the outstanding debt.
10) The seller expects to receive monies from the short sale.
11) The Short sale package was submitted incomplete
12) Any potential zoning violations from modifications or improvements to the property done without permits
Q. How to avoid foreclosure?
A. Talk to your lender when you have a problem. Lenders don’t want to foreclose on your property. They lose more money in the foreclosure process than if they allow the borrower to sell short or with a loan modification. Depending on your situation ask if they will modify your loan or start talking to them about a short sale. Open your mail; don’t avoid the opportunity to get help.
Contact a HUD approved housing counselor or call a REALTOR® for advice. Call 800-569-4287 to find a nearby counselor, or go to www.hud.gov
Prioritize spending by paying for necessities for life first. Your mortgage should be the first thing you pay.
Don’t get scammed by a foreclosure scam artist!! Don’t pay anyone anything up front, banks allow for a certain amount to go towards the negotiator at closing so there is no reason for out of pocket expenses. The only up front expenses you should be paying for are an attorney and a tax expert’s consultation fees. Do not pay an attorney for more than advice up front, they sometimes tell you to pay them a certain amount of money to negotiate a short sale but if your buyer walks away, you are still stuck with the attorney’s bill. We realtors and attorneys normally get paid at closing from the lenders proceeds.
Foreclosure Alternatives
- Loan Modification- Some lenders will do some of the following:
- convert your loan to a low fixed interest rate
- Extend the number of years on the loan
- Forgive part of the loan
- Forbearance- The lender may allow the borrower to skip one or more payments as long as the borrower plans to catch up again in the future (this is really helpful when the hardship is temporary, like with a job lay off)
- Died in Lieu- This method is seen as a friendly foreclosure and does adversely affect a person’s credit rating. In order for this to work the anticipated proceeds must exceed the loan amount (It does not work if you’re under water, so there has to be some equity). I do not recommend this method unless you have already tried to sell your home through an experienced realtor.
- Cash for Keys- This method may work when there is enough equity in the property but the owner can’t make the payments. The bank then offers the borrower some “cash for the keys” and deed to the property.
- Sell the home- If you have positive equity sell the home and satisfy the mortgage. If there is negative equity contact an experienced realtor and attempt to perform a short sale.
- File for bankruptcy- This last method will put the brakes on the foreclosure process but should only be used as a last resort since it will not stop the process but will prolong it. It will also have a higher negative effect on your credit rating than a modification or a short sale.
Tarp Funds
Banks now receive money from the Tarp funds to get borrowers into repayment plans, loan modifications and short sales.
- Lenders get $500 per re payment plan
- Lenders get $750 per loan modification
- Lenders get $2,200 per short sale.
Credit Scores, Short Sales, bankruptcies and modifications.
- The average credit score is a 680 and a 580 is needed to qualify for an FHA loan
- Short Sales reduce credit scores by 120-130 pts.
- Strategic defaults (walk away foreclosures) reduce credit scores by 200+ pts or more and the negative remarks stay on your credit for 5 to 7 years (depends on state)
- Bankruptcy filings affect credit scores by 335-365 pts & remain on your report for 5 -7 years.
- Loan modifications that roll over the late payments and fees into the mortgage can have a positive effect on credit scores.
- Government loan refinance or modifications have no effect on credit scores.
Fannie Mae and Freddie Mac guidelines
How long after a foreclosure do I have to wait before I can get a Fannie or Freddie loan?
- Foreclosure- 5 years (with possible additional terms extending to 7 years)
- Deed in Lieu- 4 years (with possible additional terms extending to 7 years)
- Short Sale- 2 years.
In conclusion
Foreclosures are tough on everybody, they affect the borrower, the lender, the neighbor, the community associations, and the city in general as they lower property values. If you find yourself in a tough situation, talk to your lender, open your mail, call an experienced Realtor (hopefully us) and pay a visit to your accountant and consult a real estate attorney. If we all do our job, we can get out of this mess but we must all work together to achieve a stable market. Remember that as a short sale seller you must co operate with your realtor in a timely fashion and if you’re a buyer protect yourself by hiring the right agent and asking your agent to make sure the property is a good short sale candidate. Also hang in there for the long run; if you don’t have patience then a short sale is not for you. I find that in my market in the Tampa Bay area, the short sales are quickly becoming a better opportunity for buyers since the foreclosures are usually picked up quickly by an all cash investor who out bid everyone else by paying higher than asking price. So if you are under water and can’t get your loan modified then your best bet is to sell short!!
By
Eric Chavarria, SFR