Here's part II in our continuing series on Arizona Short Sales. (Here's Part I of the Arizona Short-Sale Primer.) I wanted to address something that everybody seems to be asking me about lately, and is next up on our list of topics: who is eligible for a short-sale, and why would a bank be interested in accepting one?
Who Is Eligable For A Short-Sale?
There really are no hard and fast rules about who is eligible and who is not. You might hear that a person has to have a demonstrable "hardship" in order to do a short-sale. This can be death, divorce, job loss, health problems, and a host of other things. This tidbit of wisdon is generally correct. A person must have a good reason to attempt a short sale. Banks are not going to forgive tons of debt to people who simply don't like their homes anymore and wish to move, or those who are thinking something like this: "Hmm. My house is worth $100,000 less than I payed for it, and my mortgage payment is pretty high. Doesn't is make financial sense to simply dump this home and then rent for awhile, let my credit rebuild, then buy a new home when the market is done crashing? I could save thousands of dollars per month by renting. Let's see. . .my current mortgage payment is $3,200 per month. I can rent a similar home for about $1,200 per month. Good GOD! That's a lot of money. In a few years, when my credit is back to normal, and homes are a lot cheaper, I could buy again. And, I will have socked away tens of thousands of dollars over those two or three years! The logic sounds impeccable doesn't it? How could you not think that way? Furhermore, I am not here to say whether or not that is "logical," "moral," "ethical," or anything else. I am saying that with that type of thinking, a short-sale is not the answer. But can you actually do a short-sale without a verified hardship? The long and short of it: depends.
Going It The Hard Way.
I have a certain client who wants to do a short-sale. He is current on his payments, and is not in a real "hardship." He simply has a really good reason to move. He's got a great job offer in another state. However, his house is worth, on the open market, about $10,000 less than he owes the bank. Can he do a short-sale? Indeed. He can and did. Now, before you get excited about this news, here's the rest of the story. . . For this particular client, I simply went to the bank with an offer on the property, for about 10k less than my client owed.
Me: "Will you take this offer for less money than my client owes?"
Bank: "Uh. . .maybe. Why?" Me: "Well, my client wants to move. Will you do it?"
Bank: "Absolutely NOT! Are you joking?!"
Me: "Well, I had to try. Will you do it if my client pays you back the money?"
Bank: "Your client is willing to sign an agreement, and pay us the difference?
Me: "Sure. He really wants to move."
Bank: "Alright. Let me run this up the flagpole, and see if it'll fly. And you know what? It did. Moral of the story: There's always an exception.
Why Would A Bank Do That?
Banks are not in the habit of giving away money, despite bait-n-switch offers on TV. In order to understand why a bank would consider a short-sale, we have to think pragmatically. Consider this: If you don't pay your mortgage, the bank is not earning any money, right? Well, if you continue to not pay your mortgage, the bank has no choice but to try to get their collateral back from you. That "collateral" is your house. That's why they loaned you the money in the first place. It's not because you are good looking, or even your credit score or your financial ability to repay the loan. The real issue is, the money they loaned you has "backing," in the form of the actual house on the land.
Each bank now has (if they didn't before) a "Loss Mitigation" Department. This department's sole cause of existence is to "stop the bleeding." If they can, they'll work out a deal with you to get you to keep paying them. They might wave a payment or two in order to get you "caught up." They may re-negotiate your mortgage at a new interest rate. These are a bank's primary method of trying to stop the continued loss of money. Sometimes, none of these scenarios will work. You may have lost your job, or gotten a divorce, or what have you. In this case, no matter what kind of "sweet deal" the bank offers, you simply cannot continue to pay. At this point, the bank may themselves suggest that you find a real estate agent to sell your home for what you can get. It will obviously be less than you owe the bank, and they're generally speaking, "okay with that." Why? Because of the "bird in the hand, two in the bush syndrome," only in this case it's "a bird in the hand and 'three-quarters of a bird' in the bush." You see, if you bring the bank an offer on your home in which, at the end of the day, they will lose $40,000, that's a "known quantity." If they don't accept your offer, they will lose even more later. They will be forced to "foreclose" on your property. This is a legal proceedure which is very expensive to complete. So, whereas now they will lose $40,000, with the cost of the foreclosure process, they are now losing $80,000. Yes, a foreclosure will cost them all of that and sometimes more. Much more. It has been projected by legal experts that a foreclosure in Maricopa County can cost a lender as much as $75,000 - $85,000!!! And, it takes almost a full year sometimes. Certainly not less than 6 months.
But Wait. . .There's More
If the bank waits for the foreclosure process, and eventually takes your home, they're also going to have to get the home ready to sell again (utilities on, clean-up, landscaping, locks changed, etc.), pay a real estate agent to sell it (eating those costs as well), and hope the market doesn't continue to depreciate more during this rather lengthy process. Ouch!! So, doesn't it make sense that a bank would always agree to a short-sale in order to save themselves a ton of cash? You'd think so, but there are always these little things called "bureaucracy" and "principles" that get in the way. We'll touch on those next time. . .
***Keep in mind, these articles are intended for educational purposes only, and should not be construed as specific legal advice. Always consult a qualified attorney or tax advisor with questions about your specific circumstances. If you have questions regarding any of the issues presented here, you are encouraged to give me a call: 602-499-4798 or email me: email@example.com Allen Butler, GRI, AHWD