There is alot of buzz in the news these days about the massive foreclosure crisis and the fact that buyers should try to take advantage of reduced pricing by considering the purchase of a foreclosure REO or a short sale property.
Here are a few things to consider when you find yourself in a bind, having difficulty paying your mortgage, and need to consider all alternatives available to you:
Sellers must qualify for a short sale before the bank or their lender will assign a negotiator or approve a short sale contract.
What is a "short" sale and how do you qualify for a short sale of your home:
1. A short sale is the bank's agreement to accept less than the total outstanding principal amount as a full settlement and payoff of the mortgage. In the past, if this was done, the bank would come after the borrower for the difference and the IRS would consider the difference income for tax purposes. These days, it depends on the lender.
2. If you have more than one lender, i.e., a home equity line of credit or a home equity loan or second mortgage, it is doubtful that you will be successful in obtaining your lenders' approval for short sale. The long and the short of it is that they almost NEVER come to terms on who gets how much and by the time you find out, the potential buyer is long gone. If you are in this situation, short sale is probably a waste of your time, as it is nearly impossible to make it work in the span of time that would be acceptable to a buyer.
3. You have one lender. In order to qualify for short sale you have to prove financial hardship, that you have a monthly shortfall (you pay out more than you take in), and are insolvent.
4. Let's take the first qualifier, financial hardship. There needs to have been a change in your situation since you originally took the mortgage on the property that is currently affecting your ability to honor your contractual obligation to pay the mortgage. Loss of job, catastrophic illness and/or extraordinary medical bills, a disability that has affected your ability to earn, your interest rate has adjusted making your payments unaffordable, you have too much debt, you are the owner of a failed business, etc. Your bank may consider other financial hardship situations in order for you to be considered, but these are the most common.
5. Monthly shortfall and insolvency. You will be required to provide a financial statement showing that your monthly debts or obligations exceeds your monthly income. The lender will need to see your list of asset values, i.e., 401K or other investments also. In order to qualify for a short sale the lender will need to see proof that your loan balance exceeds your cash position, i.e., that you are insolvent.
Many in the industry are saying that financial hardship can be proven, in some instances, even if you do not have a monthly short fall but will have one soon due to a payment increase from rate adjustment or perhaps a pending layoff or reduction in income (say, for example, you typically earn a substantial portion of your income through working overtime and now your company has stopped paying or allowing overtime).
The short sale process is not an "easy out" by any means. The process from beginning to closing is long, stressful and without guarantee of success. Any number of events can come together to keep you from achieving a successful short sale, including your inability to find a buyer who is willing to pay a price acceptable to the lender, and willing to wait for lender approval. Sounds easy doesn't it?
Well, we all hear that these banks are chomping at the bit to get homes sold before foreclosure so surely if I bring them a buyer they will jump all over it. You need to consider one very important factor: you are now dealing with what amounts to "a corporation", not an individual seller. There is an internal process that will be pursued no matter how attractive your buyer's offer may appear on paper, and no matter what the buyer's needs are vis-a-vis a closing schedule. From the seller and buyer's perspective, short sale is not a walk in the park.
If you are a seller, contact your bank and ask to speak to someone in the loan modification department - that will get their attention. Tell them that you need to speak to someone about a possible short sale. Ask for their "package". Take copious notes concerning dates and who you speak with. Understand that you will speak to an army of individuals before you ever get to "the person" who ultimately decides your fate. Be prepared. Set aside alot of time.
Another tip, don't call a REALTOR until you have received some assurance (in writing preferably) from your lender that they will consider a short sale in settlement of your outstanding obligation. A REALTOR can do none of this for you. If the bank wants to know the market value of your home you should hire a certified appraiser. The bank will, at some point, have their own BPO (broker pricing opinion) or appraisal performed. However, the bank may want to know from you a general "price range" that you expect to list the house for sale. If you cannot afford to hire a certified appraiser, you might ask a REALTOR to do a market analysis for you but explain that your short sale has not been approved yet by your lender. An agent can do a better job for you when we have all the facts.
No, this is NOT a short sale situation. . .
I had a guy call my office last week. Really nice guy, told me he had lost his job in this area and needed to move to another part of the state to take a new position. He was already there and working, living in an apartment that he was renting. He was indignant that he was still required to "pay for this house that I'm not even living in anymore." He wanted to know what I could do for him. In our three telephone conversations before we actually met, he lead me to believe that his situation was one of financial hardship but he wanted to do the "right thing" rather than walk away and allow the property to be foreclosed. I was optimistic and had every intention of trying to help him achieve his goal of a short sale.
Then we met. The house was completely trashed - I mean trashed. He acted like it was palatial. Piles of dirty laundry all over the house, ever inch of counterspace in the kitchen had something on it, cabinet doors were hanging by one hinge, and this was a house just about 8 years old. A nice house at one time! There were wide screen LCD TVS at every turn. Furniture was just sitting in the middle of rooms and the foyer - I ask if he would be moving these things out soon and he said no, probably not.
I told him it was cold in the house and that would be an issue if we put it on the market. He told me the HVAC didn't work because he never changed the filter. Huh? At some point this homeowner must have decided that I was looking down at him, I am guessing, due to the comments and questions that I was posing concerning the condition of the property, i.e., like "what do you plan to do here before we put this house on the market?" The guy looked at me like I had two heads. He planned to do nothing and made that very clear to me in no uncertain terms. I told him that no matter what the price the house was virtually unsellable with no HVAC in our market. With literally hundreds of homes in his area and price range for a buyer to choose from, "showability" was extremely important. I can't imagine a buyer selecting this house over any other in the price range without at least some "cleaning". I even offered to refer him to a house cleaner. He declined.
Since he was acting as though he was completely broke, I was offereing to direct him to some trusted service providers that would be fair in pricing his HVAC repair and cleaning.
Then, much to my surprise he said "if we sell it for more than the bank wants do I get the difference?" I explained why this would not be the case. Then he wanted to price the house about $20K higher than comparable sales in the area. I explained that this overpricing would not result in a sale because we would have appraisal issues even if we were fortunate enough to get a buyer and the bank approved the short sale.
This homeowner owed approximately $100K more than area comparable sales, and considerably more than he paid for the house. Finally, we got to the crux of the matter. The homeowner said "well, I'm in no hurry. I can afford to pay the mortgage, I just don't want to." He went on to tell me that he was bringing home over $7000 monthly and was about to get another part time job where he would clear an additional $3000 monthly.
Clearly this homeowner could not prove hardship. What he was telling me was that he wanted a way out - didn't want to pay his mortgage any longer, realized he had put too much debt on the house, but didn't mind wasting my time if by some miracle I could make this all work out for him.
I was wasting my time. In our phone conversations when he asked me about short sale I told him that he would need to get lender approval before I could list the house. I learned on the day that I met him that "lender approval" in his mind meant that he called the lender and the lender said "yes, we might consider a short sale, get an agent." It doesn't work that way folks.
Long story short, this homeowner's situation doesn't come close to qualifying for a short sale and he was apparently unmotivated to spend any time trying to determine that - he wanted me to waste my time and "make it happen" for him with as little involvement on his part as necessary.
I could not help this homeowner because, basically, he didn't need help.
Sellers: Do yourself a favor: do your research. Have in-depth conversations with your lender if you get in a bind. There may be other options at your disposal now that the housing legislation has been approved by congress. If you have income sufficient to pay a reduced mortgage, you may qualify for assistance under the government's new plan. It's worth checking out. A word of warning however - you must be occupying the property. If you have already moved out, chances are your options will be limited.
Good luck and I hope that you are successful in achieving your goals - avoiding foreclosure is an honorable achievement.
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