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What is a Short Sale?
A real estate short sale is when you owe more than your properties current value but you need to sell. In a typical situation, your mortgage lenders would require you to come in with the difference in the amount owed. A real estate short sale is where we negotiate with your lenders to accept a pay-off that is less than you currently owe and you do not have to pay the difference. Typically, lenders won't even consider a short sale if your payments are current. Lenders will be more agreeable in negotiation if your payments are in arrears. Plus, if you have cash assets, the lender might try to tap those accounts.
Can a Short Sale Be Done on Multiple Mortgages?
Absolutely. A mortgage short sale is not restricted to just one mortgage. In fact, most successful mortgage short sale cases are for homes with multiple mortgages on them. After all, most people are upside down on a mortgage because they have more than one mortgage. Don't fret if you have a second mortgage or a third mortgage - a mortgage short sale can still be done. For example, in California, short sale with second mortgage is very common since most residents of California have second and third mortgages. With the California housing market appreciating so much over the past few years, many homeowners are finding themselves upside down on mortgage.
Will the Lender Really Accept the Short Sale and Let My Debt Go?
With a successful short sale, yes. What will happen is that the mortgage company will accept the lower price from the real estate investor and consider the entire mortgage balance settled. However, the homeowner needs to watch out for the cases where the bank will let the real estate investor buy the home for a lower value and then come after the homeowner for the balance of the mortgage. Most real estate investors with etiquette will try every way to have the bank wipe off all the debt and not come after the homeowner. However, there are some banks that won't settle the debt with the real estate investor and will insist on coming after the homeowner. There are also some real estate investors who don't tell the homeowner that they are not off scott free. So, it is up to the homeowner to ensure that before they close on the deal, they have it in writing that the bank will not come after them for the remaining of the loan.
What is a Second Mortgage Short Sale?
A second mortgage short sale is usually even easier to do than a first mortgage short sale. The process of a second mortgage short sale is similar to the first mortgage short sale but simpler. With a good short sale case, the second mortgage short sale is almost always a success.
Common Misconception That Only a First Mortgage Short Sale Can Be Done?
Many people are confused and think that the second mortgage short sale cannot be done. The common misconception that a short sale is only for the first mortgage is a serious one. In order to understand why it is so easy to short sale second mortgage, third mortgage, or even fourth mortgage, you should understand the foreclosure process.
Can the Short Sale of Second Mortgage Be Done?
Absolutely, the short sale of second mortgage is simpler than the short sale of the first mortgage. In some states, second mortgage short sales are more common than others. In California, for example, a California short sale with second mortgage is very common. Sometimes, you will find the third mortgage and even fourth mortgage.
How to Short Sale Second Mortgage?
Once you learn how to short sale the 1st mortgage, the process for second mortgage short sale is similar to the first mortgage short sale. Once you have prepared a mortgage short sale for the first mortgage, you can send the same real estate short sale package to the second mortgage company to short sale the second mortgage. Similarly, you will send the same package to the other mortgage companies to short sale other mortgages.
The only differences between the process of first mortgage short sale and the second mortgage short sale are specific letter to the mortgage companies and the amount of mortgage debt settlement offered.
Why would a Second Mortgage Company Allow a Short Sale?
Most second mortgage companies will allow a short sale because if the first mortgage company forecloses on the homeowner, the second mortgage will be wiped out. That means if the home goes to foreclosure, the second mortgage company will have nothing on the homeowner anymore. So, most second mortgage companies would rather take something now than nothing at the end.
What is Required for a Real Estate Short Sale?
Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps give you a pretty good idea of what to expect.
Call the Lender
You may need to make half a dozen 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 talk with those specific interested parties about your loan. The letter should include the following:
1. Property Address
2. Loan Reference Number
3. Your Name
4. The Date
5. Your Agent's Name and Contact Information.
Hardship Letter
The sadder, the better. 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. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, 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 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 are not in the charity business and 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 lien 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
Sometimes markets decline and property values fall. 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 and solds from the past six months.
HUD-1 Settlement Statement
A lender will generally require a written contract between you and the homeowner. A preliminary HUD-1 settlement statement will reassure the lender that the homeowner isn't receiving any cash from the deal.
The HUD-1 form requires you itemize all charges imposed upon you and the homeowner for the real estate transaction. Essentially, it is a complete list of the incoming and outgoing funds.
The contract should be written so that you pay all costs associated with the deal. And, that the "net cash" to the homeowner is the precise amount of the short pay to the lender.
Purchase Agreement and 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.
Who Can Qualify for a Real Estate Short Sale?
Typically the lenders will only accept a real estate short sale if you are at least one month behind on your mortgage payments, have a ready and willing buyer and you are unable to debt service all of your existing liabilities. Also, if your financial situation has changed and you are currently making less money than before and you have no more savings, you most likely qualify for a short sale. This is the reason why we need the above documents to paint a clear financial picture of your current situation.
The Impact of Short Sales/Foreclosures on Credit Reports
Sellers may wonder whether letting a property go into foreclosure would be easier and smarter than going through a short sale. With a foreclosure, and depending on state laws regarding foreclosure, a seller could stay in the property, essentially rent free, for four months before being forced to evacuate. But that fact alone does not mean a foreclosure is better.
Whereas a short sale involves offering the home for sale, generally listed through MLS. Potential home buyers will make appointments. Potential home buyers will make appointments to view homes, some will make lowball offers, and agents might hold open houses.
How is the Seller's Credit Affected?
Sellers will take a bigger hit on their credit report by going through foreclosure or giving the lender a deed-in-lieu of foreclosure. The points lost on a FICO score are as follows:
Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 250 to 280 points. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 400.
Short Sale
The affect of a short sale on a seller's credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.
Waiting Period Before Buying Another Home
Foreclosure or Deed-in-Lieu of Foreclosure
A seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.
Short Sale
The good news for short sale sellers is the wait is much shorter before buying another home. They can buy again in about 18 months at a good interest rate.
Short Sale/Foreclosure Deficiency Judgments
The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Other states have laws regarding personal guarantees, which could also result in a deficiency judgment if the home owner is personally liable for loan repayment.
The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.
If you're a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit is the main advantage to doing a short sale. But seek legal and tax advice before making that decision.
Which is more profitable: Foreclosures, Short Sales or REOs?
Foreclosures, short sales and REOs remind me of, "Lions and tigers and bears, oh my!" The latter are dangerous animals but different from each other, just as foreclosures and short sales and real-estate-owned (REOs) are distressed sales but different from each other.
However, they are also similar because without knowledge about handling foreclosures, short sales and REOs, you could find yourself in dangerous territory. For example, while all short sales are foreclosures, not all foreclosures are short sales. To further complicate matters, REOs are not short sales either, but some intended short sales can end up as an REO.
What is a Foreclosure Property?
A foreclosure property is a home in foreclosure when a notice of default has been filed in the public records. It means the owner has stopped making mortgage payments and the lender has given notice that unless the payments are brought up to date, it will sell the property to the highest bidder.
Lenders can foreclose for other reasons, but the most common reason lenders file a notice of default is when a borrower is at least two payments in arrears.
If the homeowner does not bring the loan current, the lender will take the property away from the owner. The final step the lender takes after a certain period has passed is to try to auction the property at a public sale.
Not all homes that fall into foreclosure go to public sale because owners have the right to make up back payments to a point; the time varies from state to state.
Real estate investors and home buyers see profit in buying foreclosures because they can often buy the property for the amount owed, picking up the home owner's equity for free.
How California Law Affects Foreclosure/Short Sale
States have varying laws governing foreclosures and some follow California law. To completely understand your rights as a foreclosure buyer, contact a local real estate lawyer. However, realize that in California, a real estate agent cannot represent a buyer who is an investor to purchase a foreclosure property if all of the following four statements are true.
1. The home qualifies as the seller's personal residence.
2. The property is a single family home or 2 to 4 units.
3. A Notice of Default has been filed in the public records against the property.
4. The investor/buyer will not occupy the property.
If any of those four statements are false, an agent in California is allowed to represent buyers, especially if the buyer is going to occupy the home. But to represent an investor, a real estate agent is required to post a bond, and no such bond is available in the state of California. So as a pre-foreclosure investor in California, you are on your own.
Moreover, as an investor, you are required to comply with the Home Equity Sales Act. Among other requirements, sellers who are in foreclosure have the right to rescind a transaction within five days. Investors must give the sellers notice of that right, including a copy of the form that will let sellers cancel.
Failure to comply with the Home Equity Sales Act carries severe penalties, including a provision that gives the seller the right to cancel the sale up to two years after the sale to the investor has closed and get the property back.
As an investor, before you decide to buy a home in foreclosure by making up the back payments to the lender, giving the seller a few dollars and recording a deed, call a real estate lawyer.
What are REOs - Real Estate Owned?
Buying an REO is similar to buying a short sale except the property is already owned by the lender. The property was acquired by the lender through a foreclosure action. Often lenders will sell repossessed homes for less than the past loan balance. Bank-owned properties are called REOs, meaning real estate owned by the lender. Banks end up owning the property when nobody at the public auction bid enough to cover the amount owed against the property.
Before You Buy a Short Sale
Do your research before making an offer to purchase. Your agent can find out who is on 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 determine how much to offer.
If there are two loans, you will probably deal with the second mortgage lender. The first mortgage lenders position is protected by the second lender unless the second lender does not want to foreclose. For example, if a seller owes $160,000 to the first lender and $40,000 to the second lender, you cannot offer $160,000 because it will wipe out the second lender.
Hire an Agent with Short Sale Experience
It's one strike against you if the listing agent has never handled a short sale, but its even worse if your own agent has no experience in that arena. You need an experienced short sale agent.
An agent with experience in short sales will help to expedite your transaction and protect your interests. You don't want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.
How Should You Price a Short Sale?
In general, most short sale experts say to price the property at or near fair market value, although a few will begin with the total payoff amount owed by the seller. How frequently prices are dropped will depend in part on whether the property is in foreclosure. Most banks have a formula for what percentage under market value they will accept, say interviewees. Figures cited vary from 8 percent under to almost 20 percent under.
Most lenders will want to get a broker's price opinion or even an appraisal to see what the property is worth before you and the seller set a list price. One way to help ensure that the bank's estimate of value is realistic is to offer comps of recent sales, both traditional and REO.
How Long Does It Take To Complete A Short Sale?
Although response times vary from lender to lender, it can take two weeks or as long as 60 days to receive an approval of a short sale from a lender. That's why it's critical that buyers and their representative understand and accept that time frame before they make an offer.
An addendum to the California Association of Realtors purchase contract includes a provision allowing either party to cancel a short sale contract within a set period if the seller hasn't gotten the deal approved. Properties with securitized loans (which are the majority these days) may require a longer time to get an approval of a short sale because of the possible need for approval from the entity holding the pool of securities.
Keep in mind that the purchase contract on a short sale property is a legally binding agreement once the earnest money has been deposited. Without language in the contract stating that the lenders must approve the offer and release all liens on the property, the seller may face a legal problem for failing to execute the contract if the short sale is not approved.
Prepare 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. Sellers may also owe taxes on the amount of debt forgiven.
Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property as an REO.
A 2002 study by Craig Focardi of the Tower Group estimated that the entire cost of a foreclosure was $58,759 and took 18 months. Other factors that can influence a bank's decision include the liability risk it assumes by owning the property after foreclosures, the money tied up during the holding period for a foreclosure and REO resale, additional costs associated with an REO such as attorney fees, and the additional reserves it will need if REOs rise in the bank's portfolio.
Submit Documentation & Purchase Offer to Lender
Once the seller has accepted the offer, send it to the lender for approval. You do not have a deal until the lender accepts it. Also, send the lender a copy of your earnest money deposit. Do not be surprised if the lender asks you to increase it.
In addition, the lender will want to see that you have your own loan available and you are pre-approved. Send a pre-approval letter to the lender. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.
Give the Lender a Deadline
Make your offer contingent upon the lender's acceptance. 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 an underling's desk.
Some lenders submit short sales to a committee, but most can make a decision within two to three weeks, providing you have submitted the offer to the individual in decision-making capacity. Get a name and phone number for the appropriate contact at the lender. Don't send an offer blindly to the department.
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 a buyer 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.
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