Think Short Sales Are Only in the Subprime Market? Think Again!

Attached is a link to a Florida Association of Realtors article pointing out the changes in the market place that are now affecting the half million dollar plus and even million dollar place home market.

For us, our experience is that, like the article said a large group of these short sale homes ARE located in the sub $200K and now even sub 150K range and WERE limited to the sub prime market but we had already been seeing plenty of Shorts 500K plus and even 1 million plus as far back as this time last year.  We believe that this (Sarasota Bradenton) market was a "leader" if you will, into the downturn - having had a market stall in September of 2005 and then at first a slow erosion of price which has turned in the last 14 months or so into a pretty rapid decline in price. And while the higher end SEEMED to react a little later - we saw that end of the market come down long before the folks nationally in the markets quoted have seen them.

Perhaps too, these took longer to go short as folks on the upper end of the market had more resources to exhaust and were willing to do so to try to avoid the stigma of either a short sale or a foreclosure. We have also seen banks be a lot more agressive in asking for some "owner contribution" on the higher end as they see this type of  customer as having a better income stream to tap into or they would ask them to liquidate 401K type assets (that usually can't be harmed in a Bankruptcy but the bank is assuming the customer wants to avoid that route as well) or even that the customer has a better income stream and can afford to take back a note after the lien is released.

But as the market continues to weaken AND folks have had their 401K's and their portfolios depleted they have less resources to tap on AND are less willing to exhaust what they have left to keep a mortgage that is far bigger than the current value of the home current.

Once again, this is not the answer for everyone but if you find yourself in this position and need to understand your options you should speak with someone who has done a number of successful short sales before you get too far behind on your payments.

http://www.floridarealtors.org/NewsAndEvents/n1-111708.cfm

- Mike W.

What your agent ought to be asking YOU if you're thinking of a Short Sale.

Below I am going to paste the contents of the questionaire we have devised to help us and our client to determine if a short if right for them AND if a short sale can even be accomplished. This is pretty comprehensive but could always use improvement. If you are not prepared to answer these questions to your realtor then maybe you're not ready OR you need to establish a relationship with someone you think is competent in handling the type of information that the answers will provide.  Anyway we look forward to your comments or questions as to why we would need some piece of this answered.

Ann M Winger, LLC Short Sale Preparation Checklist

1. Is this your primary residence?
2. Any other properties? Are they in trouble?
3. If tenant occupied is your tenant aware of any problem?
4.  If this is NOT your primary residence do you understand the IRS consequences of debt forgiveness?
5. If either of the lenders required it would you be prepared to offer some lump sum or sign a promissory note to facilitate a short sale? (Not always required)
6. Are you prepared to give us permission to speak to your mortgage lenders on your behalf?
7. Name and Account Number of First Mortgage Holder:
8. Approximate Current Amount Owed:
9. Is the account current?                                       Date of last payment:
10. Phone number for lender or copy of payment coupon
11. Name and Account Number of SECOND mortgage holder if any:
12. Approximate amount owed:
13. Is the account current? Date of last payment:
14. If married is your spouse on your mortgages?
15. Did you pay prior year’s property tax?                                 Do you have proof of payment?
16. Does the lender ESCROW your property tax?
17. ANY other liens on property such as HOA or Mechanics Liens? Current with HOA?
18. What is your current monthly income?  Can you document it?
19. Tell us about all your cash and non cash assets such as 401K and stocks – so we can determine if you will be considered a short sale candidate.
20. Do you have two years worth of fed tax records to provide banks?
21. What is your “Hardship Story”?
22. Are you working with a Bankruptcy attorney, do you intend to file bankruptcy?
23. If you are working with a BK attorney may we contact them?    
24. Do you have living arrangements for when the property sells?
25. We have reviewed the Short Sale Addendum to the Listing Agreement:    
26. As I have just explained them will you be willing and able to go through with a short sale if accepted?

- Mike W.

Who or What IS a "Short Sale Specialist"?

In an earlier blog entry I tried to lay out some specifics on doing short sales as I have learned them from experience. In our local market for the last 9 months they have become a pretty regular part of not only our business but of the overall market.  We still have Realtors who say "I don't handle those" or "I hate them and avoid them" but honestly they ARE a significant piece of the market now so if you avoid them you lock yourself out of a piece of the market.

But today's entry is me RILING on what I'm seeing out there as "Short Sale Specialists".  Last month I sold a home and the other realtor was a very nice person but pretty much brand new to real estate. I represented the seller but I found myself having to answer all the buyer type questions, find them a bug inspector, tell the buyer how to read his HUD and what money to bring to closing etc. Many of these things were just falling through the cracks as the agent just had never done them before. I asked the agent how long they had been in business. The answer was less than a year and had done very few deals - none of them a short sale. But lo and behold - printed on the business card was "Realtor, Short Sale SPECIALIST".  Now if a DOCTOR was a SPECIALIST in say BRAIN surgery I would ASSUME he'd OPENED SOMEONE'S BRAIN and hopefully a LOT of them, under someone elses guidance, until he/she WAS really a SPECIALIST.

Now we have this new portion of our business and we have people who maybe even have not DONE a single deal that is a short OR they brought a BUYER to the process - which really isn't ANY more work for the BUYER'S side than a typical sale and these people are calling themselves "Specialists".

Perhaps you're thinking, what's the harm? Well there IS REAL HARM here. If you hire somebody as your realtor to short sell your house they had BETTER know how to negotiate with banks! AND remember IF they blow it - their own credit is not harmed but they can torpedo YOUR credit - and your house goes to foreclosure instead of being short which is a huge difference on your credit report.

Since we now have people who have NEVER done a short or if they have they represented the buyer is it any wonder some realtors think these are potential disasters that "never close".

So far on all of my short sales we have had only one get out and out rejected by the bank and even on that one we are right this minute "resucitating" the deal with the lender and will likely close it too. We do expect that in some cases we will not be able to get the bank to accept a deal but we KNOW how these work and we KNOW the approach to take to get banks to accept deals.  If your agent wants YOU or worse yet THE TITLE COMPANY to talk to the bank....RUN, don't walk, away from them.  Truly here is where having a good negotiator on the phone with the bank and someone who KNOWS how to put all the paperwork together is critical. 

And ASK - how many short sales have you successfully closed? Tell me about a couple - who were the banks, what ended up being the actual closing terms, how long did it take from contract to closing. What steps did YOU take to make this happen? Here's a REAL clarifying question: "Do you KNOW how to put a HUD1 statement together"? If they say they leave that to the title company...they are NOT a short sale "specialist".  If they tell you they represented the BUYER - while it's good they got a deal done - all they did was wait while the seller and his agent got the deal lined up. Truly on the buyer side it is about managing expectations - not about managing PROCESS. Keeping the buyer IN the transaction is of course critical but the lion's share of the work is with the seller. Plus if I were using a buyer's agent to DO a short sale I would want to know they understood the process from the sell side.  I have buyer's agents calling me on my short sales wanting to put offers in because their client offered on another short sale and it's been THREE weeks and they haven't heard so they are backing out. These deals take 6-8 weeks and as the banks get BURIED they are taking LONGER. You want to BUY a short sale? Plan to wait 8 weeks to a closing - maybe more.

OK I have railed enough for one day - but I KNOW I am going to be back on this topic more, and probably sooner than later!

- Mike W.

Some Do's and Don'ts We've Learned About Short Selling Your Home.

First of all what is a short sale? A short sale is when you need to sell your home but it will not sell for what you owe the bank AND you do not have assets to cover the short fall. In the past we haven't faced this issue much as homes continued to appreciate. Now though we have had some declines in value and in addition many people have been lured into mortgages with very low payments that were not covering the interest owed so their loan principle balance has been going up while the value of the home has gone down.

In cases like this, if you were to sell the home for less than you owe on it - you would be expected to write a check for the difference at the closing table. Not surprisingly though, homes that were financed to 95 or even 100% of their value tend to be done by folks who would not have assets to put in at the time of purchase and certainly don't have them now that they are forced to sell for a loss. So what do you do?

Well one strategy is to work out with your lender or lenders an agreement to Short Sell the property. That means that you work NOT with the banks collections department but with the team at the bank known as "Loss Mitigation". If you provide the bank with an authorization your realtor can even call the bank(s) on your behalf to try to structure this deal. Some banks though will not have any discussion about selling for a loss while the loan is being paid on time so in fact you may need to be two or three months behind. Also you as a seller will have to prove to the bank that you do not have the personal assets to cover the shortfall - which is what they obviously would prefer. Most banks though would prefer a short sale to taking the house to foreclosure, because they tend to net a greater percentage of what is owed in a short sale.

For the seller why would you prefer a Short Sale to letting the home go to foreclosure? A couple very good reasons. First IF you can negotiate a short sale the banks actually file satisfactions of mortgage even though they did not get paid in full. Second - from a credit report perspective a short sale takes a much smaller "hit" on your credit report (about a 100 point hit vs as much as 250 for a foreclosure) AND it "washes" off the report MUCH sooner. Folks have been able to buy another home in as little as 24 months after a short sale.

Once you have had an initial conversation with your lenders regarding short sale you begin marketing the home, slowly reducing the price until you generate interest and offers. But in the case of a short sale any offer to purchase has to be approved not only by the sellers but by the lenders as well. It's important your realtor makes folks aware of this. This really will add a good chunk of time to the transaction. As I am writing this most lender's loss mitigation departments are BURIED and they give themselves 45 or even 60 days to evaluate the offer you have gotten. They will probably have a disinterested 3rd party do a statement of value to make sure they are getting something close to fair. Once they approve the offer then Buyer and Seller will be given some relatively short period of time (15-20 days) to do all the inspections and arrange any financing etc and get to a closing.

OK so for a seller, if the bank approves, it allows you to sell the property for less than you owe and not have to pay back the difference - so it's pretty clear what the seller's advantage is. But what about a buyer - what's in it for the buyer? Generally speaking, for those buyers patient enough to go through the process, they can get a very good value on a home that also tends to have less wear and tear than what happens to a house that goes to foreclosure and is gaveled down on the court house steps. Foreclosures take longer and in many cases seller and lender are not on amicable terms for the last 4-5 months and the property tends to be "let go" a lot more than a short sale. In our experience banks that can realize 65 to 75% of the value of their loan tend to be open to short sale and that can mean a very good value for the buyer.

What's the risk? First off for buyers they need to know, it DOES take longer and when they do get approval and have a home inspection they can expect that the sale will be AS-IS. Since the bank is losing money and the seller has no money you will not be able to come back after the inspection and ask for ANY repairs. So you need to factor that in to your offer. If upon inspection there is just TOO much work required, be sure your agent has written in a chance for you to get out of the contract and get your earnest money back.

For sellers they need to make sure that they speak with their accountant. There are some cases where the money written off by the bank has been declared "income" to the seller in the eyes of the IRS as most debt forgiveness is - and if the bank is sending you a 1099 for the charge off you could have a tax liability.

And lastly what's in it for the Realtors? Well they get to sell a property that might not have sold at all and they may also get their buyer a very good deal while getting their seller out of a very difficult circumstance. A couple words of warning for Realtors as well. First note that the bank will almost always reduce the commission earned. As a seller's agent you want to make sure in the MLS that you make buyers aware that it is a short sale, added time will be required to get any deal done, that the sale is AS IS and that the commission "split" is subject to adjustment by the lender. This last step is key so as not to create a situation where you've committed to share MORE commission than you will be paid. If everyone understands the ground rules going into the deal than there will be less problems going forward.

So is a short sale right for you? Each individual case is different but for many sellers AND buyers it may offer a real opportunity if managed properly. Be sure you use an agent who has DONE short sales - the cost of being the Guinea Pig while your agent learns this process could be dear.