Short Sales

The truth is that Distressed Sales have become all too common, but there are few bright spots!  There is no question that the market will take an upswing.  Buying distressed property now is a fantastic way to position yourself positively for that inevitable turn upwards.

The advantages that a successful short sale brings to the homeowner are too numerous to list, but they include the end the foreclosure proceedings against the borrower, lesser negative impact on the credit history (compared to the impact a foreclosure would bring), ability to maintain current employment and obtain future employment. A short sale is a complex, detailed and time consuming transaction and a distressed homeowner's financial future solely depends on his/hers decision of hiring a professional who specializes in and is an expert on short sales.

Here is a great article describing the typical distressed sale scenario:

The so-called "short sale" of a home can be a viable alternative to foreclosure and will become more prevalent as millions of adjustable-rate mortgages reset over the next 18 months, real estate industry observers say.

Short sales, an agreement that allows a home to be sold for less than the amount owed, have been around for a long time, but have come to prominence lately because of the unprecedented increase in foreclosures, said Arthur Marvin, broker for Wingate Mortgage Group in Las Vegas and class instructor on foreclosures and short sales.

"That's a lot of homes that are short sales and every one of them is overencumbered," he said. "It's grown exponentially since last year and it's going to keep on going. Just a reminder -- there is an epidemic going on across the United States and they're called foreclosures. Foreclosures are causing another epidemic called short sales."

The beneficiary, or lender, makes the final decision in approving a short sale.

While short sales are by no means a slam dunk, lenders are more willing to negotiate with borrowers today who are in default on their mortgage payments, Realtor Robin Camacho said.

"What they want upfront is a hardship letter from the seller, a contract between the buyer and seller and an estimated settlement statement," Camacho said. "They may counteroffer and you continue to negotiate. They're a lot more negotiable than they were six weeks ago."

Yenory Orange, REO managing director for Green Lockett Realty, said the last thing a bank wants to do is foreclose on a home. If a bank puts the house in foreclosure, it has to clean it up, paint it, replace the carpet, list it on the market and pay a broker's commission, she said.

Realtors need to build a relationship with the bank on a short sale, Orange said; they should meet with the loan officers and provide them with as much data as possible on the house and the market.

Financially troubled homeowners save the embarrassment and marred credit associated with a foreclosure. Investors and entry-level buyers have the opportunity to buy a home below market value. Lenders avoid the hassle and expense of seizing a home and putting it up for auction.

Short sales can occur before a home goes to foreclosure or while it's in foreclosure, Marvin said.

"The premise is that both are in trouble. The difference between a foreclosure and short sale is you can be in foreclosure and not be encumbered (in debt)," he said. "A short sale has no equity."

Potential buyers need to understand a short-sale transaction before entering any purchase contract, observers say. While a buyer and seller may agree on the price, the short sale occurs at the sole discretion of the existing lender or servicing company.

"Remember, lenders are not looking to bail out borrowers who simply overextended themselves during the recent real estate boom," an article in You magazine said. "In most cases, a lender will only consider a short sale if a borrower has clearly suffered a serious financial hardship that directly caused him or her to default on the mortgage."

Short sales are a common practice within the mortgage industry and are determined on a case-by-case basis, said Patrick Carey, head of default and retention operations for Wells Fargo Home Mortgage.

Most homeowners are in default when they apply for short sale. It's an option based on the value of the property, the underlying fundamentals of what is owed and the anticipated marketing time.

The investor has predetermined guidelines for the shortage along with the minimum amount they will take in the loan sale. When the sale proceeds do not satisfy the remaining balance, the post-sale balance is forgiven. The credit is then reported as satisfied for "less than full" amount, Carey said.

"While banks still realize large losses on short sales, there are some benefits, including the elimination of foreclosure attorney fees and costs, the marketing costs should the property go to REO and any potential risk of damage or deterioration due to prolonged vacancy," he said.

The bank's denial of a short sale is not necessarily a final "no," Marvin said. Brokers can take the process further by providing the lender with a forecast loss analysis, negotiating their position that the offer may be the best and highest benefit to the lender's investor, he said.

"The lender uses software to calculate if we let it go to foreclosure, how much do we lose? If we let it go to a short sale, how much do we lose? Whatever is less, that's the one they want. These two (foreclosures and short sales) are in competition with each other," he said.

Because foreclosures take at least five months from notice of default to final eviction and trustee sale, some homeowners find it financially advantageous to remain in the home without making payments rather than sell at a loss and move somewhere else.

"That's the $64,000 question," Marvin said. "Should they live in it and let it go to foreclosure or sell in a short sale?"

The Federal Reserve has tried to bail out the financial and credit markets by recently cutting its discount rate and infusing billions of dollars into the banking system. The real estate market, however, continues to suffer. Foreclosures are nearly double from a year ago and home prices are down 5 percent to 10 percent around the country.

Inventory of homes on the market exceeds a 36-month supply in some parts of the country. The Greater Las Vegas Association of Realtors reported 24,341 homes for sale in August and sales of 1,316 single-family units, about an 18-month supply.

So far this year, 731,244 preforeclosures have been filed nationwide, Sacramento, Calif-.based Foreclosures.com reported. That translates to nearly 10 out of every 1,000 households in trouble with their mortgages.

It's a dismal picture, but one that may brighten for some homeowners thanks to changes in the Federal Housing Administration's lending practices, said Alexis McGee, president of Foreclosures.com.

"As far as short sales, those will continue to grow as folks with little or no equity realize they can't hold on," she said. "The problem is, most banks are not really discounting for investors yet on these properties. We need 30 percent and more off the house to make the numbers work to buy, fix and sell. Their 10 (percent) to 15 percent off is simply not enough for investors, but may work for home buyers interested in a small deal."

In his column, "Eye on the Economy," National Association of Home Builders Chief Economist David Seiders said continued growth in the nation's economy is the best guarantee of a revival in demand for new and existing homes.

Beset by mortgage market woes, eroding house values in a growing number of areas and "a hefty shove from the media," housing is continuing to lose momentum, Seiders said.

"But these negatives do not mean that housing will continue downward forever," he said. "As long as the overall economy continues to expand, with the Fed's help, throwing off decent growth in employment and household income, ongoing population growth will generate decent growth in the number of households and that's the key."

Despite the current mortgage credit crunch, which is most pronounced in subprime borrowing, Seiders noted that there remains significant favorable financial support for prospective home buyers, particularly in the FHA and VA and prime conventional conforming mortgage markets.