Did you know that short sales have grown more than 600% over the last two years?
What is the difference between short selling and foreclosing?
- A foreclosure will negatively affect on your credit score significantly. Not only will this drastically drop the score, but will prevent the person from obtaining any type of financing for 7-10 years. Even after this period, the mortgage loan application will always state that the borrower had a foreclosure in the past, and can seriously affect that person’s ability to obtain financing and credit in the future.
- A short sale will affect the credit, but not nearly as much as a foreclosure. The credit will be negatively affected for approximately 24 months,. By Fannie Mae Guidelines, one should be able to purchase another home after 24 months of having done a short sale.
- With a foreclosure, a public notice is filed and privacy is not maintained. Our short sale process ensures that the seller will maintain their privacy. We do not require any signs on the property.
- With a foreclosure, a lender can assign a judgment against the homeowner and garnish remaining assets such as bank accounts, income, etc. With a short sale, we pressure the lender to let you walk away free and clear without any deficiency judgment actions taken.
This sounds too good to be true. Why would a lender agree to short sale and take a loss?
- It is a simple matter of dollars and sense. When a lender forecloses on a property, it costs them about $60,000 in attorney and personnel fees. In addition, it is very rare that the lender will sell a property for more than what the house could sell for in a short sale. Finally, the lender runs the risk of having to maintain a vacant house if the house does not sell immediately at foreclosure auction.
What is your experience with short sales and negotiating with lenders?
- We are not limited to simply having realtors negotiate with the banks. In fact, we have an entire lender relations team whose sole job is to create and maintain our relationship with the banks to ensure approvals.
- We deal with banks and lenders every day and have developed direct relationships with some of the largest lenders in the US.
- We are a licensed California Real Estate Broker. We abide by the strict Realtor Code of Ethics.
A short sale may provide advantages as a last resort to foreclosure.
Possible disadvantages include:
Potential tax liability
Seller may be asked to sign a promissory note or contribute to the loss
The short Sale is a time consuming process.
The Current Environment
We are in a very high volume situation today.
We are doubling the number of short sale offers each year
Lenders have had to take many steps to meet the demand
Advantages Include
Borrower benefits
Avoid a lengthy and stressful foreclosure process
Provides the seller with some control
Short Payoff can help preserve neighborhood market values and reputation
Future Borrower benefits
Based on Fannie Mae galilean (dated 6/25/08) seller can apply for a mortgage with a short payoff within 2 years vs. 5-7 years for a foreclosure
Avoid the stigma of foreclosure
Customers can move forward with their lives
Why is the short sale process so lengthy?
Traditionally, the process doesn't begin until an offer is received
An appraisal must be done
The offer must reasonably meet the current market value
The buyer must qualify
Must be an at arms-lenth transaction
The mortgage investor must approve each offer
Third-party approvals (mortgage insurance and/or second liens)
So what exactly is a Short Sale?
In the work of Real Estate, a short sale refers to the sale of a real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually “forgives” all or a large portion of the difference.
Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less than full balance”. As far as your credit score is concerned, there is no evidence whatsoever to support that a short sale will lower your credit score. Some have the idea that this is like a bankruptcy or a foreclosure. That’s far from the truth. In a short sale, the lender is simply allowing you to pay less than you owe!
If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit. How? Because once you have been approved for the short sale, all collection activity will STOP and you will avoid foreclosure.
Who benefits from the Short Sale?
Short sales are a win-win situation. Lenders, Mortgages and Realtors all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgages get the relief they need and are able to sell their property and avoid foreclosure, and Realtors can facilitate the transaction and receive commission from the sale of the property.
Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank.
How much does the Short Sale Cost me? Attorney's fee's are typically $1,000 and they negotiate $2500.00 from the lender. Your lender will pay commissions many times at a 6% fee once the home is sold. This sounds too good to be true! Not really. Things that are ‘too good to be true’ usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back. Can FHA, Conventional or VA loans receive a short sale? Yes! Short sales for each of these loan types have been negotiated. Why does my property have negative equity?
Here are a few common reasons:
1. Person bought at the height of the market and the market has now declined or paid more than the property was worth.
2. The area has become less desirable for any number of reasons, so property values have declined.
3. A person who purchased the home with little or no money down.
4. Person refinanced the home and now has little or no equity.
5. Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value.
The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market).
What is Negative Equity?
Also known as being “upside down”, negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.
Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.
What if I owe what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay the costs of the sale (Realtor fees, Title Policy and other seller closing costs).
Why not just let my lender foreclose?
NO! What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay Realtor commissions and all customary closing costs. Doesn’t it make more sense for them to take at, or a little below, fair market value before foreclosing???
And, even when they do sell it through foreclosure…this does NOT remove your obligation to repay the remaining balance! It is not wiped away!
What if I’m not behind on my payments?
Short sales work – even if you’ve never missed a payment! Yes, I know, short sales have gotten a stigma of being only available to the folks who have never missed a mortgage payment. They just happen to be in a negative equity position and need the short sale in order to sell their home. How long does it take? Short sale approval can take 30 to 45 days.
What if my home is already in foreclosure?
Your foreclosure sale will usually be suspended during the short sale process. That’s why it’s imperative that you contact me right away!!!
Will my lender send me a 1099 on the debt forgiven?
While the lender does have the right to report to the IRS the amount they have ‘forgiven’ in a Short Sale transaction, the amount of the resulting tax will be far less than the debt forgiven. As an example, one property owner did get a 1099 for $30,000 forgiven. This resulted in additional taxes of $1300 for that year. Paying the resulting tax is much better than paying the difference of the debt. Also, if the property is in foreclosure, the foreclosure would have a much more devastating affect on you than the amount of the 1099. Experience tells us that the lenders on 90% of short sales do not pursue filing a 1099 – but there is no guarantee they won’t.