Sometimes an investor faces changes in circumstances the make it difficult to continue paying mortgage payments on tenant-occupied rental property. Diverting the income stream from the tenants to other purposes for even a short time often has the effect of triggering potential foreclosure.
If the difficulty in making the payments stems from the tenants not paying timely then eviction and replacement with more dependable tenants is, of course, in order. Assuming this is not the case the question arises as to whether or not it might be possible to avert credit damage due to foreclosure by attempting a short sale with the tenants in the property.
Selling a tenant-occupied property is challenging unless the tenants are already planning on moving, happy to be moving, and cooperative. If the tenants don't want to move they are unlikely to cooperate with access for showings and having the house show well (who can blame them?). The sooner it sells the sooner they have to move!
Negotiating a successful short sale transaction will require showings to multiple buyers to generate an offer, then further access for one or more broker price opinions or appraisals for the seller's lienholders, then further access for the buyer's home inspections, termite inspection, HOA/Condo association inspection, and appraisor.
Due to changes in US law effective in mid-2009 tenants not related to the seller, in possession of a valid lease at market rental rates, are entitled to continue to occupy through the end of the lease if the property is foreclosed. The only exception is if the foreclosing bank sells the property to an owner who wishes to occupy themselves and even then the new owner has to give the tenants 90 days notice! So, the law actually is on the side of the tenants in the event of foreclosure. In addition a foreclosing bank may offer the current tenants a significant "Cash For Keys" incentive to move before the end of their lease. Tenants have often heard of these payments and will often actually prefer foreclosure so they can get their hands on this extra cash.
Due to these considerations, attempting short sale of an investment property occupied by tenants is unlikely to succeed.
(As always the key to success in any potential real estate transaction is working with an experienced local team of agents who have handled situations like yours before. Deanna & Jim's GOLD Team has handled both buyer and seller sides of many, many short sales, over 150 bank-owned sales, and over 350 total transactions in Northern Virginia area centered on Manassas and Prince William County in the last 8 years.)
Homeowners sometimes fall behind in their mortgage payments due to events beyond their control. When circumstances permit the best thing to do may be to work out a plan with the loan servicers to restore the account to current status over a period of time. When this workout approach fails the next best solution may be to ask the first loan servicer to consider a loan modification under the US Treasury's Home Affordable Modification Program (HAMP).
Some homeowners may succeed with a HAMP modification, some may fail to qualify and some may qualify but become delinquent again. More positive alternatives than foreclosure do remain for these homeowners using either the HAMP Home Affordable Forecloseure Avoidance (HAFA) program or a similar pre-negotiatied short sale program offered by the first loan servicer.
A short sale involves listing and selling the home for market value with the homeowner moving to new (usually rented) quarters and clearing nothing on the sale. One or more of the loan servicers ends up accepting a short payoff, hence the term "short sale."
With a traditional short sale the homeowner lists the home for sale, gets an offer and then petitions the loan servicers for approval of the short sale. After going through the servicers queued backlog of requests the proposal is evaluated by the lenders ordering an appraisal and then evaluating the proposed sales contract in light of the newly obtained appraised value. Delays in processing may last from two to eight months. During this time the buyer who made the offer on the home is very likely to give up waiting and go buy something else. Furthermore the real estate agent listing the house is forced to guess the probable appraised value of the home months in advance.
HAFA and other pre-negotiated short sale programs change around the order of the process to provide more visible progress and more predictable outcomes for all parties. Once the homeowner or lender concludes that a short sale is necessary the servicer obtains an appraisal and then determines an acceptable short payoff price based on the appraised market value and conversations with junior lenders and the mortgage insurer, if any. Then the listing agent is given a pre-approved list price, the house is put on the market as an APPROVED SHORT SALE, a buyer makes and offer to purchase and the transaction proceeds to closing much like a bank-owned or normal sale.
From the point of view of a buyer or a buyer's agent a pre-approved short sale transaction has similar predictability and certainty to a normal sale or a bank-owned sale. The long, unpredictable, frustrating delay associated with normal short sales does not exist because the loss mitigation steps have already been done. The long, unpredictable delays involved in normal short sales may lead to the property having to be under contract two or three times before the process is completed or fails. The shorter, predictable delays for the pre-negotiated short sales usually lead to success on the first time.
The key to success in any short sale purchase or sale is working with an experienced team of real estate agents. Deanna & Jim's GOLD Team has handled successful short sales for sellers and buyers (and both) for many years, as well as over 150 bank-owned sales and many normal sales in Northern Virginia.
Homeowners sometimes find it difficult to keep up with their mortgage payments due to circumstances beyond their control. The smartest thing for an employed payment challenged homeowner to do is to either cure their delinquency by becoming current or apply to their first mortgage loan servicer for a loan modification under the terms of the US Treasury's Home Affordable Modification Program (HAMP).
Unemployed homeowners, those who do not qualify for HAMP, or those who receive a HAMP modification and again fall behind may need to consider a short sale under the related Home Affordable Foreclosure Avoidance program. Short sales avoid the stigma and credit score negative impact of a full foreclosure. Short sales do require the homeowner to move to new quarters and also do return the homeowner nothing for their investment in the home to date.
Short sales have a reputation as being problematic, frustrating and difficult with little guarantee of success. The US Treasury's new HAFA short sale program systematically streamlines and standardizes the short sale process with the goal of making the process as pleasant and predictable as possible.
The key to success for any homeowner considering a short sale is to work with a team of Realtors experienced in the ins and outs of successful short sales, with significant experience selling distressed properties, and with a combination of extensive formal training and deep transaction experience.
(Deanna & Jim's GOLD Team has handled many successful short sales - on buyer, seller and both sides of the transactions, has sold over 150 bank-owned properties, has 3 master's degrees including an MBA, is led by an associate broker, and has handled over 350 Northern Virginia transactions in the last 8 years.)
10/23/09: Washington - The US Treasury has released further details of their Home Affordable Foreclosure Avoidance (HAFA) program options to the existing Home Affordable Modification Program (HAMP). HAMP and HAFA work together to provide alternatives for homeowners challenged to keep up with the mortgage payments on their primary residence home.
As the details below from Treasury's web site at www.treasury.gov attest, payment challenged homeowners will first be offered HAMP loan modifications by their mortgage servicers. If they are either not qualified for the loan modifications or cannot stay current on their modified loan payments the HAFA alternative will require their servicers to offer them a pre-approved short sale alternative. If the short sale fails a Deed In Lieu of foreclosure (DIL) alternative may be offered. If all HAMP, HAFA short sale, and HAFA DIL all fail then and only then will foreclosure complete.
How The Home Affordable Short Sale/DIL Program Works:•
Borrower Eligibility. Borrowers will be eligible for the Foreclosure Alternative Program if they meet the minimum eligibility criteria for a Home Affordable Modification but did not qualify for a modification or were unable to sustain payments under a trial period plan or a modification. Prior to proceeding to foreclosure, participating servicers must evaluate each eligible borrower to determine if a short sale is appropriate. Considerations in the determination include property condition and value, average marketing time in the community where the property is located, the condition of the title including the presence of junior liens and a determination that the net sales proceeds are expected to exceed the investor's recovery through foreclosure Incentive Payments.
Servicers may receive incentive compensation of up to $1,000 for successful completion of a short sale or DIL.
Borrowers may receive incentive compensation of up to $1,500 to assist with relocation expenses.
Treasury will also share the cost of paying junior lien holders to release their claims, matching $1 for every $2 paid by the investors, up to a total contribution of $1,000 by Treasury.
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Standardized Documentation: The program will publish streamlined and standardized documentation, including a Short Sale Agreement and an Offer Acceptance Letter. These documents will outline specific marketing terms, describe the rights and responsibilities of all parties and establish clear timeframes for performance. Creating one standard set of documents that the industry can use is expected to minimize the complexity of these transactions and significantly increase use of the short sale option.
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Property Valuation: The servicer will independently establish both property value and the minimum acceptable net return in accordance with investor guidance and will provide instruction to the borrower regarding the list price and any permissible price reductions. The price may be determined based on either: (1) an appraisal performed in accordance with USPAP and/or (2) one or more Broker Price Opinions either of which must be dated within 120 days of the Short Sale Agreement.
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Minimum and Maximum Duration: Under the program, servicers will allow borrowers at least 90 days to market and sell the property, with possibly more time based on local market conditions. The property must be listed with a licensed realtor experienced in selling properties in the neighborhood. Marketing of the property may run concurrently with the foreclosure process, however no foreclosure sale can take place during the marketing period specified in the Short Sale Agreement as long as the borrower is acting in good faith to sell the property. There will be a maximum marketing period of 1 year for the property, provided any longer period not otherwise delay foreclosure sale, to ensure diligence by servicers and borrowers in moving as quickly as possible to complete the short sale and deed-in-lieu process.
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Selling Commissions and Fees: Reasonable and customary real estate commissions and selling costs that may be deducted from the sales price will be specified in the Short Sale Agreement. The Servicer will agree not to negotiate a lower sales commission after an offer has been received.
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Fees and Charges: Servicers may not charge borrowers fees for participation in the Foreclosure Alternative Program.
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Property Eligibility: Any junior liens, mortgages or other debts against the property must be cleared for the property to be sold as a short sale or deeded to the servicer. The servicer can proceed with a short sale or deed-in-lieu if there is a reasonable belief that all liens on the property can be cleared.
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Program Expiration: Eligible borrowers will be accepted until December 31, 2012. Program payments will be made upon successful completion of a short sale or DIL.
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Deed-in-Lieu: At the servicer’s option, the Short Sale Agreement may include a condition that the borrower agrees to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time specified in the Agreement or any extension thereof. In this case the borrower would have 30 days to vacate the property and would be entitled to $1,500 to assist with relocation expenses, in addition to any other funds the servicer may provide to the borrower.
Many US homeowners have discovered that - sometimes due to circumstances beyond their control - their home mortgage payments have escalated beyond their current ability to keep paying them. In response to these very widespread situations the US Treasure is encouraging all major loan servicers to offer loan modifcations to homeowners to help them avoid foreclosure. The most recent incarnation of the Treasure load mod program is the Homd Affordable Modification Program (HAMP).
Well intended as HAMP was it was initially of little use to those homeowners with home equity lines of credit (HELOCs) or other second mortgages on their home. Treasure has now announced a Second Modification Program (2MP) that will assist in these circumstances.
Sometimes loan modifications are just not enough and the homeowner will need to move anyway. In these circumstances using a Short Sale or a Deed in Lieu of Foreclosure is superior for all concerned to outright foreclosure. Treasury has now announced a new program to use in conjuction with HAMP and/or 2MP called Home Affordable Foreclosure Avoidance (HAFA). This program will provide for a standard process to accomplish a short sale after attempting a loan modification.
What Treasury is attempting to accomplish is a standard process flow that avoids foreclosure for the majority of homeowners by providing them exits from the process before it gets to foreclosure. Details of HAFA are to be announce in late October, 2009. Details of 2MP and HAMP are already known. Payment challenged homeowners should contact the GOLD Team or their first loan servicer to get more details.
Late Payments -> Become Current
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+-> Try HAMP/2MP -> Success
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+-> Try HAFA Short Sale -> Succeed
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+-> Foreclosure
Foreclosure is still possible but the Treasury is creating a standard, multi-level process to avoid
as many foreclosures as possible.
The GOLD Team has handled over 150 foreclosures, dozens of short sales, and hundreds of normal sales in Northern Virgina.
Much of the Northern Virginia market - including Manassas, Woodbridge, Prince William, Loudoun, Sterling, Herndon, Ashburn, Centreville, Chantilly, Stafford and Faquier areas - has "subject to a potential short sale" listings comprising 30-60% of the available inventory. Buyers hoping to avoid short sales swiftly discover that resales are scarce and/or overpriced and bank-owned/foreclosure/REO listings tend to have multiple offers over list price in place shortly after the listings appear!
When considering a short sale here are some of the most important questions to have your agent ask the listing agent before making an offer:
1. Are there one or two loan servicers involved? One loan only means one servicer, two loans with the same servicer isn't too problematic. Two loans with two different servicers makes the transaction much more tedious, not impossible, just more tedious.
2. Has a trustee sale date been established yet? If so the existence of the date can sometimes be used by the listing agent to request earlier review by a loss mitigation negotiator.
3. Have any of the servicers previously approved a sales price? If so what relationship does it bear to the current asking price?
4. How does the asking price compare to 3 most-comparable recent sold properties nearby? To 3 most-comparable listed/under contract properties nearby?
5. Have the servicers already ordered and appraisal or Broker Price Opinion (BPO)? If so their negotiator may be just about ready to discuss an offer.
6. Is the property subject to a valid written lease which extends beyond the desired closing date? If so, how does the homeowner intend to get the tenants out?
7. Is a third party negotiator between the listing agent and the servicers? If so how are they being paid and by whom?
8. Is the home subject to an existing option contract? This may cloud the title and render the servicers seriously uncooperative.
9. Is the listing agent, or another licensed real estate agent, the homeowner?
10. How many successful short sale listing transactions has the listing agent closed in his/her career? With these loan servicers? Short sale buyer transactions?
11. Why is it called a "Short" Sale when it takes so long? The answer is that the existing note holders are being asked to take a "short" payoff of the amount owed them.
(Deanna & Jim's GOLD Team at RE/MAX Olympic has handled over 150 bank-owned transactions, over 350 total transactions and many short sale transactions in the last 8 years. We currently have 4 short sale buyer transactions in process, and 4 short sale seller transactions in process. Although we welcome short sale referrals from third party mediation firms (like NSC) we negotiate all our non-referred short sales ourselves.)
Homeowners challenged to continue making their payments on time have historically had to choose between outright foreclosure, abandoning the house (a form of foreclosure), deed in lieu of foreclosure (so-called "Friendly Foreclosure") and traditional short sales.
Although short sale offered distinct advantages they were extremely frustrating to both buyers and sellers because of the lengthy and extremely unpredictably time delays between when the short sale proposal was submitted to the seller's loan servicer(s) and when their lenders negotiator actually responded to the proposal. This delay was due to the loan servicers being organized to handle collection, foreclosure, and sale of foreclosed property well, with preforeclosure loss mitigation relegated to a less important role.
Innovative loan servicers are now beginning to invest in improving the systems, procedures, training and approaches they use to handle short sales with a goal of reducing the delays involved so that more property successfully short sells without appearing on the bank's books as a foreclosure.
With some of these new approaches the banks first attempt a loan modification, then transition directly to a pre-negotiated short sale approach. For a pre-negotiated short sale the bank appraises the property and determines what its market value is, then gets prior approval to sell it for market value from parties involved other than the homeowner (existing note holders and mortgage insurers), then lists the property for sale as a pre-approved short sale.
This approach offers the prospective buyers and their agents the knowledge that there will not be a length, unpredictable delay between ratification by the homeowner and approval by the other parties necessary. It effectively moves the negotation of the short sale in front of the listing rather than after contract acceptance.
This revised approach makes the entire process more rational, predicatable and straightforward.
(The GOLD Team has handled 150+ REOs, 350+ transactions and many, many short sales in Northern Virginia. We handle both pre-negotiated and old-fashioned short sales on both buyer and seller sides.)
In the most significant ways short sales might as well be foreclosures! At least that is how they look to homeowners challenged to make their payments and politicians concerned about the votes of those homeowners!
Three major similarities dominate this perspective:
(1) The homeowner has to move. Staying in the house is not a choice.
(2) The homeowner moves away with nothing in his/her pocket resulting from their time, down payment, mortgage payments and energy maintaining the home. (The fine point that the homeowner got to write off their mortgage interest while owning the house is history lost on both observers.)
(3) The bank(s) call the shots. The homeowner feels significantly disenfranchised, unempowered, and helpless.
Short sales do, of course, offer a number of advantages to the homeowners, the loan servicers and the surrounding community. For the homeowner, the politician seeking their votes, however these advantage may seem relatively underwhelming:
(1) The home will stand vacant and unoccupied for much less time
(2) The credit rating of the homeowner may be impacted much less than if foreclosure or deed in lieu of foreclosure occurs
(3) The transaction may seem friendlier and less stressful
The GOLD Team handles foreclosure listings for over a dozen loan servicers and routinely handles both buyer and seller sides of short sale transactions in Northern Virginia.
Homeowners challenged to keep up their payments sometimes conclude that the best thing to do is to move and get out from under the crushing burden of their mortgage payments. Some owners come to this conclusion after failing to successfully obtain a Loan Modification from their mortgage servicers.
Homeowners relocating under these circumstances can choose to attempt a short sale, request a Deed-In-Lieu of Foreclosure, or allow the house to foreclose. The option least injurious to their credit and ability to borrow in the future is usually the short sale.
Short sales proceed having an agent list the home for low current market value, and getting an offer to purchase it swiftly. With the homeowner's assistance the agent presents a short sale proposal to the existing first and second loan servicers. Short sales with only a first loan, or two loans with the same servicer are more straightforward. Those involved two loans with two separate servicers are the most challenging.
In a short sale situation the first lender is offered the entire proceeds of the sale after normal closing costs and a modest allowance to persuade the second lender to release their lien. It is not uncommon for the first lender to offer the second lender $1,000 to $3,000 or 1% of the sales price regardless of how much the second lender is owed.
The second lender's choice is typically to take what is offered by the first lender or let the first lender foreclose.
The second lender may claim, "But the homeowner will still owe us the money." That is true, but if and when the first lender forecloses on the house the second lien becomes an unsecured debt (unless the foreclosed home is worth more than the amount of the existing first loan). If the former homeowner then file a Chapter 7 bankruptcy they may be able to wipe out their obligation to all unsecured creditors including the second lender. (Author is NOT an attorney, reads considering bankruptcy should ALWAYS consult a competent bankruptcy attorney.) If this course is pursued the second lender will end up with nothing. A thousand dollars or two is worth more than nothing. Most second lenders cooperate.
Some second lenders may not cooperate. In these circumstances what may be needed is to credibly communicate the willingness of the homeowner to actually pursue a Chapter 7 filing. Involving a competent bankruptcy attorney is very desirable at this point. Acting as your own bankruptcy attorney, like acting as your own real estate agent, is a fool's errand.
Deanna & Jim's GOLD Team has successfully handled many short sales in the current market. We have multiple short sale listings under contract - some where we represent buyers, some where we represent sellers. We can refer excellent bankruptcy attorneys. We have also sold over 150 bank-owned foreclosed properties in the last 2 years and over 350 homes total.
Master negotiators: 350+ transactions last 8 years. 130+ bank-owned transactions 2007-8. Short sales listed, under contract, and buyer offers pending. First time buyer & investor specialists. MBA, MSE, MA Psychology.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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