As published in the March 13th, 2008 Edition of the Yucaipa News Mirror
Short Sales: Don’t Get Caught on the Short End of the Stick
Special to the News Mirror by Randy Fox
When conversations come up about the current real estate market, you’ve probably heard the phrase “short sale” mentioned. So the question arises: do you know just what a short sale is? Hmmmm, the seller is short in stature? Nope. The seller wants to sell the house in a short amount of time? Nope, guess again. Give up? A short sale is the offering of a property for sale being sold by an owner that is headed toward foreclosure.
There are many ways to lose a home, but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings; one of those options is called a short sale. What’s the cause for a short sale? Many short sales stem from the cool-down of the real estate market and the sub-prime mortgage crisis.
Short Sales Explained
The owners of a short sale property have come to the unfortunate conclusion that they can no longer afford their monthly payment; in many cases, they’ve fallen one or more months behind on their house payment. Struggling to catch up on payments but not making any headway, the decision is made to put the home up for sale; to try to sell it before defaulting on the loan and having their the lender initiate the foreclosure process.
The term "short sale" means that the amount the owner has listed the house sale at for is less than the amount owed on the loan; the listing price being a reflection of sales in recent months of other houses in the area, also called comparable properties or comps. But why would anyone want list their home for less than what they owe on it?
As an example, let's say someone purchased a home two years ago for $480,000, right in the middle of the red-hot real estate market. Not able to qualify for a mortgage that a “fixed” loan (interest rate is fixed) would provide, they do qualify for an Adjustable Rate Mortgage (ARM) that provides them with a lower monthly payment they can afford, so they go ahead and purchase the home.
Two years later, when their ARM resets, the interest rate on their loan skyrockets and their monthly payment increases $1,000 per month. During this same two-year time period, the real estate market cools down and prices of homes in the area drop. When the ARM resets, the owners are no longer able to afford their house payment and make the decision to put the home up for sale.
To set the selling price, the owners call an appraiser to give them a value on their home. The appraiser looks at the sale prices of comparable properties in the neighborhood in the past few months and subsequently values the home at $375,000.
The owners get the bad news that their home is now worth $105,000 less than what they paid for it and now find themselves “upside down” in the home. Owing more on the home than it's worth, they have to sell it at the lower value of $375,000; after all, there’s no way that someone will pay $480,000 for a home that’s only worth $375,000. In essence, the sale price of the house is listed “short”; short of the amount due on the loan.
The Selling Process
Someone looking to purchase a short sale property would think they’re getting a bargain. But while short sale properties may look like bargains on the surface, many factors contribute to why attempting to sale or purchase a short sale property can prove to be the most difficult type of real estate transaction to deal with.
When lenders agree to do a short sale, it means the lender is willing to accept less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. Moreover, not all sellers and/or all properties qualify for short sales.
The selling process of a short sale is similar to the "normal" purchase of a property, but there are differences. One major difference is that all offers are submitted directly to the lender and not to the owners of the house; all offers are subject to the approval of the lender. In essence, the fate of the owners as well as the prospective buyer submitting the offer lies directly in the hands of the lender.
Lenders may choose to do a number of things, including "sitting" on all submitted offers until they get one that's close to the price they're looking for; having their listing agent submit a counter offer to an offer that's been submitted; or to simply be unresponsive to an offer. This in turn means that the seller and prospective buyers can end up waiting days, weeks or even months for the lender to render a decision.
Be Cautious
One extremely important thing to keep in mind before selling or making an offer on a short sale property is to make sure the listed price of the property has been approved by the lender. Unfortunately, there are short sale properties listed with prices that have not been approved by the lender; list prices that are tens of thousands of dollars lower that what the lender would not even consider accepting. This is a tactic sometimes used by lenders and/or the lender’s listing agent as a way of inducing offers on the property.
This leaves both sellers and buyers wide open to not only having the lender sit on offers for weeks at a time, but it also allows the lender to counter any offer with an offer potentially many tens of thousands of dollars more than what the owner and potential buyer thought the property would sell for.
Can short sales be successful? Absolutely. Can short sales help out a home owner in distress? Absolutely. Are there short sale bargains to be had? Absolutely. Proceed with caution? Absolutely. We’ll take a more in-depth look inside both selling and buying short sale properties in future articles. Until then –
Randy Fox is a residential and commercial real estate agent with Century 21 Best Properties in Yucaipa. He can be reached by phone at (909) 965-2937 or email at randy.fox@century21.com. He also has a website; www.yucaipaproperties.net
As seen in the February 28th, 2008 Edition of the Yucaipa News Mirror
On the Road to REO’s (Bank-Owned Properties)
No doubt you are aware of the recent downward turn in the California real estate market in the past months. This trend has left the current real estate market with a large inventory of properties at reduced prices, many of which are bank-owned (REO or Real Estate Owned), also known as foreclosed or repo properties.
Why the current influx of so many bank-owned properties? A lot of it stems from the loan industry crisis. During the “peak” of the real estate market, home owners who were otherwise unable to afford to purchase a home, did not have a down payment, did not have the income to make a large monthly house payment, and/or had questionable credit were offered "creative" financing terms from lenders eager to lend money.
Adjustable-rate mortgages, known as ARMs, were especially prevalent in the sub-prime market. They are considered higher-risk loans because they typically draw borrowers in with an initial low “teaser” interest rate, which can spike upward after the first few years.
When an ARM (usually with a two-year term) matures, the monthly payment skyrockets. Those who were struggling to make their ARM payments before they matured were now found themselves facing payments that jumped hundreds of dollars a month.
For example, a homeowner who takes out a $200,000 ARM with a teaser rate of 4 percent initially pays $954.83 monthly in principal and interest. But when the interest rate jumps to 7 percent, say, in the second year of the mortgage, the payment rises to $1,320.59 a month — a move that regulators call “payment shock.” Change that figure from a $200,000 home to $300,000, $400,000 or more, and you can see how quickly payments can get unmanageable.
What does this mean to you? Why would you want to look into purchasing a REO, foreclosed, HUD or short sale property? The number one reason is simple – the possibility of getting more value for your money.
BANK OWNED OR REO PROPERTIES
REO stands for “Real Estate Owned”. These are properties that have gone through the foreclosure process and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction.
When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll receive the property 100% “as is”. That could include existing liens and even current occupants that need to be evicted.
A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.
Do be aware that REO’s may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of; in other words, just like the foreclosed property, the REO property is sold "as is". This is where you need to make sure to have the home inspected by a licensed professional home inspector to make sure there are no issues with the house that could cause you problems later.
Most buyers assume that any REO must be a bargain and an opportunity for easy money. This simply isn’t true. You have to be very careful about buying a REO if your intent is to make money off of it. While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it.
When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale.
The bargains with money-making potential exist, and many people do very well buying REO’s. But there are also many REO’s that are not good buys and not likely to turn a profit. This is where you have to do your homework to make sure the property you are interested in fits your needs and your ability to make all necessary repairs. This is where a qualified Realtor® can help you find the necessary information needed to make an informed and educated decision.
Randy Fox is a residential and commercial real estate agent with Century 21 Best Properties in Yucaipa. He can be reached by phone at (909) 965-2937 or email at randy.fox@century21.com. He also has a website; www.yucaipaproperties.net.
As published in the March 27th, 2008 edition of the Yucaipa News-Mirror
How to Conduct a Short Sale
In our last article, we took a look at the basic fundamentals of a short sale; in this article we will take a more in-depth look of how to conduct a short sale on the selling side of the transaction.
As previously mentioned in the last article, when lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due on the mortgage. Again, keep in mind that not all lenders will accept short sales or discounted payoffs, especially if it makes more financial sense for them to foreclose on the property. Also, not all sellers or all properties qualify for short sales.
Anyone thinking about conducting a short sale on a property should take preliminary measures to find out if a short sale is the right thing to do. Such measured include obtaining legal advice from a real estate lawyer familiar with short sales and calling your tax advisor to discuss the tax ramifications of conducting a short sale. As a real estate agent, I am not licensed as a lawyer or a CPA and cannot advise you on those issues; I can only advise you on what you should be aware of and who you should contact.
Mortgage Forgiveness Debt Relief Act of 2007
Due to the mortgage industry crisis, on December 20th, 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. This act was created to help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act created a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Under prior laws, if the value of your house declined and your bank or lender forgave a portion of your mortgage, the tax code treated the amount forgiven as income that can be taxed.
Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware that the I.R.S. will consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. Speaking with a real estate lawyer can determine whether your loan qualifies for a deficiency judgment or claim.
Under the Mortgage Debt Forgiveness Act of 2007, some homeowners granted forgiveness of mortgage debt won't have to pay taxes on that amount. But there are some restrictions:
If you would like to receive a copy of the Mortgage Forgiveness Debt Relief Act of 2007, contact me through phone or my website; I will be more than happy to send you a copy.
What You Will Need to Conduct a Short Sale
All lenders have varying requirements and may demand that a borrower submit a wide array of documentation; the following steps will give you a pretty good idea of what to expect and what you’ll need to do:
Call the Lender
You may need to make a few phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department; you want the supervisor's name, the name of the individual capable of making a decision.
Submit Letter of Authorization
Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to speak with those parties who have a specific interest in your loan. The letter should include the following:
Property Address
Loan Reference Number
Your Name
Date
Your Agent's Name & Contact Information
Preliminary Net Sheet
This is an estimated closing statement that shows the sales price you expect to receive and include the costs of the sale, unpaid loan balances, outstanding payments due, any late fees and real estate commissions, if any. Your real estate agent or lawyer should be able to prepare this for you if you do not know how to calculate these fees. If the bottom line shows cash to the seller, you will probably not need to conduct a short sale.
Letter of Hardship
This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Contrary to popular belief, all lenders are not cold-hearted; they can be sympathetic and understanding to situations such as if you lost your job, went through a divorce, were hospitalized, etc., but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose all assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market Analysis
Most short sales conducted today are due to property values falling; if this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:
Active on the market
Pending sales
Sold homes from the past six months.
Purchase Agreement & Listing Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to allow payment of certain items such as home protection plans or termite inspections.
If everything goes according to plan, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request.
As seen in the April 10th, 2008 edition of the Yucaipa News Mirror
Buying a Short Sale Property: Guide to Success
Special to the News-Mirror by Randy Fox
In our last two articles, we’ve taken a look at the basics of what a short sale is and how to conduct a short sale. In this article, we’ll look at how to buy a short sale property.
Whether you’re a real estate investor or someone just looking to get a good deal on a home, mention the words “short sale” and people instantly think they can get a home at a bargain price. After all, about 70-percent of homes listed for sale in today’s real estate market are short sales. Easy picking’s to get a deal, right?
Making an offer on a pre-foreclosure, short sale home is not as simple as you might think; very few short sale properties can close in the standard 30-day escrow process. In fact, many short sale homes end up not selling and fall into foreclosure. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like Donald Trump finding the next great deal, do your homework and ask your real estate agent if the home is a short sale.
What is a Short Sale?
For those who have missed my past articles, a “short sale” means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.
The seller will need to be in default, to have stopped making mortgage payments and prove hardship before a lender will consider a short sale. Also, the seller might have over-encumbered, owing more on the home than what it’s worth, so a discounted price might bring the price in line with market value, not below it.
In today’s market; home prices are going through an “adjustment period” and selling prices are a reflection of real-time/fair market values. Keeping that in mind will do you a world of good as you go through the home-buying process.
Check the Public Records
Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer. Keep in mind that the list price may not be reflection of the price the lender is asking for; the list price may be set at a level to induce offers.
If there are two loans, you could have a problem. The first mortgage lender's position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.
Hire an Agent with Short Sale Experience
Its one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. You need an agent who’s experienced with short sales.
As short sales can take weeks and even months, it is of the utmost importance that your agent follows up with the listing agent on a daily basis. Since the agent on the buyer’s side can have no contact with the lender (s) who hold the note on the short sale property, it all comes down to how aggressive the listing agent of the property is; staying at the forefront of the lender is an absolute must in order for a successful short sale transaction to transpire.
Prepare the Seller for Lender Demands
A lender is not going to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender and sellers may also owe taxes on the amount of debt that is forgiven.
Submit Documentation & Purchase Offer to Lender
Keep in mind that the seller has no say in accepting or declining your offer; all offers are sent to the lender for approval and you do not have a deal until the lender accepts it. The lender may also decide to do nothing with your offer, as they are in no obligation to respond to it. Another thing the lender may do is to hold on to your offer to wait and see if other offers come in; this can lead to a bidding war and the selling price of the home could actually end up being higher that the amount the seller owes on the home.
In addition, the lender will want to see that you have your own loan available and that you are pre-approved by your finance company. Have your agent send a pre-approval letter to the lender along with the submission of your offer. Be prepared to submit a good faith deposit to show the lender you are serious with your intentions to purchase the home. It will also help if your agent sends a list of comparable sales in the area that support the price you are offering to pay for the home.
Give the Lender a Deadline
Have your agent make your offer contingent upon the lender's acceptance and give the lender a time frame in which to respond, after which you will be free to cancel. If the lender is under no pressure to make a decision, the paperwork will sit on a desk somewhere and you may never hear back from them.
Some lenders submit short sales to committee, but most can make a decision within two to three weeks. I had one instance where the lender took six weeks to render their decision, only to come back with an offer that was $60,000 more than what my client’s had offered. Needless to say, my clients decided to look elsewhere.
Expect Commission Negotiations
Regardless of the commission the seller has agreed to pay, the lender is actually the entity paying the commission; the reason being the seller is not receiving any money with which to pay a commission. Since the lender is losing money, the lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.
Reserve the Right to Conduct Inspections
Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property "as is," which means no repairs.
It is extremely important that you obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections. Do not waive your right to obtain these inspections and make your offer contingent on approving them.
The most frustrating part of dealing with short sales will be the time frame it takes for the lender to respond to your offer. If you are in a hurry to buy a home, you should shy away from short sales and pursue another avenue to purchase a “bargain” home, such as REO’s or bank-owned properties, homes that have already gone through the foreclosure process.
However, if you are an investor and/or are in no hurry to purchase a home, and you’re willing to play the short sale game, you just may be able to get that oh-so-elusive good deal on a home in today’s real estate market.
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