Tony's Big Bear REO Blog

Are You Considering a Short Sale?

Short Sale is a hot buzz phrase in today’s Real Estate Market. There are sellers who decide that their home won’t sell at the price they had imagined.  They often start to wonder if they should do a Short Sale. A short sale doesn't always solve problems, but it most assuredly can create problems. Short sales are not the "saving grace" some home sellers would like to believe.

What is a Short Sale?

A short sale happens when the lender is shorted on a mortgage, meaning the lender accepts less than the total amount that is due. A perfect example would be If your mortgage is $100,000, but your home is worth, say, $75,000, you are $25,000 short, not including closing costs such as real estate commissions, recording fees or title and escrow charges.

More and more, we are seeing a lender willing to work with a property owner on a short sale in an effort to avoid going through the cost of a foreclosure.  The lender will approve a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.

Here are sample steps of a short sale:

· Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.

· The agent finds a buyer who makes an offer for less than the amount of the mortgage.

· Seller accepts the offer

· Seller's lender accepts the buyer's purchase offer.

· Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.

In fairy-tale land, everybody lives happily ever after. Except the seller. There are consequences.

Qualifications for a Short Sale

There is more to it that just deciding that you are going to sell your home as a short sale.  You need to consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for a short sale.

 

 

The Home's Market Value Has Dropped.

You must have documented comparable sales that show a substantiate decrease in the value of the home. 

The Mortgage is in or Near Default Status.

It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.   While it is true that you don’t have to be in default to sell your home as a short sale, I have found that the banks are much more eager to work with me when my client is behind in his or her payments.

The Seller Has Fallen on Hard Times.

This part is very important.  In order to qualify for a short sale, there must be a true hardship if you were to continue to keep the property.  The seller must submit a letter of hardship that explains why the seller cannot pay the difference due upon sale, including why the seller has or will stop making the monthly payments.

Here are a few examples that do NOT constitute a hardship are:

1.   Bad purchase decisions. Blowing your paycheck on a home theater system with surround sound does not qualify as a hardship.

2.   Unhappy with the neighbors. Even if every home on your block has turned into a marijuana farm, that will not qualify as a hardship.

3.   Buying another home. The lender will not care if you have decided the home is no longer suitable for you or your family.

4.   Pregnancy. Increasing the size of your family or starting a family is not considered a hardship.

5.   Moving into an apartment. If you decide to move out of your home, that is a lifestyle decision and not a very good reason to abandon your home.

Below are just a few examples of a true hardship:

6.   Unemployment

7.   Divorce

8.   Medical emergency / sudden illness

9.   Bankruptcy

10.     Death

 

The Seller Has No Assets

The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.

For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.

The seller can’t profit when he sells his home as a short sale.

Short Sale Consequences

A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. Therefore, pricing the property is very important at this point.  Even if you meet all the other criteria, yet you don’t price the property right, it is possible that no one will buy the short sale.  Pricing is very important but you must be able to support the price.  The lender must accept the buyer's offer.  If the lender doesn’t accept the short sale, then the deal will not take place.

· Tax Consequences

If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007

You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences and whether you can afford to pay those taxes, if any.

· Blemished Credit Report

A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed.  Short Sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction. Experts say the drop in your FICO score is identical to a foreclosure reporting.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.

 

What happens after you're told that the bank has accepted your offer on a Big Bear cabin?

You come to Big Bear to buy a vacation home and take advantage of some of the great deals being offered on distressed properties.  The banks are offering some great deals on their REO listings and buyers are buying them as quickly as they are listed.  As a listing agent for the banks, it is not surprising to get multiple offers on the bank listings within the first 24 to 48 hours.

Let’s take a look at what happens once your Realtor tells you that you’re offer is being accepted by the bank.

 No matter how good of an offer you and your Realtor write, the bank is going to send you an addendum making changes to the original purchase contract.  This normally takes a few days to get once the bank has said that they are going to accept your offer.  This addendum comes over unsigned by the bank and you, the buyer are asked to sign it and return it to the Realtor as soon as possible.  Now that the listing agent has the original offer and the signed addendum, it is returned to the bank for the final signatures. 

How long does it take for the bank to send the signed documents back?

This is a good question and there is no set time frame.  Every deal is different and so are the banks.  Some banks have a supervisor there on site that is ready to sign off on the deal and get it returned within a day or two.  Other properties are owned by Fannie Mae and they can sometimes take a lot longer to get back.  The reason the Fannie Mae properties tend to take a lot longer to get back is because they send the paperwork out to the investor for signatures.  I’ve seen Fannie Mae listing paperwork get back in as little as 72 hours.  I’ve also seen one Fannie Mae deals take six weeks to get the paperwork back. 

How does the delay in this paperwork affect my time frames agreed to in the addendum?

While you have agreed to close dates and inspection time frames in your deal with the bank, the time frames don’t start until “Date of Acceptance”.  Date of acceptance is defined as the day that the bank signs off on the paperwork and returns it to the Realtor.  If the delay in the paperwork becomes a problem with the previously agreed upon time frames, extensions can be asked for and they are normally granted.

In closing, if you are buying a bank owned home in Big Bear, or anywhere else for that matter, the bank is in the driver’s seat.  You have two options.  You can work through the process, realizing that at times, it may be a bit difficult.  The other option is to buy a home that is not owned by the bank.