SHORT SALES. Cut a sweet deal. For whom?

Buyers and sellers (and REALTORS, too). Save this for prosperity: February 2009 issue of Money Magazine titled "Cut a sweet deal with the Bank".

Main premise: although short sales are rising sharply, "here's how you can profit."

That was intriguing. I thought this is a good article for buyers, sellers and their realtors since it provides a thorough explanation of what to expect, and what to do.

There was a case study of a couple who scouted homes in Sacramento CA, and found a "steal" --- a home at $300K, a full $200K less than what it was worth a year ago. But it took 6 months before they got the keys to the house. Why? It was a short sale.

In these precarious times, who truly profits? The buyer!

STATISTICS    Nationwide, 14% of homeowners are underwater on their mortggates; 30% of owners who bought in the past 5 years are underwater (according to Zillow)

SHORT SALE  This occurs when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth.

THINGS THE BUYERS MUST KNOW AND DO

If you find a house you truly love, and it's a short sale, you should know and remember:

1. Short sale will take a LONG time. It could take anywhere between 2-6 months to execute, versus 30-45 days for a regular sale.
2. Get a pro --- This takes a lot of work, time and patience.
   • Get a realtor who is experienced with short sales (at least two short sales). This is not something the buyers can or should do without professional help.
3. Choose carefully --- there are enough choices. Pass on those with too many condition or complexities.
   • If possible, pass on those with more than one lien against it. It is a challenge to negotiate loans with two lenders
4. Fair market value --- DON'T rely on the list price alone. The listing agent may have underpriced the property to attract buyers, but that doesn't mean that price will be accepted by the short sale lender.
   • Ask the agent to determine fair market value with emphasis on other short sales and foreclosures
5. No accepted contract yet? Don't spend! --- don't spend money on inspections and appraisal until you're sure your offer is accepted and approved by the short sale lender.
   • In California, we have a Short Sale Addendum we submit with offers on short sales
   • Buyer may even specify that the deposit check will not be cashed into an escrow account unless the offer is accepted by the lender, and that's when the escrow is opened
6. Follow up, follow up, follow up --- yes, this will take time but follow up
   • Call your agent once a week
   • Have your agent determine if the seller's agent is communicating with the bank's negotiator
   • Something about the "squeaky wheel"....
7. What else is new? --- what is something better comes along that isn't a short sale? What if similar properties come up for sale, or recently sold that are priced lower than what you offered?
   • Use these comps for negotiation to prove that the property's value has shrunk even further, and you probably could amend your offer for less --- and cut a really sweet deal!

THINGS THE SELLERS MUST KNOW ABOUT SHORT SALES

Are you under water or almost under water?

If this is an option, the seller must convince the bank to forgive (erase) part of the seller's debt (loan) --- and the seller must realize his credit will be adversely affected (okay, nose dive!).

So find a realtor who is experienced and/or knowledgeable about the steps and requirements for doing a short sale.

1. Hardship --- Seller must prove that he can't make the payments or that he has to move but can't pay off the full loan.
   • Hardship can be one or more of the following reasons: job loss, job transfer, death, divorce, separation, reduced income, medical bills, too much debt, mortgage payment increases, business failure, illness, military service, incarceration, etc.
2. Credit will take a hit -- although it won't hurt as much as foreclosure or bankruptcy.
   • In rare cases, seller may be required to repay part or all of the funds, so when doing a short sale, be sure it's in writing that the lender(s) will forgive the loan(s) and relieve you of future responsibility to repay
3. Taxes on the debt --- familiarize yourself with the Mortgage Debt Forgiveness Act of 2007 that applies to primary home
   • If it's a vacation home or investment property, you need to prove to the IRS that you're insolvent or that your liabilities exceed your total assets. Otherwise, you may have to pay taxes on the forgiven piece of the loan, which will be counted as income by the IRS