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ALTERNATIVE – THE SHORT SALE
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mso-fareast-font-family:"Times New Roman"'>If you think you want to pursue a
Short Sale, either as a seller or a buyer, or simply need more information
after reading the article below; please be sure to contact us. We can discuss your specific circu=
mstances
and help you decide the best course of action for your situation.
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mso-fareast-font-family:"Times New Roman"'> (CBS) The Early Show's financial guru, Ray Martin=
,
wraps up his three-part series on home buying and selling in a buyers' mark=
et
with a look at the foreclosure process, and a way homeowners who are behind=
on
their payments can escape some of the worst consequences of foreclosure. Bu=
yers
of their homes can gain advantages over foreclosure, too.
As Foreclosures Rise, More Sellers and Lenders Consider Short-Selling
The headline news recently was that the number of mortgages entering the
foreclosure process rose to a record level. Of the nearly 44 million mortga=
ges,
about 0.58 percent — that's 254,590 — or one out of every 172
loans, are now officially in foreclosure.
Foreclosure occurs when borrowers have not made two or more payments and
lenders respond by filing a legal notice and commencing a legal proceeding =
to
take possession of the home.
The record number of foreclosures does not appear to be evenly spread around
the country. According to the Mortgage Bankers Association, the rate of
mortgages in foreclosure would have fallen if not for big jumps in foreclos=
ures
in local markets of California, Florida, Nevada and Arizona, where investors
who bought on speculation that values would rise are walking away from prop=
erty
that is now worth less than they owe. Also, in regions of Ohio, Michigan and
Indiana, areas marked by large job losses in manufacturing are seeing big
increases in foreclosures.
A Foreclosure Alternative
The prospect of foreclosure is difficult for a homeowner, but there is anot=
her
option.
A little-known alternative, once more commonly used in the real estate down=
turn
of the early '90s, is the "short sale," which works like this: A
homeowner falls behind on his or her mortgage payments, usually due to a job
loss, rising debt payments, or both. Facing a situation in which the home v=
alue
has fallen and cannot be sold for the amount of the mortgage owed, the
homeowner works out a deal with the lender to sell the home for whatever the
market will bear. If the amount of the sale is for less than the amount owe=
d on
the mortgage, the lender gets the proceeds and discharges the remaining deb=
t.
The homeowner will have to leave the house as soon as it is sold.
Alternatively, with a foreclosure, homeowners who can no longer make paymen=
ts
are served with a notice of foreclosure, which essentially informs them to
either bring the loan current or face the home being taken over and sold at=
a
public auction, after which the homeowner will face eviction proceedings. W=
hile
this process is going on, the homeowner can live in the house rent-free for=
up
to a year, depending on that state's foreclosure and eviction laws. But this
fact alone does not mean the foreclosure is better; in fact, it may be wors=
e.
Lose the House, but Not Your Credit
According to sources in the mortgage industry, p=
eople
who agree to a short sale with the lender do far less damage to their credit
rating than those who go through foreclosure.
While in both cases, short sale and foreclosure,=
the
delinquent mortgage will negatively affect their credit rating, at least sh=
ort
sellers avoid having a "debt discharged due to foreclosure" on th=
eir
credit reports. Mortgage and credit experts say that, after bankruptcy, hav=
ing
a foreclosure on your credit report is the worst result and will reduce your
credit score by over 250 points. You could also have to wait up to three ye=
ars
to qualify for a mortgage at a reasonable rate.
Short sales show up on a credit report as a "pre-foreclosure in
redemption" status and can result in a credit score reduction of 100
points or less. After the sale, the mortgage may show up as
"discharged." People who successfully complete a short sale may a=
lso
qualify for a mortgage at a reasonable interest rate in as little as 18 mon=
ths.
So, if buying a home is a future goal, then a short sale is the better opti=
on
for many.
Homeowners cannot simply decide that they want to unload a home with a short
sale; the lender must agree to it. The key to getting a lender to go along =
is
to demonstrate two things: that you have no other financial resources to pay
the mortgage, and that the sale price the buyer is willing to pay is the fa=
ir
price the market will bear. If a lender believes it can get more for the ho=
use
by taking possession of it and selling it themselves, then they will not go
along with a short sale.
To begin the process of a short sale, you first need to call the lender and
speak directly with the person in the loan workout or short sale department=
. At
GMAC ResCap, a large residential mortgage lende=
r,
there is a "foreclosure prevention department" with people traine=
d to
work with homeowners in exactly this situation. Their motivation is summed =
up
by Steve Nelson at that company: "We pretty much know what our loss is
going to be if we foreclose. If a short-seller results in a payoff that's
better than that number, we're talking all day long with people who want to=
put
a short sale together." Some lenders report a three- to four-times ris=
e in
the number of short sales over the past year.
People who want to go this route should contact a local real estate firm and
ask to work with a real estate agent who has actual experience with short
sales. These specially trained agents will know the process and deliver the
documentation that the lender requires to authorize the short sale. The age=
nt
can also find a buyer that is qualified to complete the transaction.
If all goes as planned, the lender will receive all of the proceeds, typica=
lly
not enough to pay off the loan. The remaining balance of the loan is
discharged. But a homeowner agreeing to a short sale should also get legal
advice to protect his or herself from future claims of the lender. In some
states, only purchase mortgages are fully discharged. For all other types of
debt (equity loans, refinancing, etc), the homeowner can be held personally
liable for repayment in the future. For this reason, a lawyer's advice will
include getting the lender to agree to fully discharge all mortgage debt
involved in the short sale.
Buying a Short Sale Home
Buyers who can find a short-sale can get a good deal. The
advantages of buying a property through a short sale include buying at a
discounted price and buying a house where the sellers are still motivated to
sell the home and may take care of it until it is sold.
Some buyers think they can get a better deal by waiting to buy a house when=
it
goes into foreclosure, but buying a house through foreclosure is risky busi=
ness
and not for first-time buyers or inexperienced real estate investors. You
should get advice from an experienced professional. Hire a lawyer to help y=
ou
with the eviction process if the home is occupied. Sometimes, tenants who a=
re
sued for eviction can retaliate. When sellers realize they will lose their =
home
to foreclosure, they often stop caring for it. Many states require buyers to
make certain disclosures to the owners, and failure to do so on the proper
forms and in the required timeframes can result in fines, lawsuits, and even
cancellation of the sale and loss of your money.
It's typically advised to work with a realtor with experience in short sale=
s,
because they can help you research the market to find the properties where
foreclosure notices have been filed as well as how much is owed by the lend=
er.
Typically, this can be done at the county registrar of deeds. They can also
approach these homeowners for you to let them know that they are aware that=
the
foreclosure notice has been filed and that, if the owner is interested, the=
re
is a buyer who could work with them to complete a short sale.
Even if you find a home where the owner is willing to work out a short sale,
don't assume the lender will go along with it. Once the seller agrees to yo=
ur
offer, your agent will need to send it to the lender for approval, and you =
will
not have a deal until the lender OKs it.
Expect a lender to negotiate a higher price; they will want to know they are
getting paid the most they can get for the house. Since the lender is paying
the realtor's commission, it will likely ask your agent to lower his
commission, or you to pay some of it. Typically, the lender will not bear t=
he
cost of items that are typically paid for by sellers, such as inspections, =
and
the lender will agree only to sell the property if the buyer agrees to buy =
it
in "as is" condition. This makes it all the more important for a
buyer of a property through a short sale to make an offer contingent upon
approving a through home inspection.