Allan Kleer

I've been asked so many times over the past several months if there are any advantages to succesfully accomplishing a "Short" sale versus just letting the Foreclosure process run its course. So I've decided to write this post highlighting the major differences between a Short Sale and a Foreclosure, and how will it will probably affect a seller/property owner?

This is an all too common question being asked today for property owners in Greater Miami and Miami Beach, be it an owner of a Miami Beach single family home or condo. In my experience, most owners or property investors who purchased after 2003, and whose total housing expenses exceed 31% of gross income are dealing with this issue. To keep things as simple and brief as possible, I am not going to go into the details of these transactions; rather I'm going to give my way of explaining these terms when someone asks me this very question. At Fortune International, we have an experienced and dedicated team of agents, lawyers, and paralegals, and administrative assistants that have had success negotiating zero deficiency judgements for short sales worth millions of dollars. It's not an easy process, and requires dedicated and persistent follow up with lenders, lawyers, bank negotiators, condo associations, and various other debt holders.

- A short sale is when a homeowner is trying to sell for less than the amount owed on the loan, this type of transaction requires bank approval and there are certain guidelines and pre-requisites a bank will ask for prior to s short sale approval.
- A foreclosure is when the lender takes over the property. A court ordered sale is required prior to the foreclosure and at this sale if no buyer comes forward who is willing to pay the minimum bid for the property, then the lender takes possession and the property is foreclosed on.

The following breakdown is courtesy of Oliver Ruiz, General Manager of Fortune International and President of the Miami Board of Realtors:

Fannie Mae Mortgage Eligibility (Primary Residence):

• homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
• A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after 2 years

Fannie Mae Mortgage Eligibility (Non-Primary Residence):

• An Investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years
• An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after 2 years.

Future Loan with any Mortgage Company:

• On any future loan application, a prospective borrower will have to answer YES to question C in Section VII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof of the last 7 years?” This will affect future rates.
• There is no similar declaration or question regarding a short sale.

Impact to Credit Score:

• Score may be lowered anywhere from 250 to over 300 points due to a foreclosure. Typically will affect score for over 3 years.
• Only late payments on mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points, if all other payments are being made. A short sale’s affect can be 12 to 18 months on an individual credit score.

Credit History:

• Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
• Short sale is not reported on a credit history. There is no specific reporting item for “short sale.”

Security Clearances:

• Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIS, Security, or any other position that requires a security clearance will be revoked and position could be terminated.
• Short Sale, on its own, does not challenge most security clearances.

Current Employment:

• Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure, in some cases, can be grounds for immediate reassignment or termination.
• Short Sale is not reported on a credit report and is, therefore, not a challenge to employment.

Future Employment:

• Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases, will challenge employment.
• Short sale is not reported on a credit report and is therefore not a challenge to employment.

Deficiency Judgment:

• In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment.
• In some successful short sales, it is possible to convince the lender to give up the right pursue deficiency judgment against the homeowner.

Deficiency Judgment (amount):

• In a foreclosure, the home will have to go through an REO process if it does not sell at auction. In most cases, this will result in a lower sales price and longer time to sell in a declining market. This will result in higher possible deficiency judgment
• In a properly managed short sale, the home is sold at a price that should be close to market value and, in almost all cases, will be better than an Foreclosure sale resulting in a lower deficiency.

A few of the properties that we have successfully completed "short" sales:

Orginial Article: The Advantages of a Short Sale vs. Foreclosure for Property Owners

South Beach single family homes (especially waterfront luxury properties) that are truly good deals continue to be in short supply. I'd like to take this opportunity to highlight two recently sold homes in the island communities off South Beach which are indicative of a price bottoming trend:

Di Lido Island Turnkey Endless Water Views

Tropical paradise for that was on the market for sale for just 12 days at the final asking price of $2.9 Million. Master bedroom is surrounded by water and sunlight which opens to pool/deck. Wide bay views at the north tip of Venetian Islands. The oversized living room, completely updated, is very comfortable and sunny.Courtyard/ circular driveway decorated by trimmed landscaping and wrought iron sliding gate. Fabulous private pool overlooking the open bay, dock and other boat equipment.

Key "Market Bottom" indicators:

“For Sale” Price: $2,950,000 (12 days on the market at this reduced price point)
Original List Price : $4,700,000 (July, 2008)
Previous Price Reduction: $3,450,000 (January, 2009)
Bedrooms: 4
Bathrooms: 3
House S.F.: 3,734
Land S.F.: 13,408
Closed Price per S.F.(Land): $194
Closed Price per S.F.(House): $698
Previous Sold Date: 2004 ($3,150,000)
Closed Price: $2,610,000 (Sept 2, 2009)
Discount from Latest Asking Price: 11.5%

Rivo Alto Island Waterfront Charm- Completely Remodeled

Over 100 linear feet on Biscayne Bay, on the preferred southern side of the Venetian Islands. This Mediterranean delight greets with a beautiful courtyard setting reminiscent of a European Villa. Gracious living areas and authentic touches throughout. Upstairs are 3 bedrooms with Water Views in main home. The sale also included a separate two story adjacent guest house.

Key "Market Bottom" indicators:

“For Sale” Price: $2,590,000 (19 days on the market at this ACCURATE price point)
Bedrooms: 4
Bathrooms: 4
House S.F.: 3,894
Land S.F.: 13,382
Closed Price per S.F.(Land): $175
Closed Price per S.F.(House): $740
Previous Sold Date: 1998 ($950,000)
Closed Price: $2,350,000 (Sept 1, 2009)
Discount from Latest Asking Price: 9.2%

Biscayne Island- Incredible Land "Steal"

DOUBLE LOT ON BISCAYNE ISLAND THIS HOME NEEDED TO BE UPDATED. BISCAYNE ISLAND IS ONE OF THE VENETIAN ISLANDS LOCATED ON THE MIAMI SIDE. LOCATED AT THE END OF THE STREET IN A PRIVATE CUL DE SAC SURROUNDED BY MILLION DOLLAR HOMES. THIS ONE SOLD FOR WELL BELOW LAND APPRAISED VALUE. LOCATED JUST MINUTES FROM THE NEW PERFORMING ARTS CENTER, BEACHES, LINCOLN ROAD, OCEAN DRIVE, THE AIRPORT, DOWNTOWN, ENTERTAINMENT, SHOPPING AND MORE.

Key "Market Bottom" indicators:

“For Sale” Price: $700,000 (207 days on the market at this price point)
Original List Price : $1,500,000 (July, 2007)
Bedrooms: 3
Bathrooms: 2
House S.F.: 1,888
Land S.F.: 14,760
Closed Price per S.F.(Land): $38
Closed Price per S.F.(House): $301
Closed Price: $570,000 (July 24, 2009)
Discount from Latest Asking Price: 18.5%

What we're seeing (again) is that Miami Beach waterfront and non-waterfront single family homes that are priced RIGHT have multiple offers and sell relatively quickly.

If you’re a potential buyer interested in purchasing, NOW is the time to pull the trigger if you qualify for a mortgage (count on putting 30% cash down of appraised value) or have the cash to invest in remodeling a home. My advice is that under no circumstances should buyers be seeking to potentially “flip” or plan on making a profit on their property for AT LEAST five years.

Without a doubt it can be said that we are in a buyer's market, but does that mean it is easy to get a great deal when buying properties in Miami Beach? Not so! Unfortunately, there are agents who lack negotiation skills and with sloppy works make it difficult to complete a sales transaction. Also, we've seen many buyers overpay due to poor communication and negotiation skills on the part of their real estate agent. A good listing or buyers agent is well worth their commission, and can save their clients thousands and perhaps even hundreds of thousands of dollars.

Watch other Miami Beach Real Estate Videos by The Kleer Team

Miami Beach waterfront homes and luxury properties are limited in supply, and with most major financial news experts announcing a “housing bottom”, I’d like to take the opportunity to show how two recent sales in Venetian Islands and Biscayne Island of Miami Beach indicate the conclusion.

Turnkey Home in the Venetian Island

This waterfront home in the Venetian Islands has stunning, direct, Downtown Miami and bay views. With 3,586 square foot of property, this home was renovated with 3 bedrooms, a great kitchen, media room and maid’s bedroom/bath. Facing west, with pool, boat dock and 60′ of waterfront.

Key “Market Bottom” indicators:

“For Sale” Price: $3,200,000 (20 days on the market at this reduced price point)
Original List Price : $4,200,000 (May, 2009)
Discount from Latest Asking Price: 12.5%
Previous Price Reduction: $3,400,000 (June, 2009)
Bedrooms: 4
Bathrooms: 5
House S.F.: 3,586
Land S.F.: 10,500
Asking Price per S.F.(Land): $304
Previous Sold Date: 2004 ($2,225,000)
Closed Price: $2,800,000 (August 11, 2009)

Biscayne Island- Wide Bay Fixer Upper

Opportunity to complete the remodeling of this Spectacular Waterfront residence located on the Miami side of the Venetian Island chain. The new owners will enjoy the Panoramic water views of a home located on a 15,000 lot.

Key “Market Bottom” indicators:

“For Sale” Price: $2,137,500 (5 days on the market at this reduced price point)
Closed Price: $2,030,000 (July 16, 2009)
Original List Price : $6,7500,000 (February, 2007)
Previous Price Reduction: $2,500,000 (March, 2009)
Bedrooms: 3
Bathrooms: 4
House S.F.: 4,010
Land S.F.: 15,000
Asking Price per S.F.(Land): $142
Previous Sold Date: 01/2007 ($5,350,000)

Discount from Latest Asking Price: 5%

If you’re a potential seller of waterfront real estate in Miami Beach and cannot hold on to your property because of negative cash flow (probably if your housing expenses total more than 31% of your gross income), the smart approach is to price right. Working with a knowledgeable, honest, and experienced sales agent is the key here, and the price needs to be based on the last three to six months of closed sales. My team and I have experienced that Miami Beach waterfront properties- whether they are single family homes or condos which are priced RIGHT have multiple offers and sell quickly.

If you’re a potential buyer interested in purchasing, NOW is the time to pull the trigger if you qualify for a mortgage (count on putting 30% cash down of appraised value). My advice is that under no circumstances should buyers be seeking to potentially “flip” or plan on making a profit on their property for AT LEAST five years. There are many reasons why we can expect to see an initially FLAT and then GRADUAL price appreciation for Miami Beach’s real estate market for several years. Times have indeed changed, but the opportunity to purchase a discounted PRIME waterfront single family home or condo is now!

Headlines about the overall national real estate market reaching a “housing bottom” are starting to become more common. What does this mean in practical terms if you are potential seller (or buyer)?

The housing market is based on local conditions…and in the Greater Miami and Miami Beach area, it’s no secret that it’s a genuine buyer’s market. Asking prices for class “A” waterfront properties in prime locations are down as much as 50% off the high’s of 2006. Buyers have many choices both for homes and condos, and mortgage rates are near historic lows. Also, due to the large number of construction projects built from 2002-2007, buyers of quality properties today have many options as far as neighborhood, size, amenities, and style.

So…who are the potential buyers for all of those great single family home and condo deals?

As of this writing, July 15, 2009, we are in the midst of one of the most severe economic recessions in a generation. Along with the slow economy, I believe that we have a recipe for long-term price depression (as opposed to continued overall depreciation). During the boom market, real estate prices went up as available inventory decreased and potential buyers increased due to the availability of easy credit. Although the credit markets appear to have stabilized, credit is only available to a select few who qualify based on income, high credit scores, job stability and cash reserves. With the national unemployment rate still rising (soon to reach almost 10%), most families are currently finding their discretionary household budgets shrinking. Consumers who are worried about keeping their jobs, therefore, are not rushing to purchase a property.

Given this national economic situation, most potential real estate purchasers are cautious in taking on any new debt, as they watch the foreclosure crisis continue in the Greater Miami Real Estate market. For example, even the ultra-luxury buildings in South Beach are continuing to see more foreclosure related sales. As condominium and single family homeowners continue to struggle paying debt on properties that are “upside down”, this leads to more properties coming on the market as “short sales”. As “short sales” and bank-owned properties “REO sales” eventually become closed sales at deeply discounted prices, these become the new comparables for “closed sales”.

Any buyer who wants to get financing will also need an appraisal, which are being carefully scrutinized by banks. All major lenders are being careful not to have a repeat of the appraisal abuses that took place during the real estate boom (especially in the Miami market). Therefore, if a property does not appraise for the sales price, the lender will not approve the loan. This creates a significant challenge for future price appreciation, as the new price “standard” usually is strongly influenced by what is being appraised, which are the bargain sales occurring today as Short Sales and REO’s. Approximately 50% of the real estate transactions taking place in Greater Miami and Miami Beach today are “Short Sales” and Bank Owned properties.

In conclusion, we believe that due to the high costs associated with owning real estate in South Florida (mortgage payments, high maintenance fees for condos, property taxes, windstorm insurance rates, etc.) and the relatively limited pool of future buyers, the new “bargain prices” will become the true market values for years to come.

Will housing “turn around”, it depends! Once properties stop depreciating in price, I believe we will see price stabilization for many years to come.