Short Sales – Myth Busting

4 Common Foreclosure Myths that cost Homeowners a Fortune

Common Foreclosure Myth #1: No matter what I do, I’m going to owe money to someone. On most short sales, the seller is able to walk away owing the bank nothing. Of course, it’s all up to each individual bank, but eight times out of ten, you can walk away owing nothing. A bank loses way less money on a short sale than a normal foreclosure. In return for you helping them out, they will help you out. Here is why there is this big difference between a short sale and a foreclosure.

On a short sale, the utilities are turned on and someone is living in the house. A vacant house is way harder to sell. The buyer knows the home is bank owned and will adjust their offer down because of that. On a bank owned house, the house sits there for 6-9 months empty before it sells. The bank has to pay to keep it up and insure it. They can’t loan that money out and collect interest. Also, there is the liability if some kid goes into the house and gets hurt. Because of that the banks want to do short sales and are very willing to work with you.

 

Myth #2: A Foreclosure will go off my record in 3-5 years. Yes, you might be able to get a loan after 5 years, but here’s the problem. When you walk away, the bank will come back and get a judgment for the money they lose, and also any money they have to spend. They’ll tack on attorney’s fees, late payments, interest, maintenance, lawn mowing costs, realtor fees, locksmith costs, title insurance, and all sorts of other fees. This judgment will stay with you until you pay it off. Let’s say you owe $200,000 on your home and it’s now worth $170,000. According to a study done on this, if you do a short sale, the bank will lose 19%. But, if the bank takes the home back and waits for it to resell, they will lose 41%. That means you’ll owe them $82,000 on average. That is the judgment amount.    

This deficiency converts to a judgment and, depending on your state, judgments last up to 20 years. Most of the time, the bank itself will not come after you. But, the bank will sell the right to collect the money to a third party collection company. That company will then attempt to collect from you.

The worst thing is that this debt purchasing company will be going after you for years. They will do whatever they can to collect what they think is “their money.” Even your current and future employment might be affected because many employers now require credit checks. 

 

Myth #3: Banks and lenders rarely accept short sales. We are able to get short sales accepted most of the time. Here’s why your bank may have already told you they will only take X amount.  But, let’s say someone owed you a lot of money and they wanted to pay you only half of what they owe. What would you say? You’d probably tell them to pay you the full amount, right? But, if the person came to you with cash and told you they just simply could not afford to pay you any more, what would you do? You’d probably accept whatever you could get, right? Well, it’s the same way with a bank.

The banks often tell you they won’t take a short sale. The reason is because they want you to pay them the full amount. Or, they want to get you to agree to pay them monthly for the rest of your life.   

Myth #4: A Short Sale is no less damaging to my credit than a foreclosure. I can tell you one thing. Fannie Mae and Freddie Mac, who hold the loans on about half of the loans in the country don’t think so. They recently changed their requirements. Fannie Mae only requires two years on a short sale before you can get a new loan. If you give the house back to the bank, you have to wait for five years. Several new requirements now apply that can drag this out to 7 years. These companies are the backers of more than half of the loans issued today. This makes foreclosure more damaging than even a bankruptcy, which requires a 4 year wait. 

Feel free to contact me with any questions about what you read here.

Best,

JLC

Short Sales: Fact Vs Fiction – Sell Side

This is the second of my posts regarding short sales.  Here I will cover what one can expect as a seller in a short sale.  If you have questions regarding the buy side of a short sale please refer to my previous post or get in touch with me personally.  If you are unfamiliar with the process of selling a home as a whole, scroll to the top of the page and take a look at my “Preparing Your Home for Sale” page.  I chose to separate this post into the following three sections: Qualities that are similar to a general transaction, qualities that are different, and general facts to know about short sales.   

Similar to a normal transaction: 

1. Banks look at offers much in the same way an individual seller would.   Meaning a cash offer will be most viable, followed by conventional financing, and lastly creative financing or a home sale contingency.
2. The seller is still responsible for making the home presentable and accesible for showings.  Remember that despite the circumstances, our goal is still to generate the highest sale price possible.  This will aid you in getting out of the home by making the short easier for the bank to approve

Different from a normal transaction:

1. Even though you as the seller will negotiate the contract, the bank will make the final decision on acceptance.  It is crucial to have a professional aid you in initial pricing of property as well as negotiating the contract.  The last thing you want is to accept an offer only to have the bank reject it a month or more later.
2. Unlike a general closing, sellers will not receive a check at closing.  Moreover, the difference in loan value and purchase price has been considered income and the distressed seller would be on the hook to pay taxes on that amount.  There are currently plans to do away with this stipulation making the option of a short sale more viable for many borrowers.

Things to know:

1. Banks will take between 75%-90% of fair market value.   Due to a declining market and a lack of recent sales, the  issue in many situations lies in determining that fair market value.
2. There is no iron clad explanation as to exactly what the ramifications of short selling a property are as it may very from lender to lender.  What is clear is that in no case is a foreclosure the best option for a seller, the bank, or our economy.  In some cases, depending on the banks procedure, a short sale can do very little damage to one’s credit.  These are generally cases in which the borrower can prove some sort of hardship ( loss of job, death in the family, etc.)
3. In order for the bank to accept a short sale, the borrower must be able to prove that they can not finiancially fulfill the obligations of their loan.  In order to do so, be prepared to offer extensive financial documentation of your current situation.

Short sales are here to stay for the next few years at least.  My goal is to function as a valuable resource for my clients so please feel free to contact me if you have any questions regarding your personal situation or what you have read here.

Best,

JLC

Short Sales: Fact Vs Fiction – Buy Side

Over the past couple weeks I have heard tons of questions about “Short Sales” and how they work.  With my next couple posts I will provide some clarity as to how they work and what to expect.  This post will cover the buy side of the transaction.  If you are unfamiliar with the process of purchasing a home as a whole, scroll to the top of the page and take a look at my “How to Buy a Home” page.  It will provide you with a basic understanding of the process and make the rest of this post more cogent.

I chose to separate this post into the following three sections: Qualities that are similar to a general transaction, qualities that are different, and general facts for buyers to know about short sales.

 

Similar to a Normal Transaction: 

1. Banks look at offers in much the same way an individual seller would.  Meaning a cash offer will be most viable, followed by conventional financing, and lastly creative financing or a home sale contingency.
2. After negotiating with the seller, a buyer can still expect to have a home inspection and an attorney review period, but after this point the similarities come to an end.

Different from a Normal Transaction:

1. Because the seller is distress it is often difficult to negotiate for repairs.  Not to say it can not be done, but not with the flexibility found in a conventional transaction.  So while you should have a home inspection, in a short sale situation it functions more as due diligence for the buyer before fully committing to the purchase.
2. The Bank is making the final decision on rejection or acceptance, not the seller.  Over the past year banks have been inundated with short sales and currently do not have the capacity to process them efficiently, therefore buyers can expect to wait 45- 90 days to receive final confirmation that the offer has been accepted.  Rejections generally occur in a more timely manner, approximately a month or less.  
3. Closing dates are not set in stone and are often not locked in during the initial negotiation with the seller.  Due to the soft time lines, it takes a buyer with a certain level of flexibility to purchase a short sale.

Things to Know:

1. Banks will take between 75%-90% of fair market value.  Due to a declining market and a lack of recent sales, the  issue in many situations lies in determining that fair market value.  So while a buyer can find a fantastic deal, short sales are not absolute fire sales in which the bank will take pennies on the dollar.
2. Because you are buying from a distressed seller, a buyer should expect to do at least some cosmetic work to bring the home to your standards.  (changing carpet, painting, etc.)
3. As a buyer, of course you want the lowest price possible.  From what I have seen and read, the 75%-90% of market value is accurate as to what banks will accept.  The best way to move closer to the low end of that spectrum is to make your offer as “clean” as possible.  Clean meaning low on contingencies and repair requests.  Remember, banks look at this much like a normal seller would.  For example take a $100,000 home.  Given the option would you sell to someone with a cash offer of $75,000 who will buy it as is, or the $90,000 buyer who has his own home to sell before closing and wants you to do $5,000 in repairs?

 

Short sales are here to stay for the next few years at least.  My goal is to function as a valuable resource for my clients so please feel free to contact me if you have any questions regarding your personal situation or what you have read here.

Best,

JLC