April 25, 2008 Short Sale awareness
I was going back and forth on what to write this week in my blog. I was telling my wife that I don't want to sound like a broken record, repeating the same information every week, so she suggested I write about short sales. I looked back and it has been awhile since I wrote about short sales and I am always getting calls from buyers who see a home $50,000 under price--what a steal! But, upon further investigation, I find out it is a short sale and then I have to explain what a short sale is exactly. So in this entry I will explain what a short sale is and what to expect when writing an offer.
The definition of a short sale is: a sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes. So the owner can sell the home and the bank is the one taking the true loss. There must be a real hardship on the seller's side, which the seller must prove with documentation to the bank.
What are some of the negatives for a seller shorting their home? This depends on how the bank reports the sale to the credit bureaus. It can be seen as paid in full or a negotiated payment. A negotiated payment has a more negative effect on their credit. Everyone's credit is affected differently because some people will start to make their house payment with their credit card and some people will stop making credit card payments to make their house payment. As I mentioned before, the bank wants to see a true hardship and if they see that you have money in the bank and a lot of "toys" that you bought with the equity from your house, they might not be as willing to let you just walk away with a little ding on your credit. Also, it is a long process where you are disclosing your whole life to a bank and asking them to see your situation as a true hardship. Some feel that it is easier to take the huge mark down on their credit and the extra time it will take to buy another home after a foreclosure than deal with a short sale.
For a buyer there is no telling when the bank will respond to your offer. This in turn creates frustration for the buyer. I will caution all my buyers that with a short sale it will typically take 3 months to close and the price will likely be higher then the listed price. If the price is reasonable and the listing agent is competent the offer might move more quickly on to the bank.
Some of the positive things for short selling your home are that you do not have to pay the excess amount back to the bank, and there is a new law passed by the President that states you do not have to report that short amount as income on your taxes. This is just a temporary bill and will be gone on December 31, 2010; and only the purchase money is forgiven. If you have a question about purchase money give me a call and I can explain it to you. Also, by doing a short sale you rid yourself of the dreaded foreclosure. You can typically buy a home 2-3 years after a short sale in contrast to 7 years after a foreclosure.
Now, back to my main point of why a short sale is advertised so much lower than a bank owned property. There are some listing agents that use the short sale as a marketing tool. They advertise the price low to get interest in the property to entice buyers to make an offer. This way the agent can pick up some buyers if this home doesn't work out for them. Some things that you, as a buyer, have to watch out for is that "sweet" deal; if you think it is a great deal, so does everyone else. If homes around this property are selling at $265,000 and this short sale is advertised at $200,000 that is the first sign that this price is more of a mirage than a concrete purchase price. Also, what does the home owner owe on the property? If the seller owes $365,000 and the home is advertised at $200,000 and bank owned homes in the area are selling for $265,000 then why would the bank sell it for so much under market value? They are already giving up $100,000 plus cost at $265,000 so why would they let it go for so much less? I can check the property taxes and see what the owner owes on the property and give you a better idea of what a reasonable purchase price would be. Some agents might say that the banks will sell it for less to avoid the high cost of the foreclosure process. Let's use our example above. The bank is owed $365,000 and the home is on the market for $200,000 in a $265,000 market. That is a difference in price of $65,000. This is a loss to the bank of about 25% from $265,000 to a sale of $200,000. At this point in the market I highly doubt the market will tumble an additional 25% here in California. The bank is better off denying the short sale and letting it go to foreclosure.
I just realized that this is a long post. I feel strongly that my clients need to understand the strange aspects of a short sale. I will in the future point all questions regarding short sales to this post on my website. If you have any other questions about short sales give me a call at 951-710-1662.
Sincerely Kevin Williamson Coldwell Banker Shepherd Group www.williamsonteam.net