Short Sale or Not to Short Sale?
Short Sales: An education
Short sales in real estate are here for the foreseeable future. To serve both buyers and sellers well in the current market you have to stay educated on all aspects of short sales and REO (Real Estate Owned) homes. I recently took my second class on the subject in the past 6 months because rules and procedures to make a short sale happen are constantly in flux. If you're a professional reading this blog you may wish to consider taking a short sale class that the Dares Institute, one of the best continuing education providers to the real estate and lending sectors in the business (visit: www.dares1.com for course schedules and more information). Down in the Fairfield area, I just enjoyed a course presented by Atty. John Hoffman of http://www.loansolutionassociates.com/
What is a short sale.
There are many who conflate a short sale with a bank owned home. They're mutually exclusive and different topics so this blog is dedicated to the short sale.
The news media reports often about how many homeowners are "underwater" with their mortgages. This means that the current market value of the home is worth less than the outstanding aggregate loan balances (1st mortgage, 2nd mortgages or HELOCs [Home Equity Line of Credit). A short sale occurs simply when the lender accepts less than what is owed and releases the liens that secured the debt. A simple example: House value= $450K; Loans balance on home = $500K. Negotiations with lender allow for the sale to take place accepting the current market value of the home, or less in some cases to close the deal.
Short sales are not easy and present challenges which can take weeks and months sometimes to even get a response to an offer, but the net results are positive for all involved: The homeowner avoids foreclosure and avoids the sometime public display and embarrassment of a foreclosure and/or bankruptcy, the lender relieves itself of bad debt and can now place that capital into their reserve, and the buyer gets a good deal in most cases as well.
What you should know?
The more I learn, the more I know you need to work with a team who is skilled, licensed, and equipped to facilitate such a transaction. Those individuals whom claim to help home owners navigate and facilitate these kinds of transactions in the State of CT for a fee must now be licensed. As of this blog the State has only issued 6 licenses and one of those belongs to a law firm whom we work with on these types of deals. So be sure to have that firm or representative present their license. Chances are the firm you're talking to won't have that needed license.
A broker or agent whom is being paid only a real estate commission can negotiate a short sale legally but most aren't as equipped to do facilitate such a negotiation as well as an attorney with a staff who does this kind of transaction regularly.
You should also be aware that you cannot consider a short sale for your underwater house if you are current on your mortgage. You must be in arrears on your payments. Your agent and broker should not be telling you to stop making payments, rather you should seek this sensitive and important advice from your attorney and financial advisors.
Learn as much as you can about the process and how it may benefit you. Here are some great links to sites that may be useful resources:
Connecticut Fair Housing Center
Connecticut Judicial Branch - jud.ct.gov
Connecticut Law About Foreclosure
Foreclosure vs Short Sale
Many people ask me what difference is it to me to do a short sale? Why not just walk away? No doubt your credit is pretty much trashed either way, right? Not quite. For sure your credit score will take a nose dive either way.
Some experts I talked with about this blog told me that a short sale can lower your credit score 50-130 points on average whereas a foreclosure can lower your score 200-400 points. There are lots of variables so it's tough to nail it down to specific number.
Doing a short sale under the new HAFA guidelines (covered below), a seller is now guaranteed to be released fully from the debt (at least from the banks that agree to HAFA). This means credit recovery will be sooner and a deficiency judgement won't follow you around for the next 20 years. (NOTE: the HAFA guidelines will NOT apply to Fannie Mae or Freddie Mac. They are in the process of developing their own set of rules and guidelines. Can't wait, eh?)
Up until now it was a crap shoot whether doing a short sale would really benefit you. The reason was that some banks did not release the debt and carried over the deficiency making the buyer liable for the short. I reached out to Attys Tavano and McCuin to ask about their opinion on HAFA's impact and he replied: "On the HAFA program starting 4/5, not every bank will participate so well need to see how it's all going to work out." Atty. Lou Tavano, http://www.shortsaleatty.com, sent over this great link that has info everyone has been waiting for. (Atty's Tavano and McCuin are also Dares Institute instructors on this Short Sales and more).: http://bit.ly/dr2AmG
In the government's tireless pursuit of naming programs and alike with a catchy acronym, HAFA (Home Affordability Foreclosure Alternatives), with its Supplemental Directive 09-09, that fear is over. Lender's will have to fully release the borrow when the short sale is accepted and closed. Lenders will also be pre-approving short sales. Many short sales fail because the listing brokers didn't have a clue to what would be acceptable. Another reason is that some of the banks would take weeks and weeks to even get a response. 2nd Lien holders won't be asking you to bring cash to a closing. A payment cap of $3k will be the max for 2nd lien holders. Borrowers may even be paid $1,500 at the closing to reimburse your moving expenses. A maximum response time of 10 days will be imposed on lenders. Agents can now count on being paid! How about that!
To qualify you have to prove the home in question is your primary residence, so investors take note. Your first mortgage would have to be older than 1 January 2009. Your hardship must be unavoidable now and in the near future. The delinquent balance must be south of $729,750. And lastly your debt to income ratio must be greater than 31% of your gross income.
You will have to first see you you're a fit for the HAMP (here we go again with the alphabet soup: Home Affordability Modification Program) to see if you can keep your home, but you still can do the HAFA program nonetheless.
This is all live on 5 April 2010 and we're still getting our arms around all the details to help our sellers in this situation.
