Short Sale vs. Foreclosure

People often ask me if a short sale is really worth the effort.  Well, I’d be the first to admit that short sales can be a real pain for everyone involved…sellers, Realtors, buyers…and because so many fail, people often have a negative view of the short sale process.  But, do you really know the benefits over foreclosure that might make it worth the effort?  Watch this short video and see why short sale if becoming an attractive alternative to foreclosure for many homeowners.

 

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Thanks to my wonderful and talented video producer husband, I’ve just launched the first in a series of short videos designed to help educate consumers on a variety of real estate topics.

The first in the series discusses your 8 options if you can’t pay your mortgage. Would love to hear your comments!

And please don’t hesitate to contact me for a free, confidential consultation. 619-846-9249.

Whether you’re considering a short sale purchase, or the short sale of your own home, understanding the process will relieve some of the stress.  So here is what you can expect in a short sale. 

The first thing to understand about a short sale is that unlike a traditional equity sale there is an all-important 3rd  party that controls the fate of the deal:  And that’s the lender.  In order for a short sale to occur, the lender or lenders must approve the transaction.  This involves 3 items for their consideration:

  1. Can the current owner show sufficient financial hardship to prove that he cannot pay his mortgage?
  2. Is the price offered consistent with comparable sales in the area?  Obviously the bank wants to re-coup as much of their investment as possible.
  3. Will the bank or investor agree to settle for less than the amount owed, or will they choose to foreclose?

Step #1 – Pre-Qualification

Before taking a short sale listing it is the job of the Realtor to understand the financial requirements and pre-qualify the seller.  This involves having the sellers complete a financial worksheet and reviewing their income and assets.  Whether buying or selling, this is a critical step and one reason why working with an agent that is experienced in short sales is important.  If the sellers don’t financially qualify, there is no point going any further. 

Step #2 – It’s all about the Documentation

Once it has been determined that the sellers qualify, the Realtor or qualified short sale negotiator, will contact the seller’s lender and determine the exact requirements for submission as they are all slightly different.  It will also be determined at this point if the lender participates in the government HAFA (Home Affordable Foreclosure Alternatives) program as there may be incentives for both the sellers and the lender, and certain procedures may be streamlined.  In any case, the Realtor will work with the sellers and collect all the necessary documentation.  This will include:

  1. A statement of general information
  2. Financial worksheet
  3. Handwritten letter explaining their hardship
  4. 2 months pay stubs or year-to-date Profit and Loss statement if self-employed
  5. 2 months bank statements
  6. Tax returns for the last 2 years
  7. Most current statements for all retirement accounts or other assets
  8. Authorization form to allow the Realtor or negotiator to speak with the lender.

Step #3  – Selling the Property

The house is listed for sale as a short sale.  Both listing and selling agents must agree to equally split whatever commission the lender decides to pay.  Once an offer is received the Realtor should carefully examine it and make sure that it is an offer the lender is likely to accept; the price should be consistent with comps; the offer must not be contingent on the sale of the buyer’s home; and the buyer must understand that it is unlikely that the lender will pay for any termite work or other repairs.

Step #4 – Submission of the Short Sale Package

The listing Realtor or negotiator submits everything to the lender for approval of the short sale and the listing is noted in the MLS as “Contingent”.  Again, it is important to have an experienced Realtor who makes sure that the submission is not only complete, but that it is packaged neatly and easy to read and understand.

The package goes to a special department at the lender where it is reviewed.  If there is any documentation missing or unclear, they will request additional information. Unfortunately, even this initial review can sometimes take 4 weeks or longer and often paperwork disappears and duplicates must be supplied.

Once this initial review is completed and the package confirmed as complete, a negotiator representing the lender will be assigned.  It is the job of this negotiator to carefully review the file and make a recommendation as to whether it should be approved, or not.  If there are 2 lenders (as in a 1st  and 2nd  mortgage), this entire process must be completed for both lenders. 

Step #5 – Negotiation

During the review and negotiation process, the lender’s negotiator may counter specific items in the offer including the purchase price and the requested commission.  In the case of the second mortgage holder (who stands to lose the most), they may push for a bigger contribution from the 1st  lien holder as in California they can no longer request that the sellers make a financial contribution.  Again, this is where experience counts.  The seller’s Realtor or negotiator should be in communication with the lender’s negotiator several times a week, working to move the deal along and arrive at terms that are favorable to the seller and buyer.  This part of the process can drag on for weeks, or even months, although some lenders have streamlined the process.  Also, keep in mind that many of the 2nd  mortgage holders won’t even begin the review process until the 1st  lien holder has approved the sale.

Step #6 – Approval

If the lender’s negotiator recommends approval, the file goes to upper management or the investor for final approval.  Generally speaking, if the file makes it this far, it is usually approved.  But again, this final leg of the process may take an additional two or more weeks.

And finally, the letter everyone has been waiting for – the approval letter.  Assuming all terms are acceptable to sellers and buyers the sale will now proceed as a “normal” sale.  The approval letter will stipulate a date by which the sale must close or the approval is no longer valid, usually 30 days.  Hopefully the buyer has hung-in during the approval process, and at this point the clock starts ticking for buyer inspections and contingency removals.

Navigating a short sale as either a buyer or seller can be overwhelming, and some of the items noted above may vary depending on the state you live in.  In any case, making sure you’re working with an experienced short sale Realtor is the best way to protect your interests. 

 

In the world of real estate, being an effective representative for your client means staying on top of sales numbers and making sure that you have a clear picture of the market place.  So I spent some time today researching short sale numbers in San Diego County and found two interesting statistics: 

  1. There has been little change in the number of short sales that have closed escrow this year as compared to the same period last year.

                                      Detached Homes                Attached Homes

            2011                2172                                        1508

            2010                2074                                        1578

  1. The number of short sale listings that did NOT sell in the same period is much higher than I believe most people would expect. 

                                     Detached Homes                 Attached Homes

            2011                2371                                        1462

            2010                1769                                        1227

This means that roughly half of all short sale listings this year did not become successful sales transactions.  So what happened to these homes and their owners?  We can hope that some of them received permanent loan modifications or in some manner managed to reinstate their loans and keep their homes.  But it is likely that the majority became foreclosure statistics.

And why does the short sale listing failure rate seem to have increased this year over last?  Is it just because there were more attempted?  Are the bank requirements becoming more stringent?  Are there more inexperienced agents trying to handle the negotiations?

The answer is probably, “All of the above.”  But whatever the reason, don’t let your short sale become one of the failed statistics.  Make sure that you work with an experienced short sale Realtor who will pre-qualify you and your home and knowledgably guide your negotiations to a successful conclusion.

 

A recent study by analytics company CoreLogic reported that nearly 25% of all mortgage borrowers owe more than their home is worth.  The aggregate amount of negative equity in the U.S. was a whopping $750 billion at the end of last year.   This lost equity prevents homeowners from refinancing or moving, and according to the report, is the “dominant factor” driving the real estate market.

If you’re among the millions who are paying each month for negative equity, you probably have some questions about your options.  To help address this issue, I’m offering a FREE workshop here in San Diego covering the following:

  • Should I wait for home values to increase?  What is the future of San Diego real estate?
  • What about a loan modification?  What programs are available, how do I qualify, and how many loan modifications are actually approved?
  • If I can’t afford my payments, what are my options?
  • What is involved in the foreclosure process?  How long can I stay in my home? How will it affect my credit?
  • Will filing Bankruptcy save my home?
  • What is a strategic default?  What are the risks?
  • What is a Deed in Lieu of Foreclosure?
  • Is a short sale better than foreclosure?  What is the process? What is a HAFA short sale?
  • What about deficiency judgments and 1099s?  When can I qualify to buy again?

Saturday, June 25th  10:00 – 11:30 a.m. 

San Diego County Library, 4S Ranch

10433 Reserve Dr, San Diego, CA 92127

There is no fee or obligation for attendance, but space is limited.  Advance registration is required.  Homeowners will receive comprehensive workshop materials.

Call 1-888-464-1820 x104 to Register Today

As mentioned previously, I’m not an accountant or lawyer and you should always consult the appropriate professional before making any major decision about your home.

 

Everyday I wake up, turn on my computer and read all the real estate news.  But pretty soon I’m scratching my head, wondering whether or not anyone really has a clue about what’s going on.  One story says values have double-dipped at a new low, another says they’re on the rise.  Some “experts” insist that reducing unemployment will drive the real estate recovery, while others have the statistics to “prove” that a stronger real estate market will be what heals the national economy.  No wonder the real estate market is stagnant – everyone is paralyzed by uncertainty!

As noted previously, I have no crystal ball.  Nor do I have a doctorate in economics.  However, I do know one thing that will help heal both the real estate market and the overall economy:   Would-be buyers and defaulting owners – take action now!  

If you are thinking about buying a property, quit thinking and start doing!  This is a fabulous buyer’s market and both prices and interest rates are at incredible lows.  If you’re worried that you won’t get the absolute lowest price because values might continue to drop, you’re probably wrong.  Most experts believe that we’ll see some slight ups and downs in value over the next 2 years, but it will be more of a bumpy road versus a roller coaster dive.   If you wait another year to buy, you’ll lose 12 months of mortgage interest deduction, and the enjoyment of owning your own home or investment property.

On the other hand, if you’re unable to continue to make your mortgage payments it’s definitely time to take action.  You probably won’t win the lottery, so call your bank and try to get a loan modification.  If that doesn’t work, consider a short sale.  Avoiding a foreclosure through short sale is generally not only better for the seller, but it will help the real estate market and economy.  Banks are choking on foreclosure inventory, and as those homes are released into the sales system they are often neglected and tend to lower home values.  Reducing the number of new foreclosures is key to recovery for everyone.

So if you’re still unsure and have questions about buying or selling, just give me a call.  I’m ready when you are to help turn this market around!

The short answer is “No” and “Maybe”.  When faced with the prospect of losing their home to foreclosure, many people are willing to try most anything to halt the process and save their home.  Bankruptcy however, is probably not the answer.

Let me first say that I’m not an attorney, and do not intend this as legal advice.  If you are considering bankruptcy, please consult an attorney before taking any action.

Personal bankruptcy is generally filed under Chapter 7 or Chapter 13.  Under Chapter 7 most of your unsecured debt (such as credit card debt) is permanently discharged, while Chapter 13 allows you to reorganize your debt with your creditors and develop a plan to pay-off your debts over a specific period of time.  If you qualify and file personal bankruptcy under either Chapter 7 or 13, an automatic stay is put on all your creditors, including a lender that might be pursuing foreclosure.   However, this is only a temporary halt to the foreclosure process.

As mentioned above, filing Chapter 7 does not discharge your secured debts.  A mortgage is a secured debt and the collateral is your home.  If you do not pay, your lender has the right to take back the security you offered in exchange for the money advanced as a mortgage.  So filing a Chapter 7 will not save your home from foreclosure.  At any time before your unsecured debts are discharged, the court can allow your lender’s request for “relief from the automatic stay” and the foreclosure can proceed.  After discharge, the foreclosing lender is free to continue the process.

Filing Chapter 13 however may allow you to save your home from foreclosure.  In a Chapter 13 bankruptcy you are allowed to make arrangements with your creditors for repayment of debts owed, including your mortgage.  However, this is generally allowed by the courts only when you have a stable source of income that will allow you to make all payments as agreed for the entire repayment period.  There are many factors that determine if filing for protection under Chapter 13 will allow you to keep your home. The only way you will know if this will work in your particular situation is to consult an attorney.

It is also important to note that a bankruptcy will remain on your credit report for 10 years after date of filing. If this doesn’t seem like a viable solution, please read more about other options to avoid foreclosure.