What is a Short Sale?
For homeowners who are in negative equity situations and can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a short sale. When lenders agree to a short sale in real estate, it means they are willing to release their lien against the home for less than the outstanding mortgage balance (including default interest and penalties, etc.). Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. Please see the following link for typical financial hardship options available with most lenders.
As you may already be aware, this particular type of transaction requires a realtor with the patience and knowledge necessary to persevere in the continual, and sometimes frustrating, discussions with the lender.
Our team of professionals have experience in negotiating short sales with numerous lending institutions. Our process is based on the wisdom gained in successfully closing countless short sale transactions thus rendering it efficient and reliable. We are also certified SFR (Short Sales & Forclosure Resource) by The National Association of REALTORS.
For homeowners who are in negative equity situations and can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a short sale. When lenders agree to a short sale in real estate, it means they are willing to release their lien against the home for less than the outstanding mortgage balance (including default interest and penalties, etc.). Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. Please see the following link for typical financial hardship options available with most lenders.
As you may already be aware, this particular type of transaction requires a realtor with the patience and knowledge necessary to persevere in the continual, and sometimes frustrating, discussions with the lender.
Our team of professionals have experience in negotiating short sales with numerous lending institutions. Our process is based on the wisdom gained in successfully closing countless short sale transactions thus rendering it efficient and reliable. We are also certified SFR (Short Sales & Forclosure Resource) by The National Association of REALTORS.
The incentive for the lender is to avoid foreclosing on the premises as this process is both time-consuming and expensive. On average the foreclosure process takes a year to complete. Over this period the lender will have to retain an attorney to repossess the property. As you can imagine there are many legal hurdles to overcome which can cost the lender tens of thousands of dollars depending on how vigorously the homeowner defends themselves in court. If the bank agrees to a short sale, this expense can be avoided in its entirety.
Further, if the homeowner is not making their mortgage payment, nothing is being contributed into their escrow account. The escrow account is used to pay the homeowner's real estate taxes as well as their homeowner's insurance. Taxes and insurance must be kept current in order for the lender to protect its collateral. Therefore the bank is forced to carry the cost of the home from the time of default through the date of repossession or resale. The lender can save a substantial amount of money by agreeing to a short sale as opposed to foreclosing and carrying the expense of the home.
Frequently we are asked what the average percentage a lender will reduce the outstanding principal when considering a short sale offer. The answer is loss severity does not matter whatsoever! It may initially seem counterintuitive; however, it is a reality. The lender is only concerned with the net dollar return on the short sale vs. foreclosure.
When deciding whether to accept a short sale the lender will compare the current offer to the alternative: simply letting the home go to foreclosure. At a foreclosure auction potential bidders will take the "fair market value" into consideration; not the outstanding principal balance owed by the homeowner.
The short sale lender is aware of this fact and will apply the same principle to the offer that is presented. As long as the offer reflects the current appraised value the lender will ignore how much of a cut the deficiency is because that is what will happen at a foreclosure sale! So in essense, loss severity is not really an issue when it comes to determining the banks net return on short sale vs. a return on foreclosure/trustee sale.
Further, if the homeowner is not making their mortgage payment, nothing is being contributed into their escrow account. The escrow account is used to pay the homeowner's real estate taxes as well as their homeowner's insurance. Taxes and insurance must be kept current in order for the lender to protect its collateral. Therefore the bank is forced to carry the cost of the home from the time of default through the date of repossession or resale. The lender can save a substantial amount of money by agreeing to a short sale as opposed to foreclosing and carrying the expense of the home.
Frequently we are asked what the average percentage a lender will reduce the outstanding principal when considering a short sale offer. The answer is loss severity does not matter whatsoever! It may initially seem counterintuitive; however, it is a reality. The lender is only concerned with the net dollar return on the short sale vs. foreclosure.
When deciding whether to accept a short sale the lender will compare the current offer to the alternative: simply letting the home go to foreclosure. At a foreclosure auction potential bidders will take the "fair market value" into consideration; not the outstanding principal balance owed by the homeowner.
The short sale lender is aware of this fact and will apply the same principle to the offer that is presented. As long as the offer reflects the current appraised value the lender will ignore how much of a cut the deficiency is because that is what will happen at a foreclosure sale! So in essense, loss severity is not really an issue when it comes to determining the banks net return on short sale vs. a return on foreclosure/trustee sale.
It is important to understand that most short sale candidates have not done anything wrong. In fact the majority of the non-institutional owned properties on the market are short sales. Typically a short sale homeowner purchased the property within the last three years and financed a high percentage of the purchase price and perhaps closing costs, if not all (i.e. 100% financing with a seller's concession). Since that time, prices have dropped significantly in value which means that if the homeowner wanted to sell or refinance they would have to make up the difference between the mortgage balance and the current decreased value, plus closing costs.
There is also the possibility that the homeowner may not have understood the terms of the mortgage or was fraudulently induced into a predatory subprime loans.
Whatever the reason, the homeowner is in the situation they are in, it is crucial to appreciate that foreclosure should be avoided at all costs and there is always an opportunity to rebuild both your finances and overall quality of life.
There is also the possibility that the homeowner may not have understood the terms of the mortgage or was fraudulently induced into a predatory subprime loans.
Whatever the reason, the homeowner is in the situation they are in, it is crucial to appreciate that foreclosure should be avoided at all costs and there is always an opportunity to rebuild both your finances and overall quality of life.
A short sale is the lesser of two evils. Inevitably, if the homeowner cannot afford to remain in premises, the lender will repossess the property through foreclosure proceedings. A short sale can save the homeowner many months of stress, embarrassment, aggravation and uncertainty.
When considering whether to undertake a short sale, it is very important to make sure that the seller understands the benefits when compared to foreclosure.
One advantage to a short sale is that it is a private proceeding; unlike a foreclosure which is public in nature. The majority of our current inventory here in Arizona is of like nature.
When considering whether to undertake a short sale, it is very important to make sure that the seller understands the benefits when compared to foreclosure.
One advantage to a short sale is that it is a private proceeding; unlike a foreclosure which is public in nature. The majority of our current inventory here in Arizona is of like nature.
Obviously late payments can be devastating upon your credit score. By the time the foreclosure process ends a homeowner may have missed a year's worth of payments, if not more.
By successfully negotiating a short sale, homeowners can salvage as much of their credit score as possible. Yes it is true that the lender will reserve the right to report this transaction to the appropriate credit bureaus which may negatively affect the homeowner's credit. However, as previously stated, the blemish caused by a short sale pales in comparison to the destruction of a completed foreclosure.
Commonly clients are concerned about the timeframe necessary to rehabilitate their credit so as to qualify for a conventional mortgage in the future. The only reliable data we can gather has been based upon the information provided by our prior clients; credit may be restored in as little as nineteen months. The only guarantee is that however long the timeframe may be, it is certainly less than it would have been had the foreclosure action concluded. Contrary to what the lenders will tell you, the homeowner does not need to be in default in order to be considered for a short sale! The reason the bank will tell you this is because they want you to try to make as many payments as possible. Under certain hardship scenarios we may be able to close the transaction where the homeowner never missed on payment. This is the best way to preserve as much of your credit score as possible.
Finally, with respect to bankruptcy, it has been our experience that some clients have declared bankruptcy as a last resort, unaware of an alternative.
By successfully negotiating a short sale, homeowners can salvage as much of their credit score as possible. Yes it is true that the lender will reserve the right to report this transaction to the appropriate credit bureaus which may negatively affect the homeowner's credit. However, as previously stated, the blemish caused by a short sale pales in comparison to the destruction of a completed foreclosure.
Commonly clients are concerned about the timeframe necessary to rehabilitate their credit so as to qualify for a conventional mortgage in the future. The only reliable data we can gather has been based upon the information provided by our prior clients; credit may be restored in as little as nineteen months. The only guarantee is that however long the timeframe may be, it is certainly less than it would have been had the foreclosure action concluded. Contrary to what the lenders will tell you, the homeowner does not need to be in default in order to be considered for a short sale! The reason the bank will tell you this is because they want you to try to make as many payments as possible. Under certain hardship scenarios we may be able to close the transaction where the homeowner never missed on payment. This is the best way to preserve as much of your credit score as possible.
Finally, with respect to bankruptcy, it has been our experience that some clients have declared bankruptcy as a last resort, unaware of an alternative.
Generally clients are concerned about the potential liability to repay the difference between the amount owed and the amount received by the lender as part of the short sale. This amount is known as a deficiency.
Click hear to view the latest information concerning the Arizona Anti Deficiency Statutes and Case Law: Update on Court Decisions and the Anti-Deficiency Statutes
The most common result of a short sale for the homeowner is that the lender can file a 1099-C ("Cancellation of Debt Form") which may subject the homeowner to tax liability. The I.R.S. in turn will consider the debt forgiveness as income. However, recent legislation, known as the Mortgage Forgiveness Debt Relief Act of 2007, allows the homeowner to exclude the "income" if they qualify (see referenced website for more information).
The most common result of a short sale for the homeowner is that the lender can file a 1099-C ("Cancellation of Debt Form") which may subject the homeowner to tax liability. The I.R.S. in turn will consider the debt forgiveness as income. However, recent legislation, known as the Mortgage Forgiveness Debt Relief Act of 2007, allows the homeowner to exclude the "income" if they qualify (see referenced website for more information).
From the time a Contract is entered into to sell the home, the process should take no longer than 4 months. Several of the larger loan servicing companies may take up to 6 months depending on the number of pre-foreclosure request they have received into their default management departments.However, we have been known to negotiate short sales in as little as 2 to 3 weeks. All transactions are reviewed on a case-by-case basis so as to better advise the homeowner what can expected. A lot of it depends on the seller’s hardship and the contract that we are able to procure during the listing period.
It is very important to understand that the only time a lender will stop foreclosure proceedings is after a successful short sale negotiation. In other words, the lender will continue their efforts to repossess the home despite the fact that a homeowner has listed the home for sale or entered into a contract to negotiate a short sale. Again, it is only after the transaction has closed that the lender will abandon the foreclosure action.
It is very important to understand that the only time a lender will stop foreclosure proceedings is after a successful short sale negotiation. In other words, the lender will continue their efforts to repossess the home despite the fact that a homeowner has listed the home for sale or entered into a contract to negotiate a short sale. Again, it is only after the transaction has closed that the lender will abandon the foreclosure action.
Homeowner's are forbidden from receiving any proceeds from the sale of their home. Keep in mind that as an incentive for the lender to accept less than what they are owed, they will mandate the defaulting homeowner not receive any money whatsoever, without exception.
In addition to completing our Short Sale Worksheet, please review the following information for your particular lender(s):
· CitiBank
· Wachovia
When reviewing a short sale, the lender will consider the year of purchase or refinance, as well as the type of loan (fixed, ARM, etc.).
However, most clients research short sales once foreclosure proceedings have been commenced and they have been served with a Lis Pendens or notice of default. In general until a Trustee sale has actually taken place there is still time to negotiate a short sale.
Finally, it is vital that any outstanding judgments or tax arrears be brought to our attention as these costs must be reflected in the offer to the short sale lender. Often judgments or liens can be negotiated lower as well provided there is enough time to do so.
However, most clients research short sales once foreclosure proceedings have been commenced and they have been served with a Lis Pendens or notice of default. In general until a Trustee sale has actually taken place there is still time to negotiate a short sale.
Finally, it is vital that any outstanding judgments or tax arrears be brought to our attention as these costs must be reflected in the offer to the short sale lender. Often judgments or liens can be negotiated lower as well provided there is enough time to do so.
Best of all the lender will also pay for the entire real estate commission.
We have successfully negotiated shorts sales across Phoenix.
Besides the location, another factor which must be addressed is the condition of the house. In particular, it must be determined if the plumbing, heating and air conditioning, electrical systems and appliances are in working order. If not, these items should be brought the prospective purchaser's attention immediately. This will ensure that their offer accurately reflects the premises "as is" and that an appraisal will be able to be conducted, if necessary.
Other concerns include termite infestation or damage and Certificate of Occupancy issues. If either of these issues exists, they must be brought to our attention immediately. It is possible for the lender to pay for these problems provided there is enough time to do so.
Finally, some short sales are for investment properties as opposed to principal residences. For instance your tenant defaulted on their rent which was in turn being used to subsidize the monthly mortgage payment. It is possible for short sales to be negotiated for investment properties.
Besides the location, another factor which must be addressed is the condition of the house. In particular, it must be determined if the plumbing, heating and air conditioning, electrical systems and appliances are in working order. If not, these items should be brought the prospective purchaser's attention immediately. This will ensure that their offer accurately reflects the premises "as is" and that an appraisal will be able to be conducted, if necessary.
Other concerns include termite infestation or damage and Certificate of Occupancy issues. If either of these issues exists, they must be brought to our attention immediately. It is possible for the lender to pay for these problems provided there is enough time to do so.
Finally, some short sales are for investment properties as opposed to principal residences. For instance your tenant defaulted on their rent which was in turn being used to subsidize the monthly mortgage payment. It is possible for short sales to be negotiated for investment properties.
Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give the homeowner a pretty good idea of what to expect:
•Two Most Recent Statements for All Loans: This is necessary so that we may verify the amount necessary to payoff the loan. If the homeowner has defaulted for an extended period of time the payoff must reflect all default interest, penalties, attorney's fees and escrow deficiencies.
•Hardship Letter: This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized, etc.
•Proof of Income and Assets:
•1 Month of Paystubs: If you are unemployed, a simple letter explaining your circumstances will be sufficient.
•2 Months Bank Statements: Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
•Last Year's Tax Returns: If you did not file taxes last year, a simple letter explaining your circumstances will be sufficient.
•Two Most Recent Statements for All Loans: This is necessary so that we may verify the amount necessary to payoff the loan. If the homeowner has defaulted for an extended period of time the payoff must reflect all default interest, penalties, attorney's fees and escrow deficiencies.
•Hardship Letter: This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized, etc.
•Proof of Income and Assets:
•1 Month of Paystubs: If you are unemployed, a simple letter explaining your circumstances will be sufficient.
•2 Months Bank Statements: Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
•Last Year's Tax Returns: If you did not file taxes last year, a simple letter explaining your circumstances will be sufficient.
Information on Fixtures and A.R.S. 13-1802
Please be advised that a Homeowner or tenant before or after foreclosure only has the right to remove personal property such as furniture. Legally they have the right to remover fixtures such as chandeliers, fans, and built-in microwaves.
By doing so leaves the homeowner open to criminal theft under A.R.S. 3-1802, and criminal defrauding of secured creditors. Homeowner will most likely have civil liablity for monetary damages.
Homeowner may also lose protection of anti-deficiency statute for any "waste" of the home.
We want you to be aware of this so you remain protected under the anti-deficiency statute. If you plan on vacating the premises it is also a good idea to get a short term renters/vacant home policy in place.
