Having trouble making payments on your house? Are you upside down but really need to sell? Do you wonder what a foreclosure would do to your credit report if you just walked away from the house? These are real questions that I get asked all too often. Many owners are in a dilemma just like that and don't know where to turn. Let me suggest that you give me a call and see if I can help you. But first let me briefly explain what short sales are all about.
A short sale would occur when the sales price of the property is inadequate to pay off the first mortgage, second mortgage or other liens and closing expenses. That is, you are "upside down" on your home. We often hear that terminology as it relates to automobiles, but very seldom when it comes to houses. With the decline in values in so many markets across the country, coupled with the fact that so many people took out loans at 100% of value or even 105% of value, it's pretty easy to see how the error is compounded by the drop in prices in homes.
A bank is not required to do a short sale. It needs to be negotiated. There are certain rules or guidelines that they like to follow. I'll share some of those now. There needs to be a hardship on the seller's part; loss of job, major reduction in income, disability or some other item like that. Generally, the lender is going to want to see that the seller has no other assets that can be used or sold in order to pay off the loan. If you have a high net worth, you're not a good candidate for a short sale. Your Realtor as well as an independent Realtor that the Bank selects, will have to give a substantiated opinion of value that shows the decline in value of the property. The bank will want to see that the home has been properly marketed with a Realtor and that it is indeed currently on the market. Additional documentation that the lender will require after an offer comes in is bank statements, savings account or stock brokerage account statements, copies of pay stubs and tax returns.
When an offer does come in, remember the seller is still the owner of the property and it is the owner who gets to choose which offer he will accept. Since the seller is not going to get any funds at closing the goal is really to get a property sold as quickly as possible and as close to the broker's opinion of price as possible. Occasionally in very hardship situations, the bank will let the seller have about $1000 for "moveout expenses". A short sale can take quite a bit of time to get approved. I recently did a short sale transaction that was 43 days from beginning to end with both a first and second mortgage. That is almost record fast. Generally 60 days to six months is fairly typical. From the buyer side, a very patient buyer is required because there just is no certainty as to a closing date up until about two weeks prior to closing. Many times the buyer will be required to perform their inspections and other due diligence tasks before we even know the bank will accept a short sale. That said, there usually can be some pretty good deals out there in short sales and so to play that game you need to recognize that you do put some money at risk. For the buyer that needs to close fairly quickly but is also looking for a "bargain", then that buyer needs to be looking at homes that have already been through foreclosure and are bank owned. We can help a buyer find those as well.
How does a short sale affect the seller's credit? It'll definitely be a ding on your credit report, but not nearly as bad as a foreclosure. The short sale will show up on the credit report.
If you would like to discuss your situation with me I'd be happy to have a private meeting or telephone consultation to review your particular circumstances. When dealing in a short sale situation, the experience of the listing broker is especially paramount.
Showing posts with label Short sale information. Show all posts
Showing posts with label Short sale information. Show all posts
Saturday, January 16, 2010
Friday, May 22, 2009
Durango Real Estate Short Sale
This five bedroom home located in the Rafter J. Subdivision (less than 10 minutes from town) appraised for over $700,000 not quite two years ago. An extensive addition was put on the home last year with an architect designed master suite, office and more being added. Sitting on over 3 acres of land, there is plenty of room to play; plus the new Lake Nighthorse...currently being filled...will be less than five minutes away. With five bedrooms, there is plenty of room for visiting friends or a large family. There is even a pad with RV hookup as well. Since this is a short sale, the sellers are anxious to receive any offer so that we can get the negotiations started with the bank. Asking price is $495,000.
Friday, May 08, 2009
Understanding Short Sales
A short sale is a real estate transaction where the lender agrees to accept less money than what they are owed. Typically we call this situation being “upside down" in your home… that is, you owe more than the property is worth. This situation can happen for a number of reasons. It can be caused by a decline in the value of the property, which we are seeing more and more of lately. It can also be caused when an owner takes out a second mortgage or a line of credit using the house as collateral where by the lender loaned up to 105% of the value of the property. Today that would be very difficult to do, but three, four, or five years ago, that was a very common practice. while the Durango real estate market has not been hit like other areas, we have seen an increase in the number of short sales for Durango real estate.
Why would a lender be willing to accept less money than what they are owed? That is a great question. There are two options for a lender in this situation. They can consider a short sale and accept their losses, or they can go through the foreclosure process which increases their expenses and usually makes their losses even greater. The foreclosure process in the state of Colorado will generally take nine months to a year. A short sale, on the other hand, should be just a matter of months to complete. Notice that I said should... some lenders still drag their feet and extend this timeframe. So the bottom line is this: banks will consider a short sale because it helps their bottom line.
How does a short sale situation affect the sale of a piece of real estate? Every lender has different rules when it comes to short sales. There are, however, some fairly standard policies that are followed by all of the lenders. (1) The seller will have to prepare a hardship letter discussing their financial situation and why they are unable to pay the loan off in full. (2) They will need copies of all bank statements and stock account statements. (3) They will need a financial statement showing a list of all assets and liabilities as well as a listing of the monthly expenses. (4) They need copies of the last several months pay stubs. (5) A copy of the listing agreement. (6) A letter authorizing the Realtor access to the lender in order to facilitate the transaction. As a general rule, the lender will not respond to a request for a short sale without a bona fide fully executed purchase agreement. Also any transaction will need to be done at arm's length”… that is, the sale cannot be to anyone that the seller has a close personal or business relationship with including family, friends or neighbors.
How does the process work? Buyer and seller come to terms on an acceptable sales price. The contract must contain a provision providing for lender approval of the short sale. That process can take anywhere from three weeks to three months, with most being in the 60 – 90 day range. If other offers come in during that time, the lender can choose to approve any of those and not the first offer. Once we have lender approval for the short sale contract, closing is generally within three weeks. Even though a buyer does not really know if they will be successful in being approved by the short sale lender, the buyer will still need to invest monies in having the inspections done, appraisal for their lender, title work review and the other normal due diligence expenses. Consequently, there is a definite risk in trying to buy a short sale property, it just has to be weighed against the possible gain. The positives are that you could buy a house in a very good price. The negatives are if you need a quick closing, forget it. And you risk losing due diligence expenses in the event that your offer is not the one chosen by the lender. In a short sale, except in a very few instances, the seller is not allowed to walk away with any money.
If I am a seller, how does a short sale affect my credit compared to a foreclosure? Let me say this: either one of these scenarios will affect your credit report and your credit score. There are no published rules from the credit bureaus as to how these two items would be handled. However, Fannie Mae guidelines to lenders give an idea how they will be treated. I spoke with Tim Burrell, a fellow Realtor, CyberStar and real estate attorney who operates a short sale website called http://shortsalesr.us Tim indicated that for a short sale, if the person showed a good credit history afterwards for a period of 2 to 4 years, Fannie Mae would consider allowing a loan to be underwritten. A foreclosure, on the other hand, carries a longer-lasting effect on your ability to borrow. While in each instance the derogatory will stay on your credit report for the full seven years, the effect of the foreclosure, according to Fannie Mae guidelines, is still looked at as a fatal flaw until after your five, and that assumes that you've had good credit history since the foreclosure.
What liability does the seller have for the monies that were not paid to the lender? First off, you should consult with a CPA for advice on this question. That said I'll try and explain some of the facts as I understand them. There are different scenarios depending on if secondary financing was involved, if the money was used for home improvement vs buying a jet ski, was the property a primary residence and who services the loan. There are no, “one answer fits all” situations. Colorado is called a deficiency state. That means that the seller could be responsible for any amount less than the full amount owed. That is, the lender could go into court and try to obtain a judgment against the seller for the difference. The other item to consider is that the lender may 1099-C the seller for the amount of the shortage so that the seller would then have to pay income tax on that forgiven amount as if it were income. This aspect may be affected by The Mortgage Forgiveness Act of 2007. Here is a link to that for you to review. Click Here
In summary, short sales are clearly a complex issue. Whether you are a seller and a short sale situation or a buyer considering acquiring a property that has to go through a short sale is clear you'll need professional assistance and counsel in order to get through that process. All of us at Team Lorenz would be happy to give you that help, just give us a call.
Why would a lender be willing to accept less money than what they are owed? That is a great question. There are two options for a lender in this situation. They can consider a short sale and accept their losses, or they can go through the foreclosure process which increases their expenses and usually makes their losses even greater. The foreclosure process in the state of Colorado will generally take nine months to a year. A short sale, on the other hand, should be just a matter of months to complete. Notice that I said should... some lenders still drag their feet and extend this timeframe. So the bottom line is this: banks will consider a short sale because it helps their bottom line.
How does a short sale situation affect the sale of a piece of real estate? Every lender has different rules when it comes to short sales. There are, however, some fairly standard policies that are followed by all of the lenders. (1) The seller will have to prepare a hardship letter discussing their financial situation and why they are unable to pay the loan off in full. (2) They will need copies of all bank statements and stock account statements. (3) They will need a financial statement showing a list of all assets and liabilities as well as a listing of the monthly expenses. (4) They need copies of the last several months pay stubs. (5) A copy of the listing agreement. (6) A letter authorizing the Realtor access to the lender in order to facilitate the transaction. As a general rule, the lender will not respond to a request for a short sale without a bona fide fully executed purchase agreement. Also any transaction will need to be done at arm's length”… that is, the sale cannot be to anyone that the seller has a close personal or business relationship with including family, friends or neighbors.
How does the process work? Buyer and seller come to terms on an acceptable sales price. The contract must contain a provision providing for lender approval of the short sale. That process can take anywhere from three weeks to three months, with most being in the 60 – 90 day range. If other offers come in during that time, the lender can choose to approve any of those and not the first offer. Once we have lender approval for the short sale contract, closing is generally within three weeks. Even though a buyer does not really know if they will be successful in being approved by the short sale lender, the buyer will still need to invest monies in having the inspections done, appraisal for their lender, title work review and the other normal due diligence expenses. Consequently, there is a definite risk in trying to buy a short sale property, it just has to be weighed against the possible gain. The positives are that you could buy a house in a very good price. The negatives are if you need a quick closing, forget it. And you risk losing due diligence expenses in the event that your offer is not the one chosen by the lender. In a short sale, except in a very few instances, the seller is not allowed to walk away with any money.
If I am a seller, how does a short sale affect my credit compared to a foreclosure? Let me say this: either one of these scenarios will affect your credit report and your credit score. There are no published rules from the credit bureaus as to how these two items would be handled. However, Fannie Mae guidelines to lenders give an idea how they will be treated. I spoke with Tim Burrell, a fellow Realtor, CyberStar and real estate attorney who operates a short sale website called http://shortsalesr.us Tim indicated that for a short sale, if the person showed a good credit history afterwards for a period of 2 to 4 years, Fannie Mae would consider allowing a loan to be underwritten. A foreclosure, on the other hand, carries a longer-lasting effect on your ability to borrow. While in each instance the derogatory will stay on your credit report for the full seven years, the effect of the foreclosure, according to Fannie Mae guidelines, is still looked at as a fatal flaw until after your five, and that assumes that you've had good credit history since the foreclosure.
What liability does the seller have for the monies that were not paid to the lender? First off, you should consult with a CPA for advice on this question. That said I'll try and explain some of the facts as I understand them. There are different scenarios depending on if secondary financing was involved, if the money was used for home improvement vs buying a jet ski, was the property a primary residence and who services the loan. There are no, “one answer fits all” situations. Colorado is called a deficiency state. That means that the seller could be responsible for any amount less than the full amount owed. That is, the lender could go into court and try to obtain a judgment against the seller for the difference. The other item to consider is that the lender may 1099-C the seller for the amount of the shortage so that the seller would then have to pay income tax on that forgiven amount as if it were income. This aspect may be affected by The Mortgage Forgiveness Act of 2007. Here is a link to that for you to review. Click Here
In summary, short sales are clearly a complex issue. Whether you are a seller and a short sale situation or a buyer considering acquiring a property that has to go through a short sale is clear you'll need professional assistance and counsel in order to get through that process. All of us at Team Lorenz would be happy to give you that help, just give us a call.
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