Questions and Answers for Short Sale Buyers

1. Why would a Buyer consider a short sale?
Think of a short sale as a pre-foreclosure sale.  You are purchasing from a very motivated seller and negotiating with a motivated lender. The seller want to sell to avoid foreclosure and the lender also wants to avoid foreclosing. Foreclosing on a property is very expensive to a lender. Thus, the Buyer of a short sale is very likely to get a very good deal on the property.

2. How much can a Buyer save?
The savings can depend upon many factors like condition of the property, location of the property, the motivation of the lender and seller.  In my opinion a buyer normally can purchase the property about 10% below market value.

3. But I have heard that Buyers can purchase short sales for 50 to 60 percent of value. Isn’t that true? There are rare occasions where such a deal is possible, but it is very rare. These deals are usually discovered by savvy real estate investors and the properties are rarely exposed to the public. When purchasing a short sale property that is listed expect a more modest, but very profitable savings.

4. Are there any disadvantages to purchasing a short sale?
If you do not have a pressing deadline by which you must purchase, a short sale may very well be worth the effort. There are two main issues of which the buyer should be aware: (1) The process of accomplishing a short sale involves a lot of time.  From beginning to end it can take 3-4 months on average; (2) Even though the Seller accepts your offer, it must be approved by the Seller’s lender, and it could take 60-90 days to receive an answer on your offer.

5. Why does a short sale take so long? What is the process?
Here is a brief overview of the process. First, the seller must list the property with a Realtor.  This is required by most lenders. Second, a buyer must be found and a contract executed between the Seller and the Buyer. Third, the sale and purchase agreement along with the seller’s financial information is sent to the lender for review (this is called the short sale package.) Fourth, the lender orders a Broker’s Price Opinion on the property. Fifth, once conducted, received, and reviewed, the file is assigned to a Loss Mitigation Specialist. Sixth, the LMS accepts, rejects, or counters the Buyer’s offer on the property. Seventh, the negotiation continues until it either all comes together or else falls apart.  Eighth, if all parties reach agreement the closing date is set, usually for about three weeks away.

6. How long does the above process take?
Once a purchase and sale agreement is executed between the Seller and the Buyer the whole process may take anywhere from 3-6 months.  In today’s market a Buyer can expect a response to their offer from the lender anywhere from 2-3 months, maybe longer.

7. How is the listing price of the property determined?
The list price is determined by the listing agent. As a Broker-associate who lists and sells a lot of short sales I cannot emphasize enough the importance of the list price.  Some listing agents will price a home too low, hoping to create a bidding war between buyers.  Low offers simply are doomed to be rejected by the lender.  Other agents may price the home too high and no offers are received before it is too late to save the owner from foreclosure.  The key is to price the home competitively in order to attract excited buyers, and yet not so low as to fail to get the transaction approved.  The listing agent must be very skillful in pricing.

8. Does this mean that I could offer full price and still not get the property?
Exactly right.  If the listing agent prices the home too low a buyer could easily waste three months simply waiting for a rejection.

9. Who exactly is the Seller, is it the owner or the lender?
The Seller is the owner of the property as in any other transaction.  The lender is involved in the transaction because the sale is subject to the lenders approval.  The lender must approve the deal because the lender must accept a “short pay” on the mortgage for the deal to work.  Without the lender’s cooperation there is no deal.

10. So, do I submit my offer to the Seller or the Lender?
Your offer is submitted to the Seller who in turn may accept it, reject it, or counter it. It is then forwarded to the lender who also may in turn accept it, reject it, or counter it.

11. Might I be up against other competing offers on the property?
It is possible that other offers could be accepted by the Seller as back-up contracts. Some lenders will only deal with one offer at a time which is in your best interest.  Other lenders will want to know about all offers and will consider the merits of each offer.  Being the first Buyer to have an executed offer with the Seller does not guarantee that your offer is the one the lender will negotiate.

12. Must a Buyer be Pre-Approved?
I recommend that Sellers only entertain offers from Buyers who are Pre-Approved for financing or who have the cash on-hand.  Most shorted lenders will require the same. Your Pre-Approval letter will be submitted with the offer.  Being simply Pre-Qualified is not recommended.

13. Could the property possibly be foreclosed upon before the short sale is completed?
Yes, this is a possibility.  While the Seller is going down the short sale path, the lender is proceeding with the foreclosure process if the Borrower (Seller) is in default.  The foreclosure process can take anywhere from 4 months to a year, so it is very likely that a short sale could be accomplished within that time frame.  However, pursuing a short sale is not a guarantee that the foreclosure won’t happen.

14. If the property is foreclosed upon will I lose my deposit?
Your purchase and sale agreement will contain language that requires your deposit to be returned to you if the sale is not consummated.

15. Can I use a financing contingency with my offer?
A financing contingency means that if your lender is unable to provide a financing commitment by a certain date then you may cancel the contract and receive your deposit back.  It is possible to include a financing contingency with your offer, but it would make your offer weaker than one without such a contingency.

16. Must the property be purchased AS-IS?
Yes, short sales require the property be purchased as is.  The Seller’s lender will not allow the seller to credit the buyer for repairs or spend money for repairs.  The Buyer may include an “AS-IS With Right to Inspect” addendum which would allow the Buyer to cancel the contract if major deficiencies were discovered.

17. What is the time frame for inspections?
The purchase and sale agreement will cover this but you should be aware of it. Normally, in our area inspections are conducted within 10 business days of an executed offer.  However, with a short sale, the Buyer should be sure the inspection time frame begins AFTER the lender approves the transaction.

18. When purchasing a short sale property will the Buyer incur any extra expenses?
There are no extra expenses to the Buyer when purchasing a short sale property.  The Buyers costs are, negotiated when the Buyer’s offer is submitted to the Seller and then again if the Lender counter’s the offer.  Other than this, the costs of purchasing a short sale property are the same as any other purchase.

(Copyright © 2008 By Dan Forbes, All Rights Reserved.)

 Working short sales and pre-foreclosures is an arduous task for any Realtor.  The reward is when the lender sends you an approval letter which says they accept the offer.  That happended again today.  Yippee!

By default I have become known as a short sale expert.  It wasn’t something I sought after, I have just been applying myself to my real estate business and trying to help as many people as I can in our Bradenton Florida Real Estate market.  I’ve even created a special educational web site:

THE-SHORT-SALE-EXPERT.COM

In January 2008 there were 408 foreclosure filings in Manatee County Florida.  This is four times the number of filings in 2007. There isn’t a day that goes by that I don’t speak with a homeowner in distress.  So, it’s a great “rush” when a transaction is approved.

Now, we have 30 days to close the transaction.  This shouldn’t be a problem since the buyer is pre-approved and really wants the home. 

(Copyright © 2008 By Dan Forbes, All Rights Reserved.)

I’ve been working on a flow chart to keep track of the progress with my short sale files.  If you take a look at the flow chart below you’ll see some of the items that must be completed.

Short Sale Flow Chart

(Copyright © 2008 By Dan Forbes, All Rights Reserved.)

One of the options you might have in avoiding foreclosure is sometimes called Forbearance. It’s often spelled with an e (Forebearance) probably because of it’s relation to Foreclosure.

5. The Borrower has 20 days to file an answer to the lawsuit. If they do not file an answer, it goes forward like an “uncontested” foreclosure and is fast-tracked.  It is always best to involve an attorney at this point.

6. A hearing date is set and unless there is good reason to stop the foreclosure a Final Judgment is issued and the sale date is set.  This is typically about 30 days after the final judgment.

7. The public auction is held at the Manatee County courthouse steps.

8. The winning bidder is given a certificate of sale.  This is like a receipt, but does not constitute actual ownership.

9. Providing the sale is not disputed, in about 10-12 days a “certificate of title” is issued to the new owner.

10. If someone is still living in the house the judge will grant a writ of possession and the sheriff will serve notice to the occupants that they must move out within 24 hours.  If they don’t move out all of the belongings may be set out to the curb.

Foreclosure procedures differ state to state.  You should check out the foreclosure for your own state. Also, nothing herein should be considered legal advice and homeowners are advised to consult with a competent attorney for all legal advice.

(Copyright © 2008 By Dan Forbes, All Rights Reserved.)

Most Common Question: “What do I do? - I can’t pay my mortgage”

As an attorney, I receive plenty of telephone calls and visits from people that are no longer able to pay their mortgage on their home or investment property.  They all have endless questions and usually tell me they are getting all sorts of advice that they don’t like.  They come to me to find their BEST solution, and I suppose they hope I am some sort of magician that can create an answer that they like.

The analysis of the problem is the first order of business….

These questions revolve around the “why” are they behind on the mortgage.  What situations (health, job, death, divorce, and catastrophe) triggered the problem? When did the problems arise? Are they current or delinquent with the mortgage? Are they in foreclosure? What are the repayment terms of the mortgage?  Do they have assets that are in savings, other properties, stocks, bonds?  Is this a matter of being “real estate rich and cash poor”?  What is their income past, present and future?

We like to get a financial statement filled out by the client, which sometimes is like pulling teeth - people just hate filling out financial forms - so we made one that is very simple and tracks the 1003 without the fluff.  The idea is to get a handle on the financial numbers and thus the situation from raw information.  We do this because people in general and delinquent borrowers in particular have a hard time verbalizing and quantifying the monetary problem and why it is a problem.

Simply put, there are 4 solutions to the problem:

            1.  Let the house go into foreclosure.  This is the most drastic response and is not a solution but a result.  It ruins credit badly and the property and all equity is usually lost.

            2.  Modify the mortgage(s).  If the borrower has the financial resources to permit a modification of the mortgage terms then this is the best of the bad solutions.  Modification can come in many shapes, sizes and flavors.  Think about reducing the loan balance (up to the amount allowed without prepayment fees) in exchange for an interest rate adjustment downward (great for those 12% loans).  Sometimes these solutions require financial help from family and it may not make sense to owe more on the property than it is presently worth.  But being “upside down” in value is something that is always going to happen in real estate.  If the property is the primary home and the borrower expected to live in it for the long term, then being upside down for a few years is going to be long forgotten 10 years down the road.  Like kidney stones, they will pass and the pain will be forgotten.    Often the title must be clear since from a technical standpoint, there can be a new start point created for the lien of the mortgage and that mortgage must retain its priority over other liens and potential liens.  Credit hit can be nominal to average, depending on the deal and modification.

            3.  Deed in Lieu of Foreclosure.  Everyone talks about it but this is more difficult than one may think.  In 30 years I can only think of a half dozen that we have worked successfully.  The key here is the lender has to agree to take the deed and deal with the property itself (it would much prefer a short sale) and the title to the property must be clear.  This usually means there should be only the one mortgage and there can be no liens and no judgments against the owners / borrowers.  This is basically a foreclosure without the judgment of foreclosure.  Credit hit can be substantial but not as bad as a full foreclosure.

            4.  Negotiate a Short Sale.  It is surprising how many people call me - including owners, Realtors and sales associates - and don’t know what a “short sale” means, much less how it works.  Think back just 5 or more years and remember “loss mitigation”.  The term “short sale” is relatively new lingo for an old option lenders have used for decades.  The concept is too simple:

                        a.  house bought for $300,000

                        b.  loans on house are $280,000

                        c.  value of house is now $200,000

                        d.  shortage of loan equity value is $80,000

In the above scenario if the owner needs to sell (because he or she can no longer make the house payments (taxes, insurance, utilities, interest, principal, and whatever) then typically the house needs to be sold.  However, the mortgage is greater than the selling value of the house by $80,000.  If the bank foreclosed, it could not expect to receive more than the house is now worth at a foreclosure sale.  And the bank would also have the costs of attorneys, sales agents, real estate taxes, unpaid interest on the principal, insurance and maintenance on the home until it got sold and the costs of selling the home.  For a house worth $200,000 in South Florida that could easily be another $30,000 after 6 months of the bank holding the property.  Thus, the bank often recognizes that it is better off with a sooner sale outside of foreclosure - the “short sale”.  Shore sales have downsides for the borrower, primarily in potential income tax recognition and the potential for continuing liability on the “short” promissory note(s).  However, the credit hit is substantially less than a foreclosure.

Which of the four scenarios is best for any particular borrower requires application of a firm understanding of the mechanics of the various processes.  Be sure you use an attorney experienced in working with mortgage lenders, and a Realtor that understands and has the patience for short sales.

Be sure you understand what you (or your client) need and why you (or your client) need it before you make any decision about how to handle the matter - a bad situation does not need to become worse because you just “give up”.  There is always a solution - finding the best solution to a bad situation is something you (or your clients) need to carefully examine.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales

===========================================================

(Copyright 2008 by Dan Forbes, All Rights Reserved)

Yesterday I was following up on a short sale offer and package I had previously faxed to a lender.  The package was 82 pages in length and included all the items requested from our Bradenton, Florida homeowner. The Seller, the cooperating agent, and the Buyer knows this may be a lengthy process.

I was taken back a bit when the lender’s representative said their loss mitigation department is receiving 100 - 150 such packages a day!  They are completely swamped.  I’m wondering how on earth they are handling this unprecedented problem.

One Title Company representative I spoke to yesterday said he thinks a lot of banks are just letting properties go into foreclosure because they can’t handle the short sale workload.  Also, that they are thinking prices will be higher in the months ahead.

(Copyright 2008 by Dan Forbes, All Rights Reserved)

This post contains a link to photos of a man having been swallowed by an Anaconda. There are no photos in this post for the sake of sensitivity. I’ve been working with a lot of short sale clients and I often picture our current foreclosure problem in the housing market like a pig having been swallowed by an Anaconda.  It is just going to have to work its way through the beast.

I recently came across this advice on what to do if you are attacked by an Anaconda.  This is an excerpt from the U.S. Government Peace Corps Manual for volunteers working in the Amazon jungle - what to do if an anaconda attacks you.

Related to the boa constrictor, the anaconda is the largest snake species in the world. It grows to thirty-five feet in length and weighs three to four hundred pounds.

1. If you are attacked by an anaconda, do not run. The snake is faster than you are.

2. Lie flat on the ground. Put your arms tight against your sides, your legs tight against one another.

3. Tuck your chin in.

4. The snake will begin to nudge and climb over your body.

5. Do not panic.

6. After the snake has examined you, it will begin to swallow you from the feet end - always from the feet end. Permit the snake to swallow your feet and ankles. Do not panic!

7. The snake will now begin to suck your legs into its body. You must lie perfectly still. This will take a long time.

8. When the snake has reached your knees, slowly and with as little movement as possible, reach down, take your knife and very gently slide it into the side of the snake’s mouth between the edge of its mouth and your leg, then suddenly rip upward, severing the snake’s head.

9. Be sure you have your knife.

10. Be sure your knife is sharp.

And now, about foreclosure…

1. If you are fearful of foreclosure, be advised that it can sneak up on you rather quickly.

2. Do not stand still financially. Start an agressive plan for saving your home.

3. Pull in your spending.

4. The bank will begin to send you late notices if you haven’t paid your mortgage.

5. Do not succumb to denial.

6. After several late notices the bank will file a Lis Pendens.  They will ALWAYS start foreclosure this way.  Don’t panic.

7. The bank will now begin to suck you into the foreclosure process. This will take some time.

8. Before the bank can foreclose, deliberately find a REALTOR who specializes in Short Sales. List your property with this Realtor and he/she will market your property to attract an offer from a buyer.  Suddenly, shove the contract to the Loss Mitigation Department, which, when accepted, cuts off the foreclosure.

9. Be sure that you use a REALTOR.

10. Be sure your REALTOR is sharp.

Oh, Almost forgot.  Here’s that LINK.

(copyright 2007 by Dan Forbes, All Rights Reserved)

 2007 Mortgage Forgivenewss Debt Relief Act is Now Law

On Thursday of this week President Bush sign this bill into law.  One of the provisions is that homeowners whose homes are lost through foreclosure or short sale will no longer owe income tax on the forgiven debt.

Forbes.com says,

“The Mortgage Forgiveness Debt Relief Act of 2007 will help people who have lost their homes through foreclosure or whose lenders have forgiven some of their mortgage debt so they can keep their homes.

“Ordinarily, when someone is relieved of a debt, the amount forgiven is considered taxable income.

“People who didn’t have the money to meet their mortgage payments have found that they owe income taxes on tens of thousands of dollars,” Luscombe observed. For example, if a bank forecloses when the borrower owes $400,000 on a home and then sells the property for $310,000 in full satisfaction of the debt, the borrower will usually owe tax on $90,000.

“It seems like the tax system is kicking them when they’re down,” Luscombe said.

“The new law excludes discharges of up to $2 million of indebtedness from taxation if the debt is secured by a principal residence and if it was incurred in the acquisition, construction or substantial improvement of the principal residence.”

Read the article

Please consult your tax professional about how this new law might affect you.

My Friend, Richard Zaretsky, Esq. of West Palm Beach, FL has written an excellent post on this subject.  He writes,“For those of you that aren’t up to speed on the downside of a short sale, if the bank lends you $100 and you end up only having to pay back $75, then by keeping the $25 you have to declare that $25 as ordinary income.  You see, borrowing money is not taxable as income.  But if you don’t have to pay it back, then it is no longer a loan, and instead it is income, just as if you (oh my gosh!) worked for it.“This new law is not going to give relief to flippers that have flops, or investors that over financed, or even homeowners that leveraged up their loans after acquiring the house. “  (Read his post here)

(copyright 2007 by Dan Forbes, All Rights Reserved)

A contract on a property being offered as a short sale is much like any other real estate sale and purchase agreement with a few exceptions.  It is best for the Buyer and Seller to work with an experienced Short Sale expert to be sure the contract protects their interest.

Our Florida Association of Realtors has prepared an addendum that covers several issues:

1. That the contract is contingent upon the Seller’s Lender approval.
2. The beginning of time frames like inspections, etc.
3. That Lender approval is not guaranteed.

Here is a sample addendum: Florida Short Sale Addendum

(copyright 2007 by Dan Forbes, All Rights Reserved)